CFIUS, Magnachip Face 'Tall Task' Identifying Mitigation Measures, Lawyers Say

Although the Committee on Foreign Investment in the U.S. allowed Magnachip Semiconductor Corp. to refile its proposed acquisition by Beijing-based Wise Road Capital (see 2109160037), the deal seems highly unlikely to pass CFIUS scrutiny, trade lawyers said. Finding pathways to mitigate the national security risks identified by CFIUS will be extremely challenging, they said, particularly as the U.S. increases its focus on stopping China from acquiring advanced semiconductor equipment.

“We'll see if perhaps they come up with a solution in the next couple months,” said Brian Fleming, a Miller & Chevalier sanctions and export control lawyer, speaking on the firm’s Sept. 23 podcast. “I think it's a pretty tall task and a pretty uphill battle to see how they could come up with something that would work here.”

CFIUS asked Wise Road Capital and South Korea-based Magnachip to submit a filing earlier this year, and eventually planned to refer the deal to President Joe Biden after failing to identify measures to mitigate its national security risks (see 2108310008). But even though CFIUS granted Magnachip’s request to refile and potentially propose other mitigation measures, it’s difficult to imagine CFIUS approving the deal, Fleming said, particularly because it is exactly the type of investment transaction that CFIUS is most interested in stopping (see 2109010051).

“You cannot stress enough what a priority this is and continues to be and has been now for the U.S. government,” Fleming said of semiconductors. Tim O’Toole, also one of the firm’s sanctions and export control lawyers, said the transaction likely warranted a voluntary filing with CFIUS because of how plainly it intersected with the U.S. government's focus on China and semiconductors. “It does seem like if you're in the sweet spot where you've got a China connection and a semiconductor connection, CFIUS is looking” he said.

Both lawyers said they are unsure how the companies could reach a mitigation agreement with CFIUS. O’Toole said the investment would need to be “purely passive,” and CFIUS would need assurances that Chinese investors won't “get their hands on the semiconductor technology in any meaningful way,” which would be challenging. “I don't know how you would make that happen in a way that's enforceable,” O’Toole said.

Enforcement of the mitigation agreement would be particularly difficult because Magnachip, based in South Korea but incorporated in Delaware, doesn’t have operations in the U.S., Fleming said. That could make CFIUS monitoring and oversight difficult. “Even in a country like Korea, which is a close U.S. ally,” he said, “that distance makes it impractical, if not impossible, to get the level of comfort that you should have.”

If Magnachip were based in Silicon Valley or another major U.S. tech hub, that could “incrementally increase the possibility you could find some solution,” Fleming said. “But here, I'm not quite sure how you do that or how they could ever get comfortable with that.”

O’Toole said CFIUS’s scrutiny is “also just another good example of how aggressive they're being on China.” Before the Foreign Investment Risk Review Modernization Act was passed in 2018, which expanded the jurisdiction of CFIUS to target investment transactions involving critical technologies (see 2002110042), CFIUS didn’t as often target specific, non-notified deals, O’Toole said (see 2109030039).

“They certainly have always had the power to reach out like this, they just weren't doing it on such a regular basis, and it was just random as to the transactions they’d find,” he said. “This doesn't seem random at all. This seems like they're watching this industry in particular very, very closely, and are getting staffed up enough so that they can go after transactions like this when they want to and need to.”