Magnachip Deal Represents 'Creative Approach' to CFIUS Jurisdiction, Lawyers Say

U.S. intervention in the transaction between South Korea’s Magnachip Semiconductor Corp. and Beijing’s Wise Road Capital could set a new precedent for investment reviews and lead to more extraterritorial screening by U.S. trading partners in Europe and elsewhere, lawyers said.

Magnachip, which submitted a filing to the Committee on Foreign Investment in the U.S. earlier this year at the request of CFIUS, “does absolutely no actual commercial business” in the U.S., said Paul Rosenzweig, a lawyer with Red Branch Law and Consulting. “For many years” CFIUS usually didn’t interfere in deals involving companies that conducted exclusively overseas sales, Rosenzweig said, especially ones with as little of a connection to the U.S. as Magnachip, which owns a Delaware shell company but otherwise stays out of the U.S. But that could be changing.

“The only connection that Magnachip has here is that it is listed on the New York Stock Exchange,” Rosenzweig said during an Oct. 12 podcast hosted by Steptoe & Johnson. Stewart Baker, a Steptoe & Johnson CFIUS lawyer, said the review represents a “pretty creative approach” to CFIUS jurisdiction. “It really is a fascinating change,” Rosenzweig said.

Because the U.S. seems to be reaching beyond its normal CFIUS jurisdiction, Rosenzweig said, other countries might feel empowered to do the same, and the U.S. may feel comfortable continuing to review non-notified deals with minor connections to the U.S. “Every time the U.S. moves to expand the extraterritorial effects of its laws, besides potentially diminishing America’s attractiveness as a marketplace, we do obviously invite other countries to reciprocate,” Rosenzweig said.

CFIUS initially told Magnachip it planned to refer the agreement to President Joe Biden after failing to find a pathway to mitigate the national security risks it had identified, but it later allowed Magnachip to refile (see 2109160037). The company is working to secure CFIUS approval before the end of the month. “I’m not sure where this goes,” Rosenzweig said.

Baker, a former general counsel for the National Security Agency, said he believes CFIUS intervened in the deal partly at the request of South Korea. “I don’t think the South Korean government was enthusiastic about this, and it really helps to have top-cover from the U.S. government,” Baker said. “So the legal problem gets solved in South Korea and the diplomatic problem gets solved by the U.S. going first.”

Baker also said the deal captured CFIUS’s attention because it involved the potential export of semiconductor technology to China. “Any chip transfer to China is bad from the government’s point of view,” he said. Other lawyers have said the deal is exactly the type of investment transaction that CFIUS is most interested in stopping (see 2109010051), and finding a pathway to mitigation will be challenging (see 2109240038).