The Committee on Foreign Investment in the US (CFIUS) has broad powers to review and approve proposed foreign investment in US businesses. Transactions involving Chinese acquirors or investors in US companies have traditionally been treated with greater scrutiny due to perceived greater risks posed to the US national security interests. Such transactions have also been prevalent, in terms of CFIUS review. For about a decade, until 2020, the largest proportion of CFIUS notices were filed by investors from China.[1]More recently, this trend has been changing and CFIUS is seeing less applications from investors from China, in part also because of the increased scrutiny of such transactions and low likelihood of the approval.
Israel, however, is known for its relative openness to investments from China and many Israeli companies active in various industries, including those that can involve sensitive technologies, have accepted funding and maintained affiliations with Chinese entities, some of them also government-related. Such Israeli companies should be aware of CFIUS review and it’s potential to affect their ability to conduct business in the US through subsidiaries or the ability to attract funding or go public in the US. Indeed, Chinese investment in Israeli companies that develop sensitive technologies may also present security concerns to the US.[2] In particular, these concerns stem from potential transfers of sensitive technology to China, as a result of Chinese investments (including also investments by Chinese entities in Israeli VC firms, some of which in turn invest heavily in Israeli technology companies active in areas of cybersecurity, AI, robotics, etc.[3]). Even though Israeli target companies might not be involved in developing military applications, their technology, for example in the field of semiconductors, AI, or satellite communications, may have dual use applications and thus may raise significant security concerns to the US.
CFIUS reviews foreign investments in US businesses that could either result in foreign control or provide foreign persons with non-controlling rights, that may include board membership, observer rights or access to material nonpublic information. It is rather common that investments from China in the Israeli companies are accompanied by granting such investors with an ability to nominate a board member or appoint an observer. In case of Chinese investors in Israeli VCs, they may be granted access to technical development roadmaps, market position and intellectual property, all of which may qualify as material non-public information. Increased number of non-controlling investments requires a mandatory filing for certain transactions, especially those involved in critical technologies (that include, for example, defense, aviation, semiconductors and telecommunications),critical infrastructure, or sensitive data, so Israeli companies should address CFIUS analysis early on in structuring their deals.
CFIUS review of transactions can happen anytime, including after the deal is consummated, thus exposing an acquiror to transaction termination fees (depending on how they were negotiated and how the deal was structured) and substantial penalties for failure to make a CFIUS filing. Recently there is an increase in CFIUS pursuit of non-notified and finalized transactions.
For Israeli companies, there are several CFIUS-related considerations that should be taken into account:
- To the extent an Israeli company is contemplating an investment or acquisition by a Chinese company, it may want to reconsider its presence in the US to ensure it does not fall under CFIUS jurisdiction. Recent cases demonstrate that CFIUS may establish its jurisdiction even with minimal US presence and block the transaction. For example, in case of an acquisition by a Chinese private equity firm of a US-listed holding company that owns a Korean semiconductor company, most of the operations and technical capabilities of the target company were outside of the US.[4]
- Similarly, an Israeli company having a subsidiary in the US, even without substantial operations or assets, may trigger a CFIUS review, should the Israeli company, especially if involved in critical technologies, be a subject to an acquisition or investment from a foreign entity, with a greater chance of such review if the foreign entity is Chinese. As such, when evaluating a potential transaction ,an Israeli company with any US nexus should consider whether any of its activities, even if conducted outside of the US, may potentially be considered sensitive from the perspective of the US national security interests.
- Given increased sensitivity in the US to investments from China, it is less likely that US-based venture capital firms will consider investing in an Israeli company with a preexisting Chinese investor. Factors that may further play a role are rights awarded to such Chinese investor, such as board membership, rights to appoint an observes and access to sensitive information or technology. More generally, Israeli companies with substantial investments from China should consider the impact that such investments may have on the ability to sell the company, raise funds or go public in the US, or even sell products in the US market (especially to government-related customers).
[1] See: Keynote Remarks by Assistant Secretary Fed do at the American Conference Institute’s Sixth National Conference on CFIUS, as prepared for delivery July 15, 2020 (https://home.treasury.gov/news/press-releases/sm1067); see also: CFIUS Annual Report to Congress for CY 2020 (https://home.treasury.gov/system/files/206/CFIUS-Public-Annual-Report-CY-2020.pdf)
[2] See: Chinese Investment in Israeli Technology and Infrastructure: Security Implications for Israel and the United States, by Shira Efron, Karen Schwindt, Emily Haskel; RAND National Security Research Division (Chinese Investment in Israeli Technology and Infrastructure: Security Implications for Israel and the United States | RAND); p.55.
[3] Id., p. 58.
[4] See: Press Release, December 13, 2021 Magnachip and Wise Road Capital Announce Withdrawal of CFIUS Filing and Mutual Termination of Merger Agreement (https://investors.magnachip.com/news-releases/news-release-details/magnachip-and-wise-road-capital-announce-withdrawal-cfius-filing)
Israel, however, is known for its relative openness to investments from China and many Israeli companies active in various industries, including those that can involve sensitive technologies, have accepted funding and maintained affiliations with Chinese entities, some of them also government-related. Such Israeli companies should be aware of CFIUS review and it’s potential to affect their ability to conduct business in the US through subsidiaries or the ability to attract funding or go public in the US. Indeed, Chinese investment in Israeli companies that develop sensitive technologies may also present security concerns to the US.[2] In particular, these concerns stem from potential transfers of sensitive technology to China, as a result of Chinese investments (including also investments by Chinese entities in Israeli VC firms, some of which in turn invest heavily in Israeli technology companies active in areas of cybersecurity, AI, robotics, etc.[3]). Even though Israeli target companies might not be involved in developing military applications, their technology, for example in the field of semiconductors, AI, or satellite communications, may have dual use applications and thus may raise significant security concerns to the US.
CFIUS reviews foreign investments in US businesses that could either result in foreign control or provide foreign persons with non-controlling rights, that may include board membership, observer rights or access to material nonpublic information. It is rather common that investments from China in the Israeli companies are accompanied by granting such investors with an ability to nominate a board member or appoint an observer. In case of Chinese investors in Israeli VCs, they may be granted access to technical development roadmaps, market position and intellectual property, all of which may qualify as material non-public information. Increased number of non-controlling investments requires a mandatory filing for certain transactions, especially those involved in critical technologies (that include, for example, defense, aviation, semiconductors and telecommunications),critical infrastructure, or sensitive data, so Israeli companies should address CFIUS analysis early on in structuring their deals.
CFIUS review of transactions can happen anytime, including after the deal is consummated, thus exposing an acquiror to transaction termination fees (depending on how they were negotiated and how the deal was structured) and substantial penalties for failure to make a CFIUS filing. Recently there is an increase in CFIUS pursuit of non-notified and finalized transactions.
For Israeli companies, there are several CFIUS-related considerations that should be taken into account:
- To the extent an Israeli company is contemplating an investment or acquisition by a Chinese company, it may want to reconsider its presence in the US to ensure it does not fall under CFIUS jurisdiction. Recent cases demonstrate that CFIUS may establish its jurisdiction even with minimal US presence and block the transaction. For example, in case of an acquisition by a Chinese private equity firm of a US-listed holding company that owns a Korean semiconductor company, most of the operations and technical capabilities of the target company were outside of the US.[4]
- Similarly, an Israeli company having a subsidiary in the US, even without substantial operations or assets, may trigger a CFIUS review, should the Israeli company, especially if involved in critical technologies, be a subject to an acquisition or investment from a foreign entity, with a greater chance of such review if the foreign entity is Chinese. As such, when evaluating a potential transaction ,an Israeli company with any US nexus should consider whether any of its activities, even if conducted outside of the US, may potentially be considered sensitive from the perspective of the US national security interests.
- Given increased sensitivity in the US to investments from China, it is less likely that US-based venture capital firms will consider investing in an Israeli company with a preexisting Chinese investor. Factors that may further play a role are rights awarded to such Chinese investor, such as board membership, rights to appoint an observes and access to sensitive information or technology. More generally, Israeli companies with substantial investments from China should consider the impact that such investments may have on the ability to sell the company, raise funds or go public in the US, or even sell products in the US market (especially to government-related customers).
[1] See: Keynote Remarks by Assistant Secretary Fed do at the American Conference Institute’s Sixth National Conference on CFIUS, as prepared for delivery July 15, 2020 (https://home.treasury.gov/news/press-releases/sm1067); see also: CFIUS Annual Report to Congress for CY 2020 (https://home.treasury.gov/system/files/206/CFIUS-Public-Annual-Report-CY-2020.pdf)
[2] See: Chinese Investment in Israeli Technology and Infrastructure: Security Implications for Israel and the United States, by Shira Efron, Karen Schwindt, Emily Haskel; RAND National Security Research Division (Chinese Investment in Israeli Technology and Infrastructure: Security Implications for Israel and the United States | RAND); p.55.
[3] Id., p. 58.
[4] See: Press Release, December 13, 2021 Magnachip and Wise Road Capital Announce Withdrawal of CFIUS Filing and Mutual Termination of Merger Agreement (https://investors.magnachip.com/news-releases/news-release-details/magnachip-and-wise-road-capital-announce-withdrawal-cfius-filing)
