U.S. Scrutiny of Foreign Investment in the Semiconductor Industry: CFIUS Review and Export Controls Place Deals under the Microscope

By: Maria Alonso, Associate
Date: 04/08/2021

The U.S. semiconductor industry has always been very important to the country’s national security. As a result, the U.S. government ("USG") continues to increase legal protections of the semiconductor industry by imposing certain foreign investment restrictions and export controls.

One of the primary reasons for such legal protections is that the USG seeks to secure supply chains for U.S. companies and the U.S. semiconductor industry: the USG has highlighted semiconductor manufacturing as a priority, particularly when it comes to U.S. technology transfers to China, the largest market for semiconductor chips.

This article will discuss some of the recent foreign investment deals reviewed by the Committee on Foreign Investment in the United States ("CFIUS") and recent export controls involving the semiconductor industry.

CFIUS Review of Foreign Investments in the Semiconductor Industry

Pursuant to section 721 of the Defense Production Act of 1950, CFIUS has the authority to review foreign investment transactions in U.S. businesses for national security risks. The Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA") expanded CFIUS’s jurisdiction to review and take action to address national security concerns arising from certain non-controlling investments and real estate transactions involving foreign persons. Notably, section 721 of the Defense Production Act of 1950 also enumerates the U.S. President’s authority (at the recommendation of CFIUS) to "suspend or prohibit any covered transaction that threatens to impair the national security of the United States."

Semiconductors are a key component in most electronic devices and can be used in military applications. Therefore, it is no surprise that certain export-controlled semiconductor equipment and technology are included in the "critical technology" definition, found in the CFIUS regulations. As a result, the semiconductor sector has been and remains under strict scrutiny by CFIUS.

Semiconductor Deals Blocked or Withdrawn

To date, although U.S. Presidents have only exercised the authority to block certain covered transactions due to national security concerns six times – three of which occurred during the past two administrations and involved semiconductor deals – it is important to note that within the past few years other semiconductor deals subject to CFIUS scrutiny were ultimately dropped by the parties due to CFIUS concerns.

In 2016, President Obama blocked the Chinese firm, Fujian Grand Chip Investment Fund LP from acquiring Aixtron SE, a German-based semiconductor firm, because the acquisition would have also included the company’s U.S. assets in California. Although the Obama Administration did not detail the national security concerns for blocking the transaction, the U.S. Department of the Treasury issued a statement that noted, "the national security risk posed by the transaction relates, among other things, to the military applications of the overall technical body of knowledge and experience of Aixtron, a producer and innovator of semiconductor manufacturing equipment and technology."

Additionally, in 2017 President Trump blocked the acquisition of Oregon-based Lattice Semiconductor Corp. for $1.3 billion by Canyon Bridge Capital Partners Inc., a Chinese investment firm. The transaction was blocked for the following national security risks: 1) the potential transfer of intellectual property to the foreign acquirer; 2) the Chinese government’s role in the transaction; 3) the importance of the semiconductor supply chain integrity to the USG; and 4) the use of Lattice products by the USG.

Finally, in 2018 President Trump blocked the $117 billion acquisition of U.S.-based semiconductor chip maker, Qualcomm Incorporated (Qualcomm), by Singapore-based Broadcom Limited. Some national security concerns that CFIUS had expressed prior to the blocking decision included the risk of China dominating the 5G technology development and the potential disruption of the trusted supply relationship between Qualcomm and the U.S. Department of Defense.

Although these three are the only semiconductor deals to be blocked by U.S. Presidents, CFIUS scrutiny has caused other deals to be dropped. For example, in January 2016, after CFIUS raised concerns about Chinese control over dual-use semiconductor technology involved in making LEDs, the $3.3 billion acquisition of Lumileds, a Royal Dutch Phillips Electronics Ltd. subsidiary, by a Chinese consortium led by GO Scale Capital was withdrawn. In addition, in February 2016, due to concerns about CFIUS not approving the deal, Fairchild Semiconductor International, Inc., a U.S. semiconductor manufacturer company, rejected a $2.49 billion acquisition proposed by China Resources Microelectronics Ltd. and Hue Capital Management Ltd. Most recently, in February 2018, Xcerra Corp., a U.S. semiconductor testing company, announced that it was terminating its Merger Agreement with Unic Capital Management Co., Ltd. and China Integrated Circuit Industry Investment Fund Co., Ltd. because it was highly unlikely that CFIUS would approve the $580 million transaction.

Semiconductor Deals Cleared

Based on the three transactions blocked by U.S. Presidents as well as the semiconductor transactions that were ultimately undone, it may appear that CFIUS will not clear any foreign investments (especially Chinese investments) when a U.S. target is in the semiconductor industry. That, however, is not always the case: over the past few years, CFIUS has cleared several transactions involving semiconductor companies.

Below are three recent semiconductor deals that CFIUS has cleared which, it is important to note, do not involve Chinese investment:

  • In March 2020, CFIUS cleared the $10 billion acquisition of Cypress Semiconductor Corporation, a U.S. semiconductor design and manufacturing company, by Infineon Technologies AG (Germany).
  • In April 2020, CFIUS also cleared the estimated $1.8 billion acquisition of U.S. electronic components manufacturer, KEMET Corporation, by the Taiwanese company Yageo Corporation.
  • In June 2020, Adesto Technologies Corp., a California based semiconductor company, announced that CFIUS had cleared its estimated $500 million acquisition by Dialog Semiconductor plc (United Kingdom).

These semiconductor deals were cleared by CFIUS, but not before undergoing intense CFIUS scrutiny, possibly including at least one withdrawal and refiling of the CFIUS notice. In addition, CFIUS clearance of these transactions was most likely conditioned on the parties entering into a mitigation agreement (the details of CFIUS clearance terms are not usually made public).

Overall, CFIUS’s review and blocking of the China-related semiconductor deals shows the USG’s effort to implement foreign investment restrictions to protect the U.S. semiconductor industry. CFIUS will continue to closely scrutinize foreign investments in the semiconductor sector, and foreign investors looking to invest in U.S. companies involved in the semiconductor industry should submit CFIUS filings as part of their due diligence.

Export Controls Impacting the Semiconductor Industry

Apart from CFIUS’s focus on semiconductor transactions, the semiconductor industry also faces both existing export control restrictions, as well as new export controls that are likely to be issued in the near term.

Specifically, the U.S. Department of Commerce Bureau of Industry and Security ("BIS") has published several new rules that further restrict the access of Huawei, a Chinese technology company that the U.S. considers a threat to national security, to U.S. technology controlled under the Export Administration Regulations ("EAR"). These rules significantly limit Huawei’s ability to share its semiconductor designs or continue to rely on foreign foundries for semiconductor manufacturing using U.S. equipment, software, or technology.

To protect U.S. national security, on December 22, 2020, BIS added China’s Semiconductor Manufacturing International Corporation (SMIC) and ten related entities to the Entity List. The Entity List designation limits SMIC’s ability to acquire certain U.S. technology by imposing a license requirement for all items subject to the EAR, and the USG’s license review policy of Presumption of Denial for license applications involving "items uniquely required to produce semiconductors at advanced technology nodes 10 nanometers or below," means that license requests will likely be denied.

Further, the semiconductor industry will also be affected by BIS’s ongoing effort, pursuant to the Export Control Reform Act of 2018, to identify and establish appropriate export controls for certain "emerging technologies" and "foundational technologies."

This task can include modifying or adding new Export Control Classification Numbers ("ECCNs") for the identified emerging and foundational technologies. For example, on October 5, 2020, BIS published a final rule which added controls on six categories of "emerging technologies." This final rule focused primarily on items used in semiconductor manufacturing and development, surveillance equipment, and certain spacecraft. Semiconductor manufacturing and production was impacted by two of the controls: 1) the computational lithography software designed for the fabrication of extreme ultraviolet ("EUV") masks used in semiconductor manufacturing (ECCN 3D003 was modified); and 2) technology for finishing wafers for five nanometers production (ECCN 3E004 was created).

Additionally, in the advanced notice of proposed rulemaking for "foundational technologies" that BIS published on August 27, 2020, BIS specifically mentioned the potential to impose higher level controls on semiconductor manufacturing equipment and associated software tools, lasers, sensors, and underwater systems that can be tied to indigenous military innovation efforts in China, Russia, or Venezuela.

All the export controls discussed above provide a glimpse, if only the beginning, of export controls that are forthcoming for the semiconductor industry. Accordingly, we advise semiconductor companies to closely monitor export controls involving semiconductor manufacturing and production.


In summary, semiconductor deals continue to be a top priority for CFIUS, although as noted above, it is possible for some transactions to receive CFIUS clearance even as CFIUS rejects others. Accordingly, it is critical to note that export controls are already linked to, and have a significant role in, determining CFIUS jurisdiction for transactions involving critical technologies (which include semiconductor equipment/technology), and that existing and to-be-issued export controls will continue to close the gap in coverage of semiconductor deals subject to CFIUS review.

Foreign investors in the semiconductor industry, including semiconductor and semiconductor equipment manufacturing, need to be well advised of the regulatory regimes impacting their proposed transactions. For questions regarding deals subject to CFIUS regulations, semiconductor-related export controls, and any other matters discussed in this article, please contact the attorneys at Torres Law, PLLC.

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