In a recent interview with Dealreporter (subscription required), MoFo partners Chuan Sun and Ruomu Li shared their thoughts on the CFIUS development.
The past year has witnessed several acquisitions or investments by Chinese entities in U.S.‑listed companies receive clearance from the CFIUS, however, experts think that Chinese investors should not be overly encouraged, as these deals are not necessarily great case studies for assessing CFIUS risk.
Ruomu explained that whilst CFIUS’ clearance of the GNC, Sirtex, and GFPC deals provided some encouraging signs from a foreign investor’s perspective, the UTStarcom case is probably irrelevant for evaluating overall CFIUS risk.
Furthermore, uncertainties around the implementation of The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) - which will not fully take effect until February 2020 ‑ means many Chinese outbound investors will likely wait until they have more clarity over their exposure to CFIUS risk. Both CFIUS and foreign investors will likely need to go through a learning round to test and trial the revised regulatory regime, according to Chuan.
However, a small number of Chinese buyers are still sticking to their U.S. investment plans in less risky sectors despite the uncertainties. Ruomu said she is not surprised to hear that Chinese semiconductor equipment manufacturer NAURA Technology Group is still open to M&A in the U.S., and explained that the company’s good track record would boost NAURA’s chance of obtaining CFIUS approval for future deals as long as these deals did not involve critical technologies or sensitive matters.
Chuan also pointed out that Chinese deal making remains relatively active in the life sciences sector, despite R&D in biotechnology and nanobiotechnology being subject to the FIRRMA pilot program. Private equity funds are being raised and U.S. start-ups in the sector are receiving Chinese venture capital investments. This is happening because in certain areas within the sector, such as cancer drugs, CFIUS risk is perceived as relatively low, he said.
Chuan’s opinion was echoed by Ruomu. From her perspective, Chinese investment in drug development has not received the same scrutiny by CFIUS as has the TMT industry. Whilst U.S. domestic investors tend to invest in drug developers that have already made meaningful progress, Chinese investors are willing to get involved in early stage and even incubate a drug start-up. Therefore, she believed this field is expected to draw plenty of Chinese investments in the future.
Chinese investors can also help their U.S. targets gain access to the vast Chinese market, Ruomu further explained, adding that some Chinese investors are happy to be a pure financial investor, as a way to gain the invaluable early-stage exposure to emerging U.S. start-ups in the sector.
Nevertheless, Chinese investors are still facing a tougher environment even for pure financial investments. According to Ruomu, while Chinese investors don’t need to file with CFIUS for pure financial investments as limited partners of U.S. person controlled funds, or passive investments, in practice, passivity criteria have been tightened – the stake threshold that lawyers deem comfortable moved down to 5% from a pre-FIRRMA level of 9-10% and the Chinese investors shall gain no board or board observer seat, and shall not have access to material non-public technical information.