Over the last few weeks, there has been a flurry of activity at the Committee on Foreign Investment in the United States (CFIUS). In addition to imposing filing fees, which we wrote about here, and issuing proposed amendments to broaden the mandatory CFIUS notification requirements, which we wrote about here, CFIUS recently blocked a robotics joint venture in China with no U.S. assets and limited to operations outside the United States, released detailed information regarding the transactions reviewed by CFIUS during 2018 (as well as summary data for transactions reviewed in 2019), and announced a new electronic filing system.
CFIUS Blocks Ekso Bionics Joint Venture in China
In 2019, Ekso Bionics, Inc. (Ekso), a U.S. company manufacturing robotic exoskeletons for medical and industrial use, entered into a joint venture with two Chinese parties, Zhejiang Youchuang Venture Capital Investment Co., Ltd., or ZYVC, and Shaoxing City Keqiao District Paradise Silicon Intelligent Robot Industrial Investment Partnership (the JV Partners), to develop and service the exoskeleton market in China and certain other Asian markets and to create a global exoskeleton manufacturing center (the China JV). Under the publicly disclosed terms of the China JV, the JV Partners contributed cash and Ekso licensed certain patented technologies and non-patented manufacturing technologies to the China JV. The plan was for the China JV to build a manufacturing facility in China and manufacture products incorporating Ekso’s technology for the Chinese and other Asian markets. No assets in the United States were transferred (though entities affiliated with ZYVC were to make a small, non-controlling equity investment in Ekso), and Ekso’s operations in the United States were unaffected.
In February 2019, the U.S. Department of Defense (DoD) requested information regarding the export classification of Ekso’s products and whether Ekso intended to notify CFIUS of the China JV. Ekso publicly disclosed this inquiry and its conclusion that the China JV was outside of CFIUS’s jurisdiction. Nevertheless, Ekso and the JV Partners subsequently notified the transaction to CFIUS in December 2019, possibly as a result of a request from CFIUS or its member agencies to do so. Following its review, CFIUS concluded that its national security concerns regarding the China JV could not be mitigated and required that Ekso terminate its role with the China JV.
Given CFIUS’s general sensitivity to acquisitions of emerging technology by Chinese companies and Ekso’s past work for the Defense Advanced Research Projects Agency (DARPA), among others, on military exoskeletons, this result would not have been surprising had it been a Chinese acquisition of Ekso. But, based on the limited information that is publicly available, the transaction appears to have been far from that and its review potentially signals a significant expansion of CFIUS’s asserted jurisdiction.
Traditionally, CFIUS only had jurisdiction over acquisitions of “control” over a “U.S. business.” Pure technology transfer issues were left to U.S. export control laws. In this case, however, it appears that the joint venture acquired no assets in the United States, and while affiliates of ZYVC acquired shares in Ekso, based on Ekso’s public disclosure (including the transaction agreements) it appears that the initial $5 million equity investment constituted less than 5% of Ekso’s shares, and no shareholders’ agreements or other governance arrangements providing additional rights were disclosed. In any event, based on Ekso’s disclosure, it does not appear that the JV Partners in fact nominated any director to Ekso’s board (as all incumbent directors have been in office since before the China JV was created). Ordinarily, an acquisition of less than 10% of a U.S. business in which no additional governance rights over the U.S. business are conveyed is not an acquisition of “control” for CFIUS purposes. According to the publicly disclosed agreements, Ekso agreed to license technologies enabling the China JV to manufacture products in China, to sell the products, and to provide marketing, promotion, technical training, and maintenance for the products, all limited to specified markets in Asia. Ekso also agreed to provide training and technical support to the China JV’s personnel.
Normally, simply licensing intellectual property to a foreign entity would not be an acquisition of “control” over a U.S. business (and the U.S. export control regime would address any technology transfer issues). For example, Section 800.302(f)(7) of the CFIUS regulations provides as follows:
Example 7.[…] Corporation X, a U.S. business, has developed important technology in connection with the production of armored personnel carriers. Corporation A [, a foreign person,] seeks to negotiate an agreement under which it would be licensed to manufacture using that technology. Assuming no other relevant facts, neither the proposed acquisition of technology pursuant to that license agreement, nor the actual acquisition, is a covered control transaction.
As this example appears to closely parallel the China JV, the question is why this non-U.S. joint venture, apparently acquiring no assets (not even intellectual property licenses, as the authorized territory is limited to Asia) within the United States, would be subject to CFIUS’s jurisdiction.
The most likely possibility is that CFIUS used the then-applicable critical technology pilot program to assert jurisdiction over the China JV. Under that program (and under CFIUS’s current regulations relating to jurisdiction over U.S. businesses involved with critical technologies), an acquisition of “control” over a U.S. business is not required. Instead, an investment of any size that gives the investor access to “material non-public technical information” with respect to “critical technologies” (essentially, certain U.S. export-controlled technologies) may constitute a transaction within CFIUS’s jurisdiction. The theory may have been that because the JV coupled the small equity investment with the IP license (which, again based on public disclosure, may have involved “critical technology” in the view of CFIUS), the investment resulted in the access to technology. Similar “covered investment” provisions continue to exist in CFIUS’s proposed new critical technology mandatory notification rules.
As a result, U.S. companies engaged in manufacturing and R&D joint ventures outside the United States should be aware that any equity investment in the U.S. partner may trigger CFIUS jurisdiction if export-controlled “critical technologies” are licensed to the joint venture, even if the joint venture is limited to operations outside the United States and not a single tangible asset within the United States is transferred. More significantly, under the proposed new rules, CFIUS notification would be mandatory with respect to any contribution of technology that is subject to controls for export to the jurisdiction of the joint venture or the joint venture partner(s) (even, in many cases, if export license exceptions would apply).
The second, and less likely, possibility is that CFIUS somehow concluded that the JV Partners acquired “control” over a U.S. business. It is difficult to see how this could be the case. As noted, based on public information, it appears that the foreign equity investment into Ekso was less than 10% and carried no special governance rights. It is also difficult to see, in light of the example noted above, how the China JV could be said to have acquired assets constituting a U.S. business.
There is a second relevant example in Section 800.302(f)(10) of the CFIUS regulations:
Example 10. Same facts as the example [above], except that Corporation A and Corporation X establish a joint venture that will be controlled by Corporation A to manufacture armored personnel carriers outside the United States, and Corporation X contributes assets constituting a U.S. business, including intellectual property and other intangible assets required to manufacture the armored personnel carriers, to the joint venture. Corporation X has contributed a U.S. business to the joint venture, and the establishment of the joint venture is a covered control transaction.
However, it is unclear what the additional “assets constituting a U.S. business” distinguishing this case from this additional example might be, either in the publicly available facts or the regulations (which contain no guidance beyond the tautological statement that assets including intellectual property contributed to a foreign joint venture may constitute a U.S. business if they are assets constituting a U.S. business). We cannot rule out the possibility that CFIUS took the view that the technology transfer here somehow constituted a transfer of a U.S. business, but if so no meaningful guidance is publicly available.
CFIUS Releases 2018 Annual Report and Limited 2019 Data
The CFIUS annual report for 2018 and limited data for 2019 released by CFIUS, which provide a glimpse into the first mandatory notifications submitted to CFIUS, show that investments reviewed by CFIUS during 2018 and 2019 remained relatively consistent with prior years and signal that CFIUS review may be more efficient in the post-Foreign Investment Risk Review Modernization Act (FIRRMA) implementation world.
According to CFIUS, the number of filed CFIUS notices stayed relatively consistent from 2017-2019 (237 in 2017, 229 in 2018, and 231 in 2019). The percentages of notices that proceeded to a second-stage investigation, though higher than historical norms, fell from 72.6% in 2017 to 69.0% in 2018 and further to 48.1% in 2019. The extension of the first-stage review from 30 to 45 days appears to have helped; for notices filed before August 13, 2018 (the date of the change), 76% proceeded to investigation, whereas only 53% of notices filed after August 13 proceeded to investigation. There also was a dramatic decrease in the number of notices withdrawn and refiled (which restarts the review timetable), from 18.6% and 18.3% in 2017 and 2018, respectively, to 7.8% in 2019.
In terms of outcomes, the recent spike in transactions that failed to clear CFIUS review appears to have abated. In 2017 and 2018, 10.5% and 8.7%, respectively, of transactions were either abandoned as a result of CFIUS issues (the more common negative outcome) or blocked by the President. That proportion fell to 3.9% in 2019, as compared to 1.9% during the period from 2014-2016. Of course, variations in facts and circumstances limit the interpretive value of these averages. Transactions requiring mitigation agreements remained relatively flat in 2018 (12.7%, as opposed to 12.2%); 2019 data is not yet available.
The CFIUS data from 2018 provides a glimpse into the disposition of short-form declarations (now available for all filings) during the first two months of the pilot program established by CFIUS in November 2018. CFIUS reviewed 21 declarations in November-December 2018. CFIUS cleared two of those declarations, requested a formal written notice in connection with five, and determined that it could not conclude action on 11 (leaving them free to proceed but providing no assurance that CFIUS could not revisit the transaction in the future). These numbers comport with the general understanding among CFIUS practitioners that CFIUS is unlikely to clear transactions solely on the basis of a short-form declaration and may only be willing to do so if CFIUS is familiar with the foreign investor.
The report also shows that investments by industry and country have remained relatively consistent. With respect to the latter, filings from Chinese investors continued to outpace filings from other countries, but the statistics underscore the fact that CFIUS continues to regularly review investments from jurisdictions that are close U.S. allies. The chart below shows the top five countries by number of filings during 2018.
|Number of Filings
CFIUS Electronic Case Management System
Although likely more important to CFIUS practitioners than parties to a transaction going through the CFIUS review process, CFIUS recently announced an electronic case management portal. CFIUS began accepting draft CFIUS notices through the portal on May 20. Prior to June 1, 2020, formal written notices and declarations must continue to be submitted via email. Beginning on June 1, 2020, parties must use the electronic portal to submit draft and formal written notices, as well as declarations. This is a welcome development for practitioners that should significantly streamline communications with CFIUS.
If you have any questions about the above or U.S. foreign direct investment issues generally, please do not hesitate to contact the listed authors or any of your regular Firm contacts.
 While notification is nominally voluntary, CFIUS has the power to open an investigation sua sponte and to force the production of information by subpoena, so there is little incentive to antagonize CFIUS by refusing a request.
 A second $5 million tranche, which would have been invested at a price that could not vary more than 20% from the first tranche, was never consummated but apparently would have left the ZYVC parties below 10%.
 See our prior memorandum on the proposed rules, Proposed Rule Would Broaden CFIUS Mandatory Notification Requirements (May 26, 2020), available at https://www.clearygottlieb.com/-/media/files/alert-memos-2020/proposed-rule-would-broaden-cfius-mandatory-notification-requirements.pdf.