The China Question

www.worldecr.com 16 ThE ChInAquESTIOn CHINA imposed technology export controls and sanctions on China, they have also raised tough regulations on Chinese investments in companies working on the sensitive technologies that Beijing is aer. In Washington, the watchdog keeping an eye on China is the powerful Committee for Foreign Investment in the United States (‘CFIUS’). Since August 2018, when then- President Trump gave it fangs with the Foreign Investment Risk Review Modernization Act (‘FIRRMA’), CFIUS has been especially tasked with sniffing out Chinese investments in what it calls ‘emerging and foundational technologies’. In May, Ekso Bionics, a US manufacturer of robotic exoskeletons, disclosed it had received a CFIUS ultimatum to terminate its role in a 2019 joint venture with two Chinese partners. According to the known terms of the deal, in return for a small non-controlling investment by the Chinese parties, Ekso Bionics had licensed certain patented technologies to the joint venture. e plan was to build a manufacturing facility in China and manufacture products incorporating Ekso’s technology for the Chinese and other Asian markets. Tahlia Townsend, a partner at law firm Wiggin and Dana, says one has to guess at the exact rationale behind the ultimatum. ‘Reading between the lines, it looks like CFIUS determined that the combination of the fairly modest investment into the US company by the Chinese entities and the IP (intellectual property) rights – the licence going the other way – would give those Chinese investors access to material that is non-public technical information, and thus trigger a CFIUS requirement,’ she explains. ‘IP licensing is of course a very common strategy, but there are circumstances under which IP licensing in conjunction with certain other things, like an investment by the licensee and concomitant access or other rights, can trigger a CFIUS review issue. I think this case is a pretty salutary example for industry.’ Townsend adds that there are good reasons to believe that CFIUS regulations will be further enhanced in the near future, including with respect to areas of concern around China. She refers to the bipartisan support in the US government for a tough line on Beijing as an indication of where policy is headed under the present administration. On 8 June, the US Senate overwhelmingly passed the Strategic Competition Act of 2021, a bill that sees nearly a quarter-trillion dollars spent over the next five years on scientific research and technology to bolster competitiveness against China. e legislation is not expected to sail unchanged through Congress, but shortly aer it passed the Senate, President Biden said he hoped to sign it into law ‘as soon as possible’. ‘For everything from national security to economic policy, there’s a clear and urgent need to reorient the way our country views and responds to the challenge from China,’ he said. Townsend notes that the version that passed the Senate has conflicting provisions regarding a proposed expansion of CFIUS review to certain foreign gis to, and contracts with, universities, but it looks as though that particular expansion of CFIUS authority won’t now make it into law. e impetus that led to inclusion of such authority in an earlier version of the bill, however, is instructive about the temperature around China issues. Townsend advises that another piece of legislation to watch is the US Pharmaceutical Supply Chain Review Act, introduced in April 2020, which calls for a look at the US pharma supply chain to determine over-reliance on foreign countries, especially China. ‘We can also expect noises about expanding CFIUS reviews for non-controlling investments to areas like PPE (personal protective equipment) and other kinds of medical/pharmaceutical areas that are not expressly covered by the current CFIUS regulations,’ as well as expanded concerns around investments in agriculture and food supply, Townsend says. Pursuant to FIRRMA, in February 2020, CFIUS gained expanded jurisdiction over the US real estate sector, obtaining the authority to suspend or prohibit foreign investments involving property rights over certain real estate that could pose national security concerns. Not content with cutting China from getting access to US technology, on 3 June President Biden issued an EO making it illegal for US persons to invest in technology in China, specifically in certain companies with alleged links to what the US Treasury refers to as the ‘Chinese Military-Industrial Complex Companies’. A little bit more certainty ‘Just the development and the implementation of the [FIRRMA] programme rules has created a little bit more certainty with which to judge Chinese investments,’ says Ryan Fayhee, a partner at Hughes Hubbard inWashington, DC. ‘ere is a lot more clarity around the implementation of the FIRRMA rules than there was in the past.’ Fayhee agrees there are ‘significant limitations to do wholesale acquisitions by Chinese companies in the United States and it’s still difficult to avoid some of these critical CFIUS touchpoints, in particular companies that maintain significant amounts of personal data, or acquisitions that don’t trigger some of the real estate related-rules or don’t involve some core IP issues, particularly in the high-tech space.’ But, he says, ‘at doesn’t mean Chinese companies can’t invest in the United States and can’t make their acquisitions. I think there’s some room for investment, there’s some room for acquisitions.’ Roy Liu, also a partner at Hughes Hubbard, and a colleague of Fayhee’s in the DC office, observes that FIRRMA’s mandatory filing rules, which apply to certain investments involving ‘critical’ technologies or foreign governments, has ‘There is a lot more clarity around the implementation of the FIRRMA rules than there was in the past.’ Ryan Fayhee, Hughes Hubbard & Reed ‘Between them, CFIUS and the Commerce Department are trying to control all the routes that can be used to get US technology into Chinese hands.’ Barbara linney, BakerHostetler