Jason Doiy / ALM

This week, an order from President Donald Trump put a halt to Singapore-based Broadcom Corp.'s bid for San Diego-based Qualcomm Inc., which was slated to be the largest tech deal of all time.

Trump's order followed a Monday opinion from the Committee on Foreign Investment in the United States (CFIUS), which is led by U.S. Treasury Secretary Steven Mnuchin, and investigates the national security implications of foreign investments in U.S. companies. The interagency group concluded that Broadcom's takeover of semiconductor and telecommunications company Qualcomm posed a threat to American national security.

A letter from the Treasury Department said CFIUS believed the deal would reduce Qualcomm's “long-term technological competitiveness” and would “leave an opening for China to expand its influence on the 5G-standard setting process.” There were also concerns related to Qualcomm's government contracts.

The Broadcom ruling could have broader implications for how CFIUS defines national security in relation to U.S. tech companies and their innovations, according to attorneys and academics familiar with the committee's work.

The idea of keeping technological advances in the United States isn't an entirely new concept, said David Zaring, an associate professor of legal studies and business ethics at the University of Pennsylvania's Wharton School. He recalled that CFIUS stopped the sale of Fairchild Semiconductor Corp. to Japan-based Fujitsu Ltd. under President Ronald Reagan to keep chip-design technology within American borders.

Overall though, CFIUS has been a rather quiet group—especially on technology—but that looks to be changing under the Trump administration.

“Here's an administration that invoked national security as an excuse for imposing tariffs on imports from Mexico and Canada. They're not restricting their security focus on hostile states,” said Doug Melamed, a professor at Stanford Law School and former senior vice president and general counsel of Intel Corp. “Their view of national security is it should be homegrown and home controlled.”

It's a view that could prove problematic for tech companies looking to expand their innovation outside of the United States, said Zaring. He noted that many American tech companies want to be global leaders and to engage with technology being produced abroad, and that engagement is often done through investments.

“That's tricky for general counsels,” he said. “But if they can establish that the foreign engagement is in the service of ensuring that American tech firms maintain a global leadership role in technology's infrastructure, then that kind of story might be a little easier to sell to CFIUS than the alternative.” 

He said that in-house counsel now have to think about national security and what technology transfers are going overseas in acquisitions by international companies, the same way they've always had to consider antitrust and other concerns. There's also the pending Foreign Investment Risk Review Modernization Act, which Zaring said would boost CFIUS' power to investigate technology transfers.

In the past, CFIUS, created in 1975, mostly dealt with manufacturing deals and intervened in cases where government contracts or data may be at stake. Every decade or so, Zaring said, the group's regulations have been updated and modernized, and FIRRMA's implementation would be in line with that precedent. If passed, there could be complications for in-house counsel regarding previously approved acquisitions.

“There's the ability [for CFIUS] to look back on investments and initiate investigations,” he said. “That's got to be terrifying for general counsels who think that an acquisition has been cleared.”

But there is some good news for in-house counsel at tech companies—they may be able to use CFIUS as a way to dodge a hostile takeover. Jason Waite, ‎a partner at ‎Alston & Bird who focuses on international trade and investment transactions said CFIUS' investigation into Qualcomm and Broadcom's deal is unusual because Qualcomm itself filed the notice asking for a review on the acquisition.

“The question is, is that what happened here? Did Qualcomm use CFIUS to head off this vote and is that now a tool in the toolbox of companies facing such votes?” Waite said. “And are we going to see the committee entering into these proxy fights more often, or is this such an unusual case?”

For companies looking to evade a foreign hostile takeover, CFIUS may be the answer their legal departments have been looking for. For everyone else, it could just mean increased complications, Waite said, and that means planning ahead by identifying concerns during due diligence and creating a thorough and transparent plan to address CFIUS worries.

“Qualcomm is an unusual case, because most companies want to do a deal and it's not clear if Qualcomm's interest here was to do a deal,” Waite said. “For companies that want to do a deal, [they should] engage in due diligence, including CFIUS engagement.”