In the midst of a significant increase in foreign direct investment (FDI) in the US life sciences industry, which includes medtech and biopharmaceutical companies, Chinese FDI has declined considerably since its peak year of 2016. However, according to a recent report, Chinese venture capital investment in the US life sciences industry remains remarkably resilient, partly due to the Chinese government’s “Made in China 2025” initiative and other industrial policies.
As demonstrated by recent cases, through the Committee on Foreign Investment in the United States (CFIUS), there is heightened scrutiny of Chinese investment in the US biotechnology industry, particularly with respect to transactions that may affect the US supply chain or critical or leading technology.
The determination of whether CFIUS clearance is required or recommended will generally turn on whether a company has “critical technology” or “sensitive personal data,” and whether the noncontrolling transaction has been structured in a way to wall off foreign investors from such critical technology and sensitive personal data.
Structuring transactions so that CFIUS would not have jurisdiction can be legitimate and generally is not considered evasion; for example, a license or collaboration agreement with no equity investment.
Another approach in venture deals is to use the standard National Venture Capital Association screening language to avoid holding CFIUS triggering rights (e.g., more than 9.9% ownership, no board or observer rights, no access to material nonpublic technical information or rights to substantive decision-making) until the transaction is cleared by CFIUS.
A company may want to consider filing if the closing should be conditioned on CFIUS clearance because of the national security risk profile, such as TID (those engaged with critical technologies, critical infrastructure and sensitive personal data); supply chain concerns; a foreign government as an investor; US government nexus through contracts, funding, or governmental or military customers; or a watched technology, among other concerns.
If a decision is made not to file a voluntary notice with CFIUS, the parties should prepare for non-notified outreach by CFIUS, which is almost automatic for Chinese investment in the life sciences industry. CFIUS can issue an interim order blocking the transaction to prevent the parties from proceeding with a transaction pending the completion of CFIUS review.
In any transaction involving a foreign person and a US biotechnology business, there is a potential CFIUS issue that should be analyzed promptly given the complexity of the rules.
Companies planning to seek foreign investment or offering themselves for sale to foreign persons should conduct self–CFIUS due diligence to identify the CFIUS concerns early on because such concerns may affect the transaction structure. Companies should also consider the implications for future US governmental funding of taking on foreign, particularly Chinese, investors.
International investors into the United States and purchasers should conduct CFIUS due diligence and a risk assessment of how to address CFIUS and other national security issues and the overall deal completion risk that they present.
Due to the geopolitical risks linked with Chinese investors, we are increasingly seeing a trend of requests from sellers to add certain protective clauses in the transaction document, such as the “reverse breakup fees” clauses related to a CFIUS review result, as well as clauses whereby, regardless of whatever mitigation measures CFIUS may impose, the buyer will need to do all they can to cooperate and comply with the mitigation requests from CFIUS.
For more information, see What Chinese Life Sciences Companies Need to Know Under US-China Tension, part of our Asia Life Sciences Webinar Series 2023, a collection of tailored webinars focusing on hot topics, trends, and key developments in the life sciences industry essential to our clients and contacts operating in Asia.