Against the background of global economic integration and China’s “going global” strategy, the scale of overseas M&A by Chinese enterprises has been growing. With the rise of trade protectionism and the intensification of China-US trade frictions, the US has imposed restrictions on cross-border M&A to prevent foreign enterprises from obtaining leading technologies in the US and their IP rights through commercial channels, to contain competitors, and to maintain technological advantages and economic interests.
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Since the US Export Control Reform Act (ECRA) and the Foreign Investment Risk Review Modernisation Act (FIRRMA), as part of the National Defence Authorisation Act for Fiscal Year 2019, took effect on 13 August 2018, the US has put up trade barriers to technology exports and foreign investment legislatively through the technology export path.
In particular, the US has added 14 new emerging and foundational technology (EFT) control lists in the act, covering artificial intelligence (AI), machine learning, microprocessor technology, advanced computing, quantum information and sensing technology, robotics and advanced materials.
Two major regulatory authorities
The ECRA Has authorised the US Department of Commerce to be responsible for and enforce the Export Administration Regulation (EAR), specifically the Bureau of Industry and Security of the Department of Commerce, to structure the export control system and control measures under the EAR.
The FIRRMA authorised the Committee on Foreign Investment in the US (CFIUS) to review and regulate foreign investments involving critical technology. Under the FIRRMA, a foreign investment transaction must be filed with the CFIUS if:
(1) the investment is led by a foreign government;
(2) the target of the investment is a US business owning critical infrastructure, critical technologies or sensitive personal data of US citizens; and
(3) foreign investors will hold a material interest in the target of the investment.
Two regulations and entity list
Commerce control list (CCL)
This is a list of products, technologies and software controlled by the EAR, with an export control classification number assigned to each restricted item. This number consists of three parts:
(1) restricted technology fields, divided into 10 categories (0-9);
(2) restricted formats, divided into five categories (A-E); and
(3) reasons for the restriction, divided into six categories. The CCL will be updated from time to time according to US national security and diplomatic needs.
Commerce country chart (CCC)
There are 196 countries and regions arranged into five categories (A-E) according to the security threat level, from lowest to highest. Among these categories, China and Russia are categorised as group D, while Iran, North Korea, and Cuba are in group E. The US government will determine whether an item needs a licence, and which licence is needed using both the CCL and CCC.
Entity list
US organisations are not allowed to import or export, trade or make academic exchanges with entities in this list unless they obtain a licence.
Technology export control
The technology export control covers all US companies, and their subsidiaries and affiliates abroad, which can be involved in product or technology export for military use. The contract parties involved in the US technology export agreement also should alert their clients to comply with relevant US laws. Under the US Department of Commerce’s EAR, exports of products or technologies listed on the CCL require an export licence from the Department of Commerce.
Exports under US technology export controls come in three forms:
(1) Export. The transmission of materials (goods, software and technology) in any form outside the US, including their transfer and transportation;
(2) Re-export. The retransmission of materials from a non-US country to another non-US country; and
(3) Deemed export. The transfer or transmission of materials within the US to non-US persons. Technology includes tangible information and intangible technical services and technical exchanges. Besides the conventional transfers of materials, technical exchanges, product demonstrations, meetings and communications with non-US persons may be deemed “exports” under the EAR.
System for licences
The US government operates a licensing system for transactions in controlled items and technologies. Theoretically, not all transactions involving controlled technology require a licence. Generally, the “end use” and “end user” of the technology are significant in determining whether a licence is required for a transaction relating to the transfer of technology or IP.
Types of export licences include general licences, single validity licences (also known as special licences), and multiple validity licences. Generally, export licences should be applied for by exporters. The issuance of an export licence requires a number of steps, including government-to-government assurances and multilateral reviews.
Cross-border M&A has become an important way for companies to acquire quality resources globally, and the leading technologies and IP owned by a target company have become increasingly significant in cross-border M&A. Thus, in such cross-border M&A transactions, the parties should pay attention to technology export control to avoid risks caused by foreign government regulations.
Guan Gang is a partner at East & Concord Partners
East & Concord Partners
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E-mail: guangang@east-concord.com
