In what may be the first action of this type, CFIUS has asked the U.S. party to a China joint venture to terminate its role in the project.
Ekso Bionics Holdings, Inc., a Nasdaq-listed medical devices company, announced a joint venture in January 2019 with Zhejiang Youchuang Venture Capital Investment Co., Ltd. and another partner to develop, sell and support exoskeleton products in Asia. The US party reportedly was to contribute a license to manufacturing technology together with its PRC patent rights; the other parties were to contribute cash.
CFIUS applies to any transaction “by or with any foreign person that could result in foreign control of any U.S. business, including such a transaction carried out through a joint venture.” In the joint venture context, this generally means the parties must take care not to contribute into the joint venture things that, taken together, might constitute a “U.S. business.”
CFIUS regulations suggest a technology license by itself is not a U.S. business. The regulations contain an example in which a license to a foreign party of technology needed to manufacture armored personnel carriers, even when coupled with the sale of the U.S. licensor’s production of APCs, did not constitute the acquisition of a U.S. business. Of course, any technology license would be subject to scrutiny under export regulatory laws, but that is a separate question.
On the other hand, the regulations suggest that “land and equipment … [together with] intellectual property, other proprietary information, and other intangible assets,” when contributed to a joint venture, could constitute a U.S. business. Practitioners generally view the contribution of U.S. personnel to be problematical as well. Where the U.S. assets are not even remotely sufficient to be operated independently as a business, they shouldn’t constitute a “U.S. business.” Many deals do not present such a bright line, however.
After the parties established their joint venture, the U.S. government inquired into the deal, and in December 2019 the parties made a voluntary filing with CFIUS. In its review, CFIUS focused on Ekso’s legacy work for the US government as well as technology transfers and other aspects of the joint venture. At the end of the day, CFIUS was not able to resolve its national security concerns and asked the parties to voluntarily terminate Ekso’s role in the joint venture. The parties have indicated they will work with CFIUS to finalize the terms of an agreement to do so.
This development is sure to cause more waves in an already choppy US-China business environment. But parties should be careful not to generalize from one case, where not all the facts are known.
The 60-second takeaway is this is not positive news, but companies should be careful not to over-generalize from one case.