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August 4, 2020

Stroock Special Bulletin

By: Chris Griner, Gregory Jaeger, Shannon Reaves, Christopher R. Brewster, Erin Bruce Iacobucci

On Wednesday of last week, U.S. Treasury Secretary Steven Mnuchin announced that TikTok was under a national security review by the Treasury Department’s Committee on Foreign Investment in the United States (CFIUS), and that the agency was close to making a recommendation to President Trump regarding the Chinese-owned video-sharing app.  TikTok is a wildly popular short-form video networking service owned by the Chinese firm ByteDance.  The announcement confirmed what had been unofficially known since last November – that TikTok was being investigated by CFIUS based upon national security concerns, including the gathering and storage of massive amounts of personal data and the Chinese government’s censoring of political content on TikTok. 

According to news sources, on Friday of last week, President Trump was planning to announce that he would either “ban” TikTok, or require the company’s owner, Beijing-based ByteDance, to divest its ownership interest.  Presidential divestment orders are exceedingly rare, although many transactions have been abandoned or unwound to avoid a Presidential veto.  (“Banning” TikTok would presumably entail export controls that would effectively deny TikTok access to U.S. markets, a national security protection that does not depend on CFIUS review but can be difficult to enforce.) The latest news is that Microsoft, which has been in negotiations to acquire ByteDance, will pursue the acquisition of TikTok with an eye toward completing the transaction by September 15. 

The history of the TikTok transaction began in November 2017, when ByteDance acquired the app for approximately $1 billion. was a Shanghai-based app that maintained an office in Santa Monica, California, from which it established a large U.S. presence.  ByteDance later merged into TikTok, which took over’s U.S. subscribers.  The enormous world-wide popularity of the TikTok app (approximately 1.5 billion monthly users, including approximately 26.5 million users in the U.S.), eventually caused bipartisan concern regarding how the app was gathering and maintaining personal information, and importantly, whether ByteDance could be compelled to disclose such user information to the Chinese government.  TikTok maintains that it has never provided data to the Chinese government and would not do so if asked.  Secretary of State Mike Pompeo disagrees, saying that people should only download TikTok “if you want your private information in the hands of the Chinese Communist Party.”

The President’s actions against TikTok come as no surprise.  The Pentagon has already discouraged service members and their families from using TikTok, the Biden campaign bars its use on devices used by campaign staff, and the Defense Information Systems Agency has instructed DOD personnel not to use TikTok.  In addition, Senators Tom Cotton (R-AR),  Chuck Schumer (D-NY), and Marco Rubio (R-FL) have noted that China has sought to censor TikTok videos, especially videos concerning Hong Kong, and have raised the possibility that the platform could be used to influence the U.S. elections and undermine alliances.  In addition to being an entertainment medium, TikTok is also used to share political messaging.   

The President’s threats against TikTok also are consistent with other actions that have been taken regarding other recent transactions such as Grindr, PatientsLikeMe and StayNTouch Inc., all of which were unwound after skipping CFIUS review.  Although CFIUS never publicly announces the reasons for its recommendations, it is clear that its action regarding the TikTok acquisition likely was based upon the risk to personal data – a longstanding issue in CFIUS reviews that is expressly called out in the Foreign Investment Risk Review Modernization Act of 2018.  The TikTok review illustrates the continuing bipartisan concern in the U.S. that the Chinese government can compel Chinese companies to support and cooperate with Chinese government requests for personal data, notwithstanding any pledge by the company to maintain the confidentiality of such data. 

The TikTok transaction is also a vivid reminder that investors act at their peril if they bypass CFIUS review of transactions that may implicate U.S. national security.  Transactions that are not filed for CFIUS review remain open to challenge in perpetuity.  The hard lesson to be learned from TikTok, and other similar cases, is that even if companies take significant measures to protect the integrity of personal data they collect, those measures may not be enough to assuage U.S. regulators if a foreign government can override those protections, especially if that government is at odds with the United States. 

The lessons for dealmakers from the TikTok veto and its predecessors are clear:

1. FILE with CFIUS any foreign acquisition of, or covered investment in, a U.S. business that involves access to personal identifying information; and

2. FILE with CFIUS any foreign acquisition of, or covered investment in, a U.S. business that disseminates or is or can be a platform for disseminating political information.

Since the CFIUS review process was first written into law, we have noted that transactions that are not filed for review are open to challenge forever – even months and years after closing.  Although CFIUS reviews can cause unwanted delays and result in the restructuring of transactions, unraveling a transaction can impose staggering costs, including forced fire sales of valuable businesses and/or properties.  Cases such as TikTok and Grindr receive headlines – but there are many more low-profile transactions that CFIUS has called in for review, resulting in parties abandoning transactions, often at significant inconvenience and potential cost.

Although the TikTok case sounds alarms for Chinese investors and their partners, investors from allied countries may find a different message in the case.  It is now clear that Chinese investments present special CFIUS challenges and can expect aggressive review by the Committee.  For years, investors have complained that Chinese buyers were driving up prices beyond reason as they pushed to acquire U.S. companies.  The U.S. continues to encourage foreign investment, including investment in the national security sector, but there is no question that it is more difficult for a Chinese transaction to clear CFIUS review – and some will be blocked outright.  This could offer major investment opportunities for investors from allied countries.


For More Information:

Chris Griner

Gregory Jaeger

Shannon Reaves

Christopher R. Brewster

Erin Bruce Iacobucci

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.