CFIUS, IEEPA and “Rule of Law”

in the US – TikTok’s Implications for

Future Investments into the US
August 7, 2020

Jingsong (Jeff) Zhang

Partner, New York & Beijing
T +1 212 506 5363
E jeffzhang@orrick.com
1. Background

• TikTok is a video-sharing social networking service owned by ByteDance,

a Beijing-based Internet technology company.

• ByteDance first launched Douyin for the Chinese market in 2016. Later,
TikTok was launched and became available worldwide, including the United
States, after merging with Musical.ly in August 2018. It has reportedly been
downloaded over 175 million times in the United States and over one billion
times globally.

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2. Two Lines of Concerns Raised by The
US Government

• First, there is a concern about the user data -- TikTok collects and the prospect
that Chinese government can access that data.
– “TikTok automatically captures vast swaths of information from its users, including Internet
and other network activity information such as location data and browsing and search
histories. This data collection threatens to allow the Chinese Communist Party access to
Americans' personal and proprietary information -- potentially allowing China to track the
locations of Federal employees and contractors, build dossiers of personal information for
blackmail, and conduct corporate espionage.”
-- President Trump’s Executive Order issued on August 6, 2020
– TikTok argues that this is not the case because data from U.S. users remains exclusively in
TikTok’s servers located in America.

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2. Two Lines of Concerns Raised by The
US Government (Cont.)

• Another concern is whether TikTok employs content-moderation policies and

practices that serve the preferences of the Chinese government.
– “TikTok also reportedly censors content that the Chinese Communist Party deems
politically sensitive, such as content concerning protests in Hong Kong and China's
treatment of Uyghurs and other Muslim minorities. This mobile application may also be
used for disinformation campaigns that benefit the Chinese Communist Party, such as
when TikTok videos spread debunked conspiracy theories about the origins of the 2019
Novel Coronavirus.”
– “These risks are real … The United States must take aggressive action against the owners
of TikTok to protect our national security.”
-- President Trump’s Executive Order issued on August 6, 2020

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3. Can the Executive Branch Force ByteDance to Sell
TikTok – a “Shotgun Wedding”? Yes.

• The legal framework here involves the Committee on Foreign Investment in

the United States (“CFIUS”), which is an inter-agency panel authorized to
evaluate whether “covered transactions” would threaten the national security
of the United States.
• In 1988, Congress passed the Exon-Florio Amendment to Defense
Production Act, which conferred on the President the authority to prohibit
“mergers, acquisitions, or takeovers” that threaten national security --
Congress has delegated to the President authority to ban such transactions if
the executive branch makes the requisite findings.

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3. Can the Executive Branch Force ByteDance to Sell
TikTok – a “Shotgun Wedding”? Yes. (Cont.)
• ByteDance acquired Musical.ly in November 2017 for nearly $1 billion, and merged it
into TikTok in August 2018.
• Though Musical.ly like ByteDance was a Chinese company, such acquisition could be subject
to CFIUS review.
– For purposes of CFIUS review, a covered “U.S. business” is any entity that engages in interstate
commerce in the United States—even if that entity is a foreign corporation. (See 31 CFR 800.252(a)
(a “US business…means any entity, irrespective of the nationality of the persons that control it,
engaged in interstate commerce in the United States”)).
• ByteDance did not seek approval from CFIUS at the time of the acquisition. But as TikTok’s
popularity in the U.S. exploded and the two lines of concern described above arose, and as
CFIUS authority extends to retroactive review of prior transactions, CFIUS opened a review of
the ByteDance-Musical.ly deal in November 2019.
• CFIUS may conclude that ByteDance should not have been allowed to acquire the business
now known as TikTok, and order divestiture or else cease operations in the United States.
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4. Can ByteDance Litigate Such A Determination?

• In general, CFIUS orders (like other actions under the Defense Production Act)
are not subject to judicial review, at least according to the statute.
• But the D.C. Circuit has construed that statutory prohibition not to apply to
constitutional claims that might be made.
– In 2014, the D.C. Circuit’s Ralls decision approved a procedural due process
challenge brought by a Chinese company when CFIUS issued a retroactive
divestment order involving the company’s acquisition of four American companies.
– The court held that the Fifth Amendment requires that the subject of such orders
must be given the chance to confront at least the unclassified evidentiary basis for
the CFIUS determination and to present their own evidence. (See Ralls Corp. v.
Comm. On Foreign Inv. in US, 758 F.3d 296 (D.C. Cir. 2014)).
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4. Can ByteDance Litigate Such A Determination?
(Cont.)

• Has ByteDance had such an opportunity since the commencement of the

pending CFIUS review?
– ByteDance may well be in the midst of receiving all the process that is due
to it.
– It could still sue, objecting that it deserved more process than it got and that
the ultimate CFIUS determination was arbitrary despite the process that
was given, but they are not likely to win in the end on substantive issues.

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5. Can the Executive Branch Ban TikTok?

• Yes, President Trump issued an executive order to ban TikTok on August 6,

2020.
• IEEPA (International Emergency Economic Powers Act) is a federal law
authorizing the president to regulate international commerce after declaring a
national emergency in response to any unusual and extraordinary threat to the
United States which has its source in whole or substantial part outside the
United States.
– Under IEEPA, the president (or the executive branch entity such as US
Department of Commerce as delegated by the president) can investigate, regulate
or simply prohibit—that is, ban—an array of activities involving a sanctioned entity
(including payments, notably) and can freeze the assets of that entity (thereby
prohibiting all dealings with the foreign entity’s interests in those assets).
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5. Can the Executive Branch Ban TikTok? (Cont.)

• Alternatively, the administration might assert that this situation falls within the scope of
Executive Order 13873 (“Executive Order on Securing the Information and
Communications Technology and Services Supply Chain”), from May 2019.
• EO 13873, which was inspired by concerns about Huawei and ZTE, opens with the
requisite emergency declaration:
– …the unrestricted acquisition or use in the United States of information and
communications technology or services designed, developed, manufactured, or
supplied by persons owned by, controlled by, or subject to the jurisdiction or
direction of foreign adversaries augments the ability of foreign adversaries to create and
exploit vulnerabilities in information and communications technology or services, with
potentially catastrophic effects, and thereby constitutes an unusual and extraordinary
threat to the national security, foreign policy, and economy of the United States.

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6. So, What Is in The Ban?

• Legal basis:
– “By the authority vested in me as President by the Constitution and the laws of the United States of
America, including the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.)
(IEEPA), the National Emergencies Act (SO U.S.C. 1601 et seq.), and section 301 of title 3, United
States Code,
– I, DONALD J. TRUMP, President of the United States of America, find that additional steps must be
taken to deal with the national emergency with respect to the information and communications
technology and services supply chain declared in Executive Order 13873 of May 15, 2019 (Securing
the Information and Communications Technology and Services Supply Chain). Specifically, the
spread in the United States of mobile applications developed and owned by companies in the
People's Republic of China (China) continues to threaten the national security, foreign policy,
and economy of the United States. At this time, action must be taken to address the threat
posed by one mobile application in particular, TikTok.”

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6. So, What Is in The Ban? (Cont.)
• Scope of the Ban:
– Section 1. (a) The following actions shall be prohibited beginning 45 days after the date of this order,
to the extent permitted under applicable law: any transaction by any person, or with respect to any
property, subject to the jurisdiction of the United States, with ByteDance Ltd. (a.k.a. Zijie Tiaodong),
Beijing, China, or its subsidiaries, in which any such company has any interest, as identified by the
Secretary of Commerce (Secretary) under section 1(c) of this order.
(b) …
(c) 45 days after the date of this order, the Secretary shall identify the transactions subject to
subsection (a) of this section.
– Section 2. (a) Any transaction by a United States person or within the United States that evades or
avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the
prohibition set forth in this order is prohibited.
(b) Any conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.…
– Section 3. For the purposes of this order:…
(c) the term "United States person" means any United States citizen, permanent resident alien, entity
organized under the laws of the United States or any jurisdiction within the United States (including
foreign branches), or any person in the United States. 12
7. What Are the Lessons Learnt?

• What’s next with TikTok?

– TikTok would no longer be made available by US companies like Apple and
Google through their app stores.
– TikTok could no longer maintain its servers or any other operations or
property inside the United States; it will have to operate entirely from foreign
locations beyond the reach of IEEPA leverage, which is to say: from China.
– It is reported that TikTok will open a London HQ – can TikTok keep its
international business outside of the US?

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7. What Are the Lessons Learnt? (Cont.)

• Planning Ahead!
– For Chinese companies in the process of an investment or an acquisition in
the U.S., the parties need to resolve whether a filing with CFIUS is
mandatory under October 2018 FIRRMA "pilot program" regulations relating
to an investment in a U.S. business involved in "critical technology."
– If not, but the non-U.S. investor could gain control over a U.S. business, the
parties should consciously resolve whether they will seek CFIUS clearance
for the transaction. Whether to do so may depend on the types and
magnitude of national security considerations (such as the target company's
PII storage) that the transaction presents.

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7. What Are the Lessons Learnt? (Cont.)
• Sword of Damocles
– For parties deciding not to notify the transaction to CFIUS, they should recognize that
without CFIUS clearance, the CFIUS Sword of Damocles (large or small as it may be) will
hang over the outcome of the transaction.
• Avoid the “fire sale”
– For Chinese companies that have already invested in or acquired a U.S. company and did
not notify CFIUS in the process, it may be prudent to now conduct an internal review of
those transactions.
– The review should cover, among other questions, whether the transaction has made PII of
U.S. citizens accessible to the Chinese company.
– By proactively managing this risk going forward, the Chinese company would potentially be
in a stronger position with more options than if CFIUS intervenes and demands a fire-sale
divestment.
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QUESTIONS?

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 Jinsong (Jeff) Zhang
Jinsong (Jeff) Zhang, a partner in Orrick's In addition, Jeff advises multinationals, financial
Beijing and New York offices, is a trusted institutions and private equity funds on their
advisor to international and Chinese general corporate, capital markets and
investors and corporates on their regulatory compliance matters.
transactional, regulatory and compliance
matters. His work spans a variety of Prior to joining Orrick, Jeff was a partner at the
industries, including financial services, New York office of an international law firm.
technology (automotive technology and Earlier in his career, Jeff practiced in New York,
mobility, life sciences, and Fintech), as well Hong Kong, and mainland China with two major
Partner as energy and infrastructure. international law firms, and also served as the
New York & Beijing Head of Legal and Compliance of the U.S.
Being recognized by Legal 500 Asia Pacific, operations of a leading Chinese investment
T +1 212 506 5363
E jeffzhang@orrick.com
clients have praised Jeff as a practitioner "who bank, where he gained tremendous experience
is dedicated to serving his clients and is able to in helping Chinese clients navigate regulatory
Education leverage off the firm’s global network to provide and compliance issues in the U.S.
● Executive Master of Business Administration,
services in specialized areas".
Kellogg School of Management at Northwestern
University, 2020 Jeff serves on the International Advisory Board
● J.D., Duke Law School, 2005 Jeff’s practice focuses on China-related of Duke Law School, where he was also
● LL.M., Case Western Reserve University, 2002
● LL.M., Coursework, International Economic Law, inbound and outbound mergers and appointed as a Senior Lecturing Fellow. In his
Fudan University, 2001
● LL.B., China University of Political Science and acquisitions and private equity transactions. He leisure time, Jeff serves on a volunteer basis as
Law, 1997 has extensive experience with share and asset the Chief Legal Officer of The Chinese Finance
Memberships acquisitions, growth capital and buyout Association (TCFA), a non-profit professional
● American bar Association
● New York State Bar Association
transactions as well as tender offers, organization headquartered in New York with
● Duke Law School International Advisory Board privatizations, restructurings, spin-offs, strategic more than 7,000 members globally.
● The Chinese Finance Association
alliances and joint ventures.
Admissions
● New York
● Qualified in the People's Republic of China 17