Late last month, Reuters reported that Chinese gaming company Beijing Kunlun Tech Co. was being pressured to divest Grindr, the popular gay dating app, due to privacy-related national security concerns. As we’ve previously blogged, CFIUS has increasingly emphasized privacy concerns & their potential national security implications when evaluating foreign investments – and particularly investments by Chinese companies.
This Cleary Gottlieb blog says that this situation highlights both the importance of privacy concerns & the risks of not voluntarily bringing a deal to CFIUS before moving forward. Here’s an excerpt:
CFIUS’s concern about protecting personal data is shared by Congress, which made protecting sensitive personal data a central feature of its recent reforms to the CFIUS process. The Foreign Investment Risk Review Modernization Act (“FIRRMA”), enacted in August 2018, calls out transactions involving businesses that maintain or collect the sensitive personal data of U.S. citizens, together with certain transactions involving critical technology or critical infrastructure, as requiring additional scrutiny of potential foreign influence and access to non-public information.
Also notable was CFIUS’s decision to review the Grindr acquisition more than three years after Kunlun gained control. Kunlun acquire 60% ownership and effective control of Grindr in January 2016. In January 2018, Kunlun acquired the remaining ownership interests of Grindr and replaced Grindr’s longtime CEO and founder, Joel Simkhai, an Israeli national, with Yahui Zhou, the Chairman of the Kunlun Group and a Chinese national.
Because CFIUS does not provide individual case information (except in the rare instances where they issue a formal blocking order), we do not know whether the Chinese acquisition of control three years ago or the Chinese assumption of a day-to-day operational role last year formed the impetus for CFIUS’s recent actions. Either way, CFIUS’s actions were taken post-closing, emphasizing the risk to acquirors of proceeding with a transaction raising potential CFIUS concerns without completing the voluntary filing process.
– John Jenkins