U.S. Orders ByteDance To Unwind Deal That Created TikTok

The Trump Administration ups the ante with TikTok and orders its parent to divest the app that formed the core of the popular short video sharing platform.

In an order issued late last week, the Trump Administration completed its retrospective review of ByteDance’s acquisition of the app Musical.ly that became TikTok. The decision on whether ByteDance’s acquisition threatened the national security of the United States (U.S.) is separate from the executive order released earlier in the week banning the app. The Trump Administration is giving ByteDance 90 days to sell Musical.ly, a move that may well impair TikTok in nations other than the U.S. It is not immediately clear how this order affects the executive order issued a week earlier barring all transactions with TikTok.

The Committee on Foreign Investment in the United States (CFIUS) has been reviewing ByteDance’s acquisition on national security grounds, but the fact that the CFIUS process wrapped up the same week the Trump Administration issued an order banning TikTok in the U.S. is curious to say the least. There have been media accounts for some time that the CFIUS agencies were looking at the ByteDance deal because of increasing tensions with the People’s Republic of China (PRC).  While it is not a frequent occurrence, there is precedent for a retrospective use of the CFIUS process. For example, in March 2019, the Trump Administration ordered Kunlun, a PRC gaming firm, to spin off Grindr, a LGBTQ dating app, for similar national security reasons.

In the order, the Trump Administration makes the case that “[t]here is credible evidence that leads me to believe that ByteDance Ltd., an exempted company with limited liability incorporated under the laws of the Cayman Islands (“ByteDance”), through acquiring all interests in musical.​ly, an exempted company with limited liability incorporated under the laws of the Cayman Islands (“Musical.​ly”), might take action that threatens to impair the national security of the United States.” The Trump Administration has been expressing concern that PRC companies have been sharing the personal data of users, many of whom are Americans, with the PRC government because of recent changes in law that require information sharing with authorities in Beijing.

In the “Order Regarding the Acquisition of Musical.ly by ByteDance Ltd,” President Donald Trump stated

The transaction resulting in the acquisition by ByteDance of Musical.​ly, to the extent that Musical.​ly or any of its assets is used in furtherance or support of, or relating to, Musical.​ly’s activities in interstate commerce in the United States (“Musical.​ly in the United States”), is hereby prohibited, and ownership by ByteDance of any interest in Musical.​ly in the United States, whether effected directly or indirectly through ByteDance, or through ByteDance’s subsidiaries, affiliates, or Chinese shareholders, is also prohibited.

Moreover, ByteDance is under an obligation to destroy user data before selling. Specifically, the order directs

Immediately upon divestment, ByteDance shall certify in writing to CFIUS that it has destroyed all data that it is required to divest…as well as all copies of such data wherever located, and CFIUS is authorized to require auditing of ByteDance on terms it deems appropriate in order to ensure that such destruction of data is complete.

Moreover, during the 90 day period preceding the sale, CFIUS is authorized to take necessary steps to ensure ByteDance’s compliance.

The week before, the White House acted against two popular applications from the PRC on account of purported national security issues created by Americans downloading and using them. The White House issued an “Executive Order on Addressing the Threat Posed by TikTok” and an “Executive Order on Addressing the Threat Posed by WeChat” that bar any transactions with the companies that made, distribute, and operate TikTok and WeChat respectively, the former being much more popular in the United States (U.S.) than the latter. These bans are also of a piece with the Trump Administration’s narrative that the PRC is responsible for COVID-19 and poses an existential threat to western democracy. In response, the PRC is likely to increase pressure on U.S. and foreign firms operating in that nation or with supply chains rooted in the PRC. In any event, it is not clear how effective these directives will be and the companies being targeted are almost certain to sue to stop enforcement.

© Michael Kans, Michael Kans Blog and michaelkans.blog, 2019-2020. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Michael Kans, Michael Kans Blog, and michaelkans.blog with appropriate and specific direction to the original content.

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