US Effort to Force TikTok Sale Challenges US-China Dealmaking

Federal efforts to force a ban or sale of TikTok present legal hurdles and complex challenges for US-Chinese dealmaking across industries. Chronic supply chain issues and geopolitical tensions add more governmental and regulatory hurdles for China-based companies that seek to conduct business in the US.

Legal challenges have generally positioned a ban as improper limitation on free speech protected by the First Amendment, and as legally impossible because complete divestiture by TiKTok’s parent can’t occur given overlapping and intricate US and Chinese rules.

These arguments, however, haven’t prevented the popular video-sharing social media app from being under fire in the US for years.

Although parent company ByteDance is incorporated in the Cayman Islands, Chinese entrepreneurs built and own the platform. Politicians on the left and right, including Sen. Richard Blumenthal (D-Conn) and Sen. Tom Cotton (R-Ark), labeled TikTok a national security threat, criticizing the app’s addictiveness and potential for misinformation to go viral.

But an outright ban is neither practical nor possible for an estimated 170 million Americans who use the platform, according to TikTok’s own tracking—and for users who gain significant income from streaming and posting.

The Protecting Americans from Foreign Adversary Controlled Applications Act, signed by President Joe Biden on April 23, gives ByteDance nine months to divest itself of TikTok and find US owners. Finding the right buyer of a company valued up to $100 billion might have longer odds than ByteDance’s various legal challenges.

Lawmakers opting for divestiture versus immediate shutdown is implicit recognition that many aspects of the US and Chinese economies remain intertwined, if not interdependent. Still, the state-side business environment is likely to worsen before it gets better.

On May 1, the US imposed sweeping sanctions targeting Chinese defense companies selling materials to Russia for use in Ukraine. Two weeks later, Biden announced significant tariff increases on Chinese electric vehicles and lithium batteries.

TikTok backlash isn’t happening in a vacuum. US legislative and executive actions signal what types of business interests will face less regulatory scrutiny in the near term.

Freedom Versus Security

Banning anything in the US is relatively difficult, but TikTok’s own saving grace might be a core freedom that the Chinese government regularly impedes. The Department of Justice will need to prove the platform presents a threat to national security to overcome legal challenges based on free speech.

US officials must also demonstrate that divestiture is the least-restrictive solution, which could be tough given TikTok says it has already spent close to $2 billion moving US user data and systems to secure servers in Texas.

The political sticking point remains, however, that ByteDance still controls the algorithm that determines what shows up in TikTok users’ feeds, which raises whether this firewall is sufficient to protect US national security interests.

ByteDance has said untangling TikTok technologically from its other global subsidiaries isn’t feasible. The lesson for other China-based companies may be in how they segregate US user data.

Market Share

TikTok provides content creators with lucrative monetization. Creators don’t want to lose access to their endeavors, and they can use the platform to speak out against a potential ban. ByteDance has until January 2025 to sell TikTok, and with the US presidential election, neither party wants to face voter blowback.

Companies with popular and ubiquitous products—for example, Chinese suppliers of smartphone device components—are likely to face less regulatory scrutiny.

Defense Connections

US sanctions are largely focused on Chinese military-related companies. Sanctions of this sort date back at least to Tiananmen Square in 1989 and make sense in the context of increased potential for US-China conflict over Taiwan.

These restrictions usually tighten over time. For example, the Department of Defense halted official use of commercial off-the-shelf drones in 2018, a year before Congress banned Pentagon use of Chinese-made drones and drone components.

Now lawmakers are considering additional restrictions and tariffs on Chinese-made commercial and hobby drones. If the TikTok divestiture is upheld, the US will likely continue to pursue other China-based technology companies over spyware concerns.

Securities Rules

China-based companies will face the least amount of direct regulatory attention if they’re registered issuers with the Securities and Exchange Commission. While there are added legal and accounting expenses for such compliance, publicly traded China-based companies that registered with the SEC usually find scrutiny recedes as they develop a record of compliance with regulatory filing and accounting requirements.

China-based companies with the requisite internal controls and systems to sustain SEC-registration requirements will likely benefit from capital raising opportunities uniquely available in US markets.

The impending TikTok ban, coupled with new sanctions and tariffs, portends legal and business prospects for particular China-based companies that operate in the US, especially those that wish to continue access to US retail and capital markets.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Richard Lomuscio is partner at Stinson and specializes in commercial and regulatory matters concerning securities.

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