The Committee on Foreign Investment in the U.S. (CFIUS) blocked the deal, worth $3.78 billion, according to a report by Sean Yang, an analyst with market research firm TrendForce.
WD, however, said Unisplendour voluntarily terminated the deal after it was notified by CIFIUS of its intentions to review it.
Western Digital and Unisplendour had been notified by CFIUS that it would investigate the proposed deal, which triggering a 15-day period "during which either Western Digital or Unis... may terminate the stock purchase agreement."
"As a result, Unis... has informed Western Digital that it has decided to terminate the agreement,' WD stated in a news release.
Unisplendour is a subsidiary of Chinese conglomerate Tsinghua Unigroup.
A plan for the Tsinghua Unigroup and WD to form a joint venture to sell data center storage products and services will continue, according to WD.
"Western Digital and Unis continue to have a strong strategic relationship, and their joint venture agreement in China announced on Nov. 9, 2015 remains on track to become operational by the second calendar quarter of 2016, pending regulatory approvals," WD stated.
China is a growing presence in the NAND flash industry and is expected to play a pivotal role in supply and demand over the next two to three years, according to TrendForce. State-backed Tsinghua Unigroup has become a prominent example of the surge in Chinese deal-making in the semiconductor sector, where the nation is filling production capability gaps with acquisitions and investments.
Last year, a flurry of multibillion-dollar NAND flash shopping sprees signaled a shift toward more non-volatile memory production.
Among those deals, WD announced it planned to purchase flash drive maker SanDisk for $19 billion. The deal's stipulations required the Unisplendour agreement to go through.
With the Unisplendour deal terminated, the terms of WD's purchase of SanDisk will follow an alternate merger plan.
Under the alternate arrangement, each SanDisk share will now be worth $67.50 in cash plus a 0.2387 share of WD stock, versus a plan to pay $85.10 per share in cash and 0.0176 shares of WD common stock per share of SanDisk common stock.
The SanDisk acquisition will have to be voted on at a WD shareholder meeting to be held on March 15.
CFIUS, which sent a letter notifying Unisplendour that the agency would be reviewing the WD deal, used the 1983 Exon-Florio Amendment to the Defense Production Act to block the attempt to purchase a 15% equity stake in WD.
The Exon-Florio Amendment allows the U.S. president to suspend or prohibit foreign acquisitions, mergers or takeovers of U.S. companies if there is credible evidence that a foreign controlling interest might threaten national security.
The Chinese government regards NAND flash to be a critical part of its plan to localize semiconductor production, according to TrendForce's Yang. "At the same time, the domestic consumption of this memory is rising rapidly," he said.
According to DRAMeXchange, China purchased $6.5 billion worth of NAND flash in 2015, or about 28% of the global total.
In 2016, China is expected to consume about one-third of the worldwide share of NAND flash.
In light of that growth, Chinese semiconductor companies will try to establish a complete NAND flash supply chain through various business models or investment ventures, Yang said.
"Tsinghua Unigroup attempted to indirectly obtain NAND flash manufacturing capability by first becoming WD's largest shareholder and then having WD to take over SanDisk," Yang said. "Tsinghua Unigroup will now have to adjust its strategy, and the market will pay close attention to what the Chinese conglomerate will do next in its pursuit of NAND flash technology."