In 2012, President Barack Obama vetoed the acquisition of Oregon windfarms by Ralls Corporation, an American company owned and controlled by two senior officials of Sany Group, a Chinese corporation. The transaction was vetoed following review by the Committee on Foreign Investment in the United States ("CFIUS") on grounds that the acquisition threatened U.S. national security.

The proximity of the windfarms to a sensitive military installation was widely reported as the basis for the decision. The extraordinary veto (the first since 1990) was followed by something even more extraordinary: the first legal challenge to a Presidential veto. Ralls argued, among other things, that it had been denied its property without due process, in violation of the Constitution, because it was not apprised of the factual basis for the veto, or given an opportunity to rebut the evidence. The District Court dismissed the complaint.

On July 15, however, in a bluntly worded opinion, a unanimous three-judge panel of the US Court of Appeals for the District of Columbia Circuit reversed the District Court decision, finding that due process required "at the least" that the parties be afforded (1) notice of the official action, (2) access to the unclassified information "on which the official actor relied," and (3) an opportunity to rebut that evidence. Ralls Corporation v. Committee on Foreign Investment in the United States (No. 1:12-cv-01513) (July 15, 2014) ("Ralls")

Section 721 of the Defense Production Act, which created CFIUS, expressly bars judicial review of the "actions" and "findings" of the President. In its decision, therefore, the DC Circuit took pains to make clear that the statutory prohibition only reaches the authority of the President to suspend a transaction, the determination that the foreign interest might take action that threatens to impair the national security, and the determination that other provisions of law do not provide adequate authority to protect national security. Reserving the question of whether Executive Privilege would otherwise bar disclosure, an argument raised for the first time in oral argument (and remanded to the District Court for consideration) the Court flatly rejected the argument that its decision would require disclosure of the president's thinking on sensitive questions, calling it "off base":

Our conclusion that the procedure followed in issuing the Presidential Order violates due process does not mean the President must, in the future, disclose his thinking on sensitive questions related to national security in reviewing a covered transaction. We hold only that Ralls must receive the procedural protections we have spelled out before the Presidential Order prohibits the transaction. The [Defense Production Act] expressly provides that CFIUS acts on behalf of the President in reviewing covered transactions, see 50 U.S.C. app. § 2170(b)(1)(A) (review conducted by "President, acting through [CFIUS]"), and the procedure makes clear that the President acts only after reviewing the record compiled by CFIUS and CFIUS's recommendation, see 31 C.F.R. § 800.506(b), (c). Adequate process at the CFIUS stage, we believe, would also satisfy the President's due process obligation.

Ralls at 38. [Emphasis added.]

It is not yet clear whether the opinion will be appealed – or whether the Administration will seek rehearing en banc. What is clear is that the decision, if it stands, will have significant impact on the CFIUS process. What the impact will be -- and how CFIUS will respond – less clear. Nevertheless, we offer the following observations:

Pending resolution of the case, it is likely to be business as usual at CFIUS, with a couple of key caveats:

  1. The decision opens the door to the prospect of a more transparent process, in which CFIUS will be required to disclose the unclassified evidence on which it relies. Plainly, if the decision is upheld, such disclosure will be required before a transaction can be vetoed. Less clear is whether disclosure is required in cases where veto is merely threatened – or even a realistic prospect – if not restructured or a key asset abandoned. In such cases, even if disclosure is not required, we expect the parties to request more information from the government – which may translate to lengthier and more combative investigations.
  2. The decision also opens the door to potential legal challenge if the parties are denied due process. This may make CFIUS more cautious. But if its fact-finding is open to challenge, CFIUS may also kick up its demands for information, increasing the burdens on filers – and lengthening reviews.
  3. Statutory deadlines remain. If CFIUS is required to provide parties with the basis for adverse decisions, and an opportunity to respond, it will need to carve out the time from a process already pressed for time. And scrubbing the record to redact classified information will also take time – and staffing by an already overburdened staff known to work nights and weekends. We can expect more cases where the clock threatens to run out unless transactions are withdrawn and refiled. This also can serve to make for longer reviews.

Meanwhile, it is important to underscore the fact that the President retains the authority – immune from judicial review – to approve or disapprove transactions. Parties that invoke Ralls to fight veto decisions – or that hasten to close transactions so they can preserve their ability to assert a property interest in any judicial challenge – may still find themselves blocked and vetoed – albeit with their due process rights intact.

Accordingly, the prudent course continues to be advance planning, with careful attention to the national security implications of proposed transactions. It could be some time before the implications of Ralls shake out – but under any scenario the authority of CFIUS to review acquisitions remains intact, its ability to call in unfiled transactions remains undisturbed, and the authority of the President to block or unwind transactions that threaten national security remains in full force.

By Christopher R. Brewster, Special Counsel in the National Security/CFIUS/Compliance Practice Group of Stroock & Stroock & Lavan LLP.

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