On September 12, the Ralls Corporation, a Chinese-owned wind-farm developer, sued the Committee on Foreign Investment in the United States ("CFIUS" or the "Committee"), raising statutory and constitutional challenges to recent CFIUS orders that effectively require Ralls to unwind its acquisition of four wind-farm projects in Oregon. The suit is a rarity, and there have been no significant instances of judicial review of CFIUS decisions in the past. But even a partial success for the plaintiffs could have very broad significance for the review of foreign direct investment across all sectors of the economy — because CFIUS approval is frequently a major concern for transactions involving foreign acquisitions of, or joint ventures with, U.S. businesses. The Ralls lawsuit challenges not only the lack of transparency in CFIUS's procedures and decision making, but also CFIUS's authority to prevent or unwind a transaction involving a foreign person based on national security concerns. Further, the lawsuit indicates that CFIUS has national security concerns regarding foreign acquisitions of even small wind turbine projects.
Background on CFIUS review
Since the 1970s, Congress has authorized the President of the United States "to suspend or prohibit any covered transaction that threatens to impair the national security of the United States." National security reviews of foreign acquisitions of U.S. businesses are conducted through CFIUS, an inter-agency committee with jurisdiction to review "covered transactions," a term defined to include transactions "by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States." Under the CFIUS authorizing statute, the parties to a transaction may, but are not required to, submit a joint written notice to the Committee. If CFIUS determines that a notice involves a "covered transaction," it must determine "the effects of the transaction on the national security of the United States."
If CFIUS identifies a national security concern, the parties will often agree to take measures to resolve the concern, including entering into formal, contractual "mitigation agreements" with the government. If CFIUS and the parties are unable to negotiate mitigation measures or otherwise address the concern, the Committee has statutory authority to refer the matter to the President. The authorizing statute requires the President to make certain findings, and to announce his decision about whether to take action, in 15 days. The statute further authorizes the President to "take such action for such time as [he] considers appropriate to suspend or prohibit any covered transaction that threatens to impair the national security of the United States."
CFIUS review of the Ralls wind-farm project
Ralls is a Delaware company owned by two Chinese businessmen (Dawei Duan and Jialiang Wu, the CFO and VP of Sany Group, a Chinese manufacturer); it is named for the Texas town where they built their first wind farm. According to Ralls, its primary business purpose is to develop wind energy products for which wind turbines manufactured by Sany could be used. The Ralls complaint alleges that in early 2012, Ralls bought four small Oregon companies whose assets consisted of wind-farm development rights, land rights to construct wind farms, power purchase agreements, and government permits. The projects — which collectively would produce a mere 40 megawatts of power — allegedly had received other federal regulatory approvals, such as a determination by the Federal Aviation Administration that the turbine towers presented no hazard to aviation. The U.S. Navy had initially requested that Ralls voluntarily re-locate one of the turbines, apparently due to proximity to certain restricted military airspace. The complaint contends that after Ralls complied with the request, the Navy recommended that Oregon issue the necessary state regulatory approvals.
In June of this year, Ralls submitted a voluntary notice to CFIUS of its (by-then-consummated) acquisition of the Oregon projects. In late July, CFIUS allegedly issued an order purporting to require Ralls to cease construction, remove all materials from the location, and "immediately cease all access" to the properties. Under the order, U.S. citizens contracted by the companies were permitted to access the site "solely for purposes of removing any items from the Properties in compliance with" the order. After Ralls informed CFIUS that it was considering selling the project companies, potentially to a U.S. buyer, CFIUS issued an amended order. In addition to restating each of the previous directives, the amended order prohibited Ralls from transferring to any third party for installation at the project site, any item made by the Sany Group. The amended order also prohibited Ralls from transferring the properties themselves until all items on the properties had been removed and Ralls gave CFIUS notice and opportunity to object to the potential buyer.
The Ralls lawsuit
On September 12, Ralls filed a complaint in the U.S. District Court for the District of Columbia challenging the CFIUS actions as a violation of the federal Administrative Procedure Act (APA) and an unconstitutional deprivation of property without due process. The complaint specifies the CFIUS review process in some detail. The suit raises a host of challenges, asserting that CFIUS exceeded its authority by (a) failing to give reasons for its actions; (b) prohibiting the transaction outright, rather than imposing conditions to mitigate national security risks; and (c) prohibiting Ralls from selling items produced by Sany even to U.S. buyers and the sale of the wind-farm projects without CFIUS approval, even to a U.S. buyer. The suit also alleges that the order deprived Ralls of property without due process by prohibiting further construction, use of (or even access to) the property, and sale of assets on the property to which Ralls holds project development land rights.
The lawsuit could have broad implications on a number of different grounds.
First, the plaintiffs challenge CFIUS's procedures for reviewing transactions. Ralls objects to CFIUS's failure to provide any "evidence or explanation for its determination[s]" that the transaction was a "covered transaction" (and thus under CFIUS jurisdiction), that the transaction poses national security risks, and that those risks cannot be mitigated by less-restrictive means than a total prohibition. The challenges should be understood in the context that CFIUS review is generally confidential (CFIUS does not disclose even the fact that a review was requested). When CFIUS has a national security concern, the Committee will often explain to parties that there is evidence of a national security concern but, in the interest of national security, the Committee cannot share that evidence with the parties. Here, Ralls is complaining about the inability to hear or understand the issues. If successful, the suit could increase the transparency of the review — such as a requirement that the Committee articulate for the parties its justification for orders beyond a bare finding of "national security risk." Such disclosure could open the door to fruitful mitigation discussions.
Second, and more fundamentally, the possibility that CFIUS actions could be subject to even a limited form of judicial review would reflect a sea change in CFIUS practice. As a practical matter, lawsuits seeking to challenge actions by CFIUS are rarely brought. (One notable exception — a 2006 lawsuit by then-New Jersey Governor Jon Corzine seeking to force CFIUS to investigate the acquisition by Dubai Ports World of an entity engaged in shipping and logistics operation at Port Newark — was dismissed voluntarily.) CFIUS's authorizing statute, the Foreign Investment and National Security Act of 2007, gives the President authority to suspend or prohibit any covered transaction based on his finding of national security risks, and states that his actions and supporting findings "shall not be subject to judicial review." The Ralls complaint is predicated on the notion that CFIUS can be subject to judicial review through the APA — particularly where, as here, it purported to issue an order under its own authority — even if the President's actions would be exempt. Whether this suit can proceed at all in a federal court is, therefore, likely to be one of the first issues litigated. The plaintiffs will likely draw support from the background presumption that agency actions are subject to judicial review.
Finally, Ralls challenges the scope of CFIUS's remedial authority. The company asserts that only the President, not CFIUS, may suspend or prohibit a transaction. Ralls also argues that CFIUS overstepped its authority by prohibiting Ralls from selling "to any third party" (including a U.S. owner) any items produced by the Sany Group. Such an order, Ralls asserts, oversteps both the limitation that CFIUS may review only transactions that involve acquisition of control by a foreign person (as the order covers U.S. buyers), and the limitation that CFIUS may only review acquisition of a U.S. business (since the order applies to "items" produced by Sany Group). The challenge reflects the unusual posture of this case, in which CFIUS issued a unilateral order rather than negotiating "consensual" mitigation with the parties upon threat that CFIUS would recommend that the President take action to block the transaction. Any judicial decision that limited CFIUS's remedial power to impose national-security-related mitigation conditions would be of great interest to the investment community.
In short, both CFIUS practitioners and a broad range of parties involved in foreign investment in the United States should watch the case closely. Although the plaintiffs will face threshold arguments from the government that the actions are non-reviewable, even a partial victory on the merits could have significant economic and legal effects for U.S. national security review of foreign investment, and thus the case may attract participation by a range of interested parties as amici curiae. Some indication of how the Court will treat the case could come as early as this week; on September 13, Ralls filed a motion for a temporary restraining order and preliminary injunction, which Judge Amy Berman Jackson set for expedited briefing and consideration.
Remarkably, this momentous development arises in the context of a CFIUS challenge to the acquisition of a nascent alternative energy project. CFIUS is charged with reviewing and investigating foreign acquisitions of critical infrastructure, including major energy assets. Small wind turbines are unlikely to fall into that category, but it is clear that CFIUS believes foreign ownership of wind turbines could threaten national security.
Originally published in V&E CFIUS and National Security Review E-communication, September 17, 2012
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
