Last week, Ralls Corporation released details about its settlement agreement with the Committee on Foreign Investment in the United States (CFIUS). While the full terms of the agreement were not made public, Ralls has claimed the settlement favorably addressed its concerns. The Ralls v. CFIUS litigation was previously discussed by the Bryan Cave National Security Team in July 2014 in our alert “The D.C. Circuit Imposes Some Due Process in the CFIUS Review Procedures But the Impact May be Limited and, in any case, Short-Lived.”
In 2012, Ralls, an American company ultimately owned by two Chinese nationals, purchased four American-owned wind farm companies whose assets included a project site within restricted U.S. Navy airspace. Before this case, most foreign entities acquiring assets in the United States, and their lawyers, would have been surprised to learn that acquiring a wind farm could raise national security concerns. CFIUS reviewed the transaction several months after closing and determined that the acquisition presented risks to national security, apparently because of the wind farms’ proximity to a Naval Air Base. The President later agreed with CFIUS’s analysis and ordered Ralls to reverse the original acquisition and divest its interests in the wind farms, including removing the concrete bases Ralls had installed for its wind turbines. Ralls filed suit against CFIUS alleging a lack of due process on the ground that it had not had an opportunity to see and rebut the evidence on which CFIUS relied to make its findings regarding the threat to national security. While Ralls ultimately won a partial victory in the D.C. Circuit forcing CFIUS back to the negotiating table and to reveal additional information regarding its decision making process, the court did not question the unreviewability of the President’s decision, nor did it substantively address CFIUS’s determination regarding national security.
Based on the publicly available information, it may appear that Ralls “won” its confrontation with CFIUS, but that assessment must be tempered. Ralls has stated that CFIUS has dismissed its enforcement action against Ralls. Additionally, Ralls, apparently, is not required to reverse its original acquisitions, and, according to CCTV-America, CFIUS has agreed that the acquisitions “have not raised national security objections.” But, available details suggest that the settlement stemmed at least in part from a desire by both Ralls and CFIUS to avoid the costs of further litigation. Furthermore, while Ralls may sell the windfarms, it is only permitted to sell the four windfarms to a foreign investor satisfactory to CFIUS. It is also unclear what, if any, mitigating conditions were required by the settlement, and, at a minimum, the CFIUS review process has added an additional three years to the transaction. Ralls has undoubtedly spent considerable amounts on attorneys’ fees and other related expenses.
So what lessons can be learned from the Ralls incident? First, Ralls had no reason initially to believe that acquisition of windfarm properties would raise national security issues. It must be clear now to all potential foreign acquirers of U.S. entities that national security issues can be raised not only because of the nationality of the foreign acquiring entity and the types of products or facilities being acquired, but also because of the location of the properties being acquired. Second, while Ralls achieved a favorable result, it might have achieved the same result more quickly and less expensively had it voluntarily submitted a notice to CFIUS before it closed its transaction—resolving the potential issues through agreement on mitigation.Third, engagement with CFIUS is crucial to achieving a favorable result. Fourth, at the same time, litigation has become a potential option for companies dealing with CFIUS albeit a limited, last-resort option.