In recent years, the United States has become a preferred destination for Chinese acquisitions and strategic investments. This is mostly due to the weak dollar, the US debt crisis, and the desire to gain access to US brands, distribution systems, and technological know-how. However, the biggest concern for Chinese investors entering the US market is the national security review by the Committee on Foreign Investment in the United States (CFIUS).
CFIUS is an inter-agency body made up of representatives from nine federal agencies including the Department of Defense (DoD), the State Department, and Homeland Security. It is chaired by the Secretary of the Treasury and has broad powers to determine whether a foreign investment transaction poses a national security risk and therefore should be prohibited. It can block a potential deal or even unwind an already closed transaction. For example, Huawei Technologies Co., Ltd. (Huawei), a leading Chinese global telecoms company, had to abort several acquisition talks of US companies based on CFIUS recommendations. In February of 2011, at the request of CFIUS, Huawei also had to unwind its completed purchase of 3Leaf – a bankrupt US server technology company.
In another recent transaction, President Obama upon CFIUS recommendations personally ordered Ralls Corp., (Ralls), to divest wind farms the company had purchased in Oregon near a Navy training site. Ralls is a Delaware-based company owned by two executives of China’s Sany Group. Ralls did not voluntarily file a CFIUS notice and, upon learning of the transaction, CFIUS requested the submission. On review and investigation, CFIUS issued an interim mitigation order against Ralls. Ralls challenged the order in US Federal District Court for the District of Columbia (District Court) arguing that the mitigation order amounted to divestment which can only be ordered at the discretion of the President. Upon CFIUS recommendations, President Obama issued an order for the divestment. Ralls then challenged CIFUS and the presidential order in the District Court, amongst other arguments, on constitutional due process grounds under the Fifth Amendment. The District Court dismissed all but Ralls due process challenge in early 2013 and later ruled against Ralls stating that Ralls had assumed the risk knowing the transaction could be unwound when it did not seek review by CFIUS. The District Court further held that Ralls was not denied its due process rights because it was given opportunity to submit evidence in its filing to CFIUS and present its case to CFIUS officials.
Ralls appealed the case to US Court of Appeals for the District of Columbia (Appeals Court). The Appeals Court issued an unprecedented opinion stating reversing the District Court’s ruling and held that the presidential order of divestment was an unconstitutional deprivation of Ralls’ property rights without due process. The Appeals Court went on to hold that Ralls did not waive its property rights by not seeking CFIUS approval since the CFIUS process is voluntary and approval can be sought after the closing of the transaction. More significant is the Appeals Court’s ruling that the CFIUS process itself does not afford sufficient due process rights to parties subject to the CFIUS notice. Although CFIUS permits its staff to interact with the parties filing the notice during the review process, the Appeals Court reasoned, CFIUS does not inform parties of the committee’s specific concerns and Ralls never had the opportunity to tailor its notice to address those concerns or rebut any factual premises underlying the final decision. The Appeals Court ruled that parties must be afforded an opportunity to access unclassified evidence supporting the CFIUS recommendations.
This Appeals Court decision is not a decisive victory. It is subject to further challenges and appeals. But if the decision stands, it will bring some transparency to the CFIUS process for foreign investors. Having access to unclassified information and knowing at least some specific CFIUS concerns could mean better opportunities for foreign investors to address any national security concerns upfront. Regardless, any foreign investor should consider voluntary filing and pre-notice filings with CFIUS, early communications, seek professional counsel at early CFIUS stages to help anticipate and mitigate any CFIUS concerns early, and never assume that CFIUS approval is impossible. In addition to CFIUS, Chinese investors should also be mindful of any securities regulations, antitrust concerns, and any industry-specific regulations that may apply.