In a significant ruling, a US federal appeals court has found that, in blocking the acquisition by Chinese nationals of several wind farm projects located in the US, the US government's Committee on Foreign Investment in the United States (CFIUS), and the President, failed to give the non-US acquirers the due process rights to which they were entitled. See Ralls Corp. v. Committee on Foreign Investment in the U.S., No. 13-5313 (D.C. Cir. 2014). The court required the government to provide the transacting parties access to the non-classified information on which the government relied in prohibiting the transaction, and remanded for further proceedings. While the decision stops short of approving the transaction, it should increase the transparency of US government review and decision-making in what has traditionally been a fairly opaque arena.
What is CFIUS?
CFIUS is an inter-agency US government committee chaired by the US Department of Treasury, and its members include various departments and agencies charged with national security, foreign policy, trade and economic responsibilities (including the Departments of Justice, Homeland Security, Commerce, Defense, State, and Energy). A creature of statute, CFIUS reviews so-called "covered transactions" that could result in control of a US business by a foreign person (corporate or individual) to determine whether the transaction constitutes a threat to US national security.
Review by CFIUS arises in two ways. The parties to the transaction may undertake a voluntary submission to CFIUS, generally before closing, and provide the often substantial information that CFIUS regulations require (e.g., information regarding the scope, purpose and value of the transaction, the identity of the parties and their significant shareholders, etc.). The submission is "voluntary" in that failing to make a submission to CFIUS does not violate US law. That said, CFIUS is authorized to initiate its own review of acquisitions of US businesses, and can do so even after closing. Initial CFIUS review lasts no more than 30 days. Then, CFIUS must either approve the transaction or, if it determines that the transaction might impair US national security, initiate a 45-day investigation. (The 45-day investigation period is mandatory for transactions involving critical infrastructure and major energy transactions.) Should CFIUS find, at the end of its investigation, that the transaction should be prohibited or suspended given security concerns, it will report its findings to the President, who has 15 days to review the matter and determine whether the transaction should be prohibited or suspended. CFIUS may approve a transaction outright or subject to mitigation agreements that may reduce non-US ownership, control, or influence over potentially sensitive areas. At its most drastic, CFIUS or the President can block an acquisition or unwind a transaction that has already closed.
CFIUS Investigation of the Proposed Acquisition
Ralls is a US company owned by two Chinese nationals, one of whom was also CFO of Sany Group, a Chinese manufacturing company, and the other a vice president of Sany Electric Company, Ltd. Ralls develops wind energy projects for wind turbines manufactured by its Sany affiliate. In March 2012, Ralls acquired four wind farm projects in Oregon near restricted military airspace maintained by the US Navy—without first seeking CFIUS review. In June 2012, Ralls was informed that the US Department of Defense intended to invoke CFIUS review of the already-closed transactions. After review, CFIUS determined that the acquisition posed a national security threat, and ordered Ralls essentially to halt all activity at the wind farms and remove all items from the sites. Ralls was then also prohibited from selling the wind farms without first notifying CFIUS, which could object to any sale. With these restrictions in effect, CFIUS submitted its report to the White House, which subsequently ordered Ralls to divest itself of the US business, based on "credible evidence . . . that Ralls . . . might take action that threatens to impair the national security of the United States." Ralls, slip op. at 10. In what became the basis for Ralls' successful legal challenge, neither CFIUS nor the White House gave Ralls notice of the evidence on which they relied in making their security determinations nor opportunity to rebut that evidence.
Dismissal in the District Court
In September 2012, Ralls filed a lawsuit in federal district court challenging the lack of due process in the CFIUS review process and seeking to invalidate the divestiture order. This was itself an aggressive tactic, since in most cases parties that receive prohibition or divestiture orders often voluntarily withdraw the transaction, in many cases before Presidential review is concluded. The federal district court found that Ralls had no property interest subject to due process, since in the district court's view Ralls knew its acquisition was subject to CFIUS and Presidential approval but nonetheless waived the opportunity to obtain a determination from CFIUS and the President by not submitting the transaction for review prior to closing.
Due Process and the CFIUS Review Process on Appeal
Ralls appealed to the United States Court of Appeals for the DC Circuit, the federal appellate court that frequently confronts legal and regulatory issues involving the US government. The court found that Ralls had a property interest in the wind farm projects it acquired, and that those property interests were protected by the due process clause under the US Constitution. It further held that Ralls did not waive its due process rights by failing to seek CFIUS approval before completing the transaction on the grounds that CFIUS regulations expressly contemplate that a party may seek approval before or aftera transaction is closed. Id., slip op. at 31-32. The court then reasoned that due process in the circumstances required "at the least, that an affected party be informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence." Id., slip op. at 36.
The court was clearly troubled that, throughout the CFIUS process, Ralls was not made aware of nor permitted to access the evidence used to force the divestiture of the wind farm projects. Thus, Ralls, and the court, could not determine the reason why the transaction was prohibited, and indeed the fact that other non-US owned wind farms operate near the same restricted airspace led the court to infer that the proximity of Ralls' wind farms to restricted airspace was not the only factor that resulted in the orders against Ralls. Id., slip op. at 46. Ultimately, because Ralls "never had the opportunity to tailor its submission to [CFIUS and Presidential] concerns or rebut the factual premises underlying the President's action," id., slip op. at 37, the government's action deprived Ralls of its constitutionally-protected rights without first affording constitutionally-mandated due process. On remand to the district court, Ralls is to be provided appropriate due process, including access (and opportunity to respond) to the unclassified information used by the government to block the transaction. Id., slip op. at 47.
Potential Impact of the Decision on In-Bound US Acquisitions
While the Ralls decision did not actually permit the transaction to go forward at this point, the ruling injects a welcome transparency into what to date has proved to be a largely opaque CFIUS review process, with CFIUS frequently demanding information from transacting parties without explaining the reasons why that information is sought or, for that matter, the reasons behind its decision to review and investigate—and thereafter to deny, require mitigation of, or divest (or approve)—a transaction.
The DC Circuit, however, also may have inadvertently incentivized parties not to voluntarily seek CFIUS review before a transaction closes, because it was only by actually closing the underlying transaction prior to CFIUS review that Ralls was able to assert a property interest in the four wind farm projects subject to due process protection. Best practices for non-US persons undertaking a covered transaction have generally included submitting to pre-closing review by CFIUS, rather than risking the specter of post-closing CFIUS review that can have adverse, if not disastrous, effects for both the non-US buyer and the US seller. While parties still may favor the greater certainty that pre-closing review affords, they now may find themselves assessing whether they instead might await possible CFIUS review after a transaction is closed, in order to assert due process claims should judicial review prove necessary. In any event, the last word may not yet be in with respect to the Ralls decision, as the US government has the option to seek further review of the decision on rehearing before the DC Circuit, or in the United States Supreme Court.