A United States Court of Appeals (the Court) has ruled that the U.S. national security review process applicable to acquisitions of control by foreign persons of U.S. businesses must afford parties due process as required by the U.S. Constitution. This might seem an obvious ruling but the review process that has resulted in the suspension of two acquisitions and abandonment of others based on perceived national security threats has been notoriously opaque, providing parties subject to it little insight into its workings and no means of challenging its outcomes. This has frustrated parties and counsel who are left with little to no understanding of why the U.S. government is opposed to a particular foreign investment. Although the decision affirms that the underlying statute largely shields the outcome of the process from judicial review, it makes clear that the process of evaluating a transaction is not so shielded and must comport with due process guarantees.

The Court took up the challenge when Ralls Corporation (Ralls), an entity controlled by Chinese nationals, appealed a lower court ruling dismissing its claims that the President and the Committee on Foreign Investment in the United States (CFIUS) – the entity authorized to conduct the U.S. national security review of foreign investment on behalf of the President – violated due process when Ralls was ordered in 2012 to divest interests it had acquired in a number of wind farms in Oregon located in proximity to restricted airspace near a naval station. Ralls argued that although it had been given the opportunity to present its case, CFIUS had not disclosed to Ralls any of the evidence on which the President relied to make his decision. The U.S. government argued it was not required to disclose such information as the President’s decisions under the statute are non-reviewable.

The Court disagreed. The Court ruled that Ralls had a constitutionally protected property interest under state law in the wind farm projects it had acquired, and the Constitution required Ralls to receive more due process that it did. Specifically, the Court ruled that the due process clause of the U.S. Constitution entitles a party subject to the CFIUS review process to “have notice of, and access to, the evidence on which the President relied and an opportunity to rebut such evidence before he reaches his non-justiciable (and statutorily unreviewable) determinations.” Importantly, though, the Court said that right extended only to access to unclassified information (and the Court did not rule on whether the President may invoke “executive privilege” to limit disclosure), which ultimately may limit the level of transparency afforded to notifying parties.

Ralls did not challenge the merits of the President’s decision requiring it to divest its interests in the wind farms or argue that the Court was entitled to review the merits of that decision, and the Court found that the statute authorizing the national security review did not permit it to do so. Thus, the Court’s decision does not overturn the President’s Executive Order (Order) directing Ralls to divest its interests in the farms. Despite the fact that the ultimate outcome remains the same, the decision is important because it makes clear that constitutional protections are to be respected even when U.S. national security interests are at issue.

The U.S. National Security Review Process

The U.S. national security review process, sometimes called the CFIUS or Exon-Florio process after the administering agency and underlying statute respectively, authorizes CFIUS and/or the President as applicable to review so-called “covered transactions” i.e., any transaction that could result in a foreign person having control of a U.S. business. CFIUS is authorized to investigate any such transaction, and if it finds that the transaction threatens to impair U.S. national security interests may seek to negotiate or impose mitigation measures to address such threats. Alternatively, CFIUS can send a report to the President who may determine to take action including prohibiting or suspending a transaction if he finds there is “credible evidence that leads him to believe that the foreign interest exercising control might take action that threatens to impair U.S. national security.” CFIUS itself is not authorized to suspend or prohibit a transaction; only the President has that authority.

Parties may choose voluntarily to file a notice of a proposed or consummated transaction with CFIUS and seek a so-called no action letter protecting the transaction against later remedial action under the statute. Ralls chose not to avail itself of the voluntary notification process and instead filed a notice only after being told that the U.S. government would self-initiate an investigation if Ralls did not file a notice.

Due Process Claim

The district court had ruled that Ralls did not have a property interest subject to due process protections because it knowingly acquired assets subject to potential presidential review and prohibition without availing itself of the pre-notification procedure; and even if it did have such an interest, it received enough due process during the review to satisfy constitutional requirements. The Court disagreed. It noted first that there was no dispute that Ralls possessed state law property rights when it acquired its interests in the wind farms. It further noted that the U.S. government “cannot evade the due process protections afforded to state property by simply ‘announcing that future deprivations of property may be forthcoming.’”

Having found a protectable property interest, the Court then considered whether Ralls has been afforded constitutionally required due process before the Order issued depriving it of that interest. The U.S. government did not dispute that Ralls had not had the opportunity to hear the evidence underlying the U.S. government’s concern or to rebut that evidence and that is what the Court ruled was required to comport with the Constitution. Importantly, the Court recognized that even if Ralls does not ultimately successfully rebut the evidence, it is still entitled to the opportunity to try to do so, at least to the extent unclassified evidence was used.

As a result, the Court remanded the case to the district court with “instructions that Ralls be provided the requisite process set forth herein, which should include access to the unclassified evidence on which the President relied and an opportunity to respond thereto.”

Administrative Procedure Act Claims

At the district court level Ralls also had raised a number of challenges based on the Administrative Procedure Act (APA) to an order that CFIUS had issued before the President issued his Order suspending the transaction. The APA governs government regulatory procedures generally. As Ralls already had acquired the wind farms and was developing the sites, CFIUS issued effectively a stop-work order prohibiting Ralls from doing any further development at the site or even accessing it. Ralls challenged that order both procedurally and on the merits. Ralls complained that it was not provided any evidence supporting the order and that the order exceeded CFIUS’s authority because it effectively amounted to a suspension which only the President is authorized to issue. The district court dismissed these challenges as moot given that the Presidential Order superseded the CFIUS order. However, the appellate court noted that there is an exception permitting the court to rule on an otherwise moot claim if the violation claimed “is capable of repetition and yet evading review.”

Ralls argued that it intended to continue pursuing wind farm development opportunities in the United States and therefore could find itself similarly situated in the future. The U.S. government argued that each CFIUS case is different and very fact specific and that Ralls would be unlikely to find itself in the same situation going forward. Notably the Court apparently was swayed by evidence Ralls had submitted that numerous other foreign-owned wind turbines were located near the wind farm sites acquired by Ralls so the U.S. government’s concern was about Ralls itself and not just foreign-owned turbines being situated near sensitive airspace. Thus, the Court thought CFIUS was likely to respond similarly to a proposed Ralls acquisition in the future and therefore deemed it appropriate to have the merits of Ralls’ APA claims considered on remand to the district court.


In the midst of the constitutional challenges, the parties to the transaction are litigating a contractual dispute as the acquisition contract did not address CFIUS risk. Ralls claims that the Presidential Order voids the contract, and thus, the wind farms revert to the seller Terna Energy (Terna) and Ralls is relieved of making future contractual payments. Terna counters, and the U.S. government agrees, that the Presidential Order does not rescind the contract but rather orders Ralls to divest the properties. The U.S. government is suing Ralls to enforce the order insisting that Ralls’ unilateral position that the contract is void does not constitute compliance with the Order. As all this demonstrates, it is important to address the CFIUS risk in acquisition contracts.