On July 15, 2014, the U.S. Court of Appeals for the District of Columbia Circuit ("DC Circuit") issued a decision in Ralls Corporation v. Committee on Foreign Investment in the United States 1 , ruling, among other things, on the minimum steps required to be taken by the Committee on Foreign Investment in the United States (“CFIUS”) in order to satisfy an applicant's procedural due process rights when the applicant may be denied an interest in its property by the exercise of the President’s authority under the Defense Production Act of 1950 (the “DPA”), as amended by the Foreign Investment and National Security Act of 2007 (“FINSA”). 2 Notably, the DC Circuit’s opinion did not call into question the authority of the President to block certain covered transactions under the DPA. Moreover, the implications of the DC Circuit’s ruling that Ralls Corporation ("Ralls") was deprived of constitutionally protected property interests without due process of law may be limited, in light of the unique circumstances surrounding the Ralls case. Nevertheless, as discussed further below, the decision may have meaningful tactical and timing implications for both CFIUS filers and CFIUS itself, at least pending final resolution of this case. The Ralls Transaction and CFIUS In March 2012, Ralls, a U.S. corporation owned and controlled by two Chinese national senior executives of Sany Group ("Sany"), entered into an agreement to purchase the assets of four U.S. wind farm project companies in Oregon ("Project Companies"). 3 Three of the wind farm projects were located within seven miles of restricted airspace and an ordnance zone utilized by U.S. military aircraft. The fourth wind farm was located within the restricted airspace. The parties to the transaction did not file a voluntary notice with CFIUS prior to consummation of the transaction. Shortly after Ralls acquired the Project Companies, the Navy expressed concerns regarding the location of the wind farm project site within the restricted airspace. As a result, Ralls agreed to move this wind farm to a new location, but still within the eastern region of the restricted airspace. Shortly thereafter, CFIUS independently expressed interest in reviewing the transaction. On June 28, 2012, in response to CFIUS’s request, Ralls and Terna Energy USA Holding Corporation ("Terna"), the seller of the interests in the Project Companies, submitted a voluntary notice to CFIUS describing the March 2012 transaction. 1 Ralls Corp. v. Committee on Foreign Investment in the United States, No. 13-5315 (D.C. Cir. July 15, 2014). 2 50 U.S.C. App. § 2170 (2012). 3 Ralls’s investment strategy involves identifying opportunities to construct wind farms in the United States and to install Sany wind turbines at these locations in order to create exposure in the U.S. market to Sany’s products.Fried Frank Client Memorandum 2 On July 25, 2012, CFIUS issued an interim mitigation order. 4 Days later, CFIUS announced that its review of the transaction would move into the 45-day investigation phase. On August 2, 2012, CFIUS issued an amended interim mitigation order (the "CFIUS Order") which stated that the March 2012 transaction was a "covered transaction" for purposes of section 721 of the DPA and that certain national security risks were present. 5 The CFIUS Order required Ralls to: (i) cease construction and operations at the four wind farm project sites; (ii) remove all material and equipment from the sites; (iii) cease access to the project sites; (iv) refrain from selling or otherwise transferring items manufactured by Sany to a third party for installation at any of the sites; and (v) refrain from a sale or transfer of the Project Companies or related assets to any third party until all materials were removed from the sites and until CFIUS had been notified of the pending sale and had had an opportunity to object. On September 13, 2012, at the conclusion of the 45-day CFIUS investigation period, CFIUS provided a report to President Barack Obama. On September 28, 2012, invoking authority granted to the President under the Constitution and section 721 of the DPA, President Obama issued an executive order 6 declaring that Ralls’s purchase was prohibited and that ownership by Ralls of the Project Companies was prohibited (the "Presidential Order"). The Presidential Order required Ralls to: (i) divest all interests in the Project Companies, their assets, and any operations owned or controlled by the Project Companies within 90 days; and (ii) remove all structures, physical objects, installations or other materials from the wind farm project sites and any other sites within 14 days. While the Presidential Order expressly revoked the CFIUS Order, the Presidential Order also continued the CFIUS Order's restrictions on access to the wind farm project sites and restrictions on the sale or transfer of the Project Companies and any Sany-manufactured items. 7 On September 12, 2012, prior to the issuance of the Presidential Order blocking the transaction, Ralls filed suit in the U.S. District Court for the District of Columbia (the “District Court”) against CFIUS alleging claims under the Administrative Procedure Act and the due process clause of the Fifth Amendment to the U.S. Constitution. After the issuance of the Presidential Order, Ralls amended its complaint to add President Obama as a defendant, and to assert additional claims. 4 CFIUS, Order Establishing Interim Mitigation Measures, (July 25, 2012). 5 CFIUS, Amended Order Establishing Interim Mitigation Measures, (Aug. 2, 2012). 6 Order of September 28, 2012, Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, 77 Fed. Reg. 60281 (Oct. 3, 2012), also available at http://www.gpo.gov/fdsys/pkg/FR-2012-10- 03/pdf/2012-24533.pdf 7 The Presidential Order also required Ralls to make certain certifications to CFIUS until the divestment of the Project Companies occurs, and stated that U.S. government employees should have access to the wind farm project sites to verify that Ralls is complying with the requirements of the Presidential Order.Fried Frank Client Memorandum 3 Ralls Litigation History and Current Status In decisions issued in February 8 and October 9 of 2013, the District Court dismissed Ralls’s claims. Ralls appealed to the DC Circuit from the District Court’s dismissal of certain of its claims, specifically its due process challenge to the Presidential Order and its claims challenging the CFIUS Order. Before reaching the merits of Ralls’s claims, the DC Circuit first considered whether it had jurisdiction to review the claims at all in light of the statutory bar to judicial review of Presidential determinations made pursuant to section 721 of the DPA. The DC Circuit noted that a statutory bar will preclude judicial review of a constitutional claim only if there is clear and convincing evidence that the Congress intended it to do so. Applying this standard, and noting that the Government must overcome a high bar, the DC Circuit examined the text of the statute and the statute’s legislative history and found there was not sufficient evidence of Congressional intent to preclude review. This finding was significant in carving out an exception to the statutory bar for certain constitutional challenges to the CFIUS review process. The DC Circuit then considered whether any of Ralls’s claims presented a political question 10 and found that they did not. In reaching these conclusions, the DC Circuit distinguished between the reviewability of final actions taken by the President and the reviewability of the procedure followed by the President in deciding to take such action, the subject of Ralls’s claims. In this instance, the DC Circuit was able to exercise its jurisdiction since it was considering only the procedural due process claim rather than the substantive determination of the President, which would have fallen under the statutory bar. Having established that it had jurisdiction to review Ralls’s claims, the DC Circuit next determined whether Ralls had property interests entitled to due process protection. The DC Circuit found that Ralls’s property rights under state law fully vested, and due process protection accordingly attached to those rights, upon completion of the transaction. Contrary to the Government’s contention, the possibility that the federal government could later review the transaction, in the view of the DC Circuit, did not operate to make Ralls’s property interests contingent in any way. The DC Circuit also found that Ralls did not forfeit its property interests by not seeking CFIUS pre-approval of the transaction. Because the DPA expressly contemplates that a party may seek CFIUS approval before or after the completion of a transaction, or not at all, failure to seek pre-approval did not affect Ralls’s property interest or due process rights relating to those interests. The DC Circuit then considered whether Ralls was provided due process before it was deprived of its protected interest. Despite the fact that Ralls had interacted with CFIUS and was afforded an opportunity to meet with CFIUS to discuss the transaction, the DC Circuit found that Ralls was not afforded sufficient due process because it did not have the opportunity to tailor its submission to address or rebut the Government’s concerns and did not have access to the unclassified evidence that CFIUS and the President relied upon in making their determinations. In this connection, the DC Circuit stated that while 8 Order, Ralls Corp. v. Committee on Foreign Investment in the United States., No. 12-1513 (D.D.C. Feb. 22, 2013), available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv1513-46. 9 Order, Ralls Corp. v. Committee on Foreign Investment in the United States, No. 12-1513 (D.D.C. Oct. 9, 2013), available at http://www.cadc.uscourts.gov/internet/opinions.nsf/B27E81AF31E360DA85257D16004E43E7/$file/ 13-5315-1502552.pdf. 10 The political question doctrine excludes from judicial review controversies that revolve around policy choices and value judgments which are considered the purview of the legislative or executive branch. Fried Frank Client Memorandum 4 national security interests may support withholding classified evidence, such interests do not support withholding unclassified evidence. The DC Circuit thus concluded that the Presidential Order deprived Ralls of its constitutionally protected property interest without due process of law. Key Implications for Filers There are a number of key implications for both CFIUS filers and CFIUS itself on a going forward basis, at least pending final resolution of the case: Thoughtful, Proactive Engagement with CFIUS: CFIUS filers should consider using the CFIUS pre-filing submission and formal 30-day CFIUS filing review period as opportunities to purposefully engage with CFIUS to, among other things, formally request unclassified “evidence” and information relating to CFIUS’s review of the transaction. 11 Chinese Focus on Investment in the U.S.: The willingness of Ralls Corp. and its Chinese owners to challenge the CFIUS review process over a relatively small early stage investment highlights a recent trend of Chinese investors’ increasing engagement with the CFIUS process. 12 At the same time, the U.S. government remains focused on scrutinizing investments from Chinese acquirers. Future Availability of Due Process Challenges: It is an open question whether a due process claim could succeed if a party has not completed a transaction prior to seeking CFIUS approval. In the Ralls case, the parties had already closed the transaction when CFIUS sought review, leaving open the question of whether parties that have not closed would have a sufficient property interest worthy of protection. CFIUS Resource Constraints: CFIUS is already resource constrained and any incentive to have filing parties further engage CFIUS will tax already constrained resources and likely have the further effect of extending aggregate review times. 11 On the other hand, the DC Circuit explicitly stated that there is no right for parties to have access to classified information CFIUS is relying on in its determination. There is also an argument that CFIUS may take the approach on a going forward basis that all information it relies on is classified. 12 For further information on increasing Chinese investment, please refer to our client memo on the CFIUS annual report for Calendar Year 2012, CFIUS Submits Annual Report to Congress. Data related to transactions occurring in 2012 is the most recent data available on CFIUS filings.Fried Frank Client Memorandum New York Washington, DC London Paris Frankfurt Hong Kong Shanghai friedfrank.com 5 Despite the potential implications raised by the DC Circuit decision for the CFIUS review process, the decision does not bring into question the ultimate authority of the President to block certain covered transactions. Instead, by not addressing the blocking determination by the President, the DC Circuit affirms the ability of the President to determine whether transactions pose national security risks and may, therefore, be blocked. However, as Ralls’s claims challenging the CFIUS Order have been remanded for consideration by the District Court, it remains to be seen the extent to which the CFIUS interim order may be open for review. Depending on the outcome of the District Court’s review and any appeals of the DC Circuit decision, there may be additional implications for filing parties to consider. The case is not over yet as there could also be a request for rehearing in the DC Circuit or a petition for review by the Supreme Court of the United States.