Even in the US, developers of power assets (and their lenders and investors) should consider political risks. President Obama’s recent order requiring Chinese nationals to divest their interests in four US wind farms, following a recommendation of the Committee on Foreign Investment in the United States (CFIUS), was a wake-up call. But, it was not the start of a war on power projects.

CFIUS is an interagency committee that reviews the national security implications of transactions where a foreign person could take control of a US business. The committee has authority to initiate a review of a transaction on its own.

The review can occur before or after the transaction is completed. Planning ahead can alleviate costly headaches down the road.

A party to the transaction in which a foreign person may acquire control of a US business can self-report proactively. Consider whether there is a real risk that the transaction raises a national security concern. Is the project near a military base? Is the foreign person from a country with which the US has had recent tensions? Is the equipment capable of disrupting a sizeable portion of the electricity grid or some other pivotal US infrastructure?

A favorable ruling gives the parties access to a safe harbor that curtails any further action by CFIUS. The tradeoff is that the parties may have to follow certain “mitigation” conditions CFIUS imposes and obtaining a ruling can be time consuming and sometimes costly.

A negative decision permits the parties to cut their losses before they get too far down the road.

President Obama’s recent order stemmed from a CFIUS review initiated after a transaction closed.

The order requires Ralls Corporation (a US corporation owned by two Chinese nationals) to divest itself of the projects within 90 days and have a third party remove any property from the project sites within 14 days. Equipment made by Sany Group (a Chinese affiliate of Ralls) for the project can’t be sold to third parties for use at the sites. Ralls is challenging the President’s order on constitutional grounds, but the story is still unfolding.

If the parties forego a protective filing, they will need to allocate risks in the transaction documents. That means they need to decide who interfaces with CFIUS, who makes strategic decisions, who pays the cost of proceedings and, potentially, how the deal may be unwound most efficiently and whether one party will indemnify the other. They also should require the non-filing party to cooperate and provide all information necessary to conclude CFIUS’s review of the transaction.

Ultimately, the parties may decide to avoid falling into the CFIUS trap in the first place. It is not triggered by greenfield investments or where the foreign person does not acquire a controlling interest.

Control doesn’t mean merely that the foreign person has a direct controlling interest (indirect interests count as well). However, it often is possible to avoid shedding control by spreading it out amongst unrelated parties or giving foreign persons only passive roles (with certain blocking rights).

As appeared in Power Finance & Risk, October 22 2012.