US President Barack Obama has blocked the acquisition of four wind farms by a Chinese-owned corporation. This is the first time in more than two decades a President has used the Exon-Florio Act (the Act) against an investor on national security grounds. This briefing looks at the run-up to the event and why it matters.
On 28 June 2012, Ralls Corporation, owned by two Chinese nationals who are also senior executives of Sany Electric, filed a voluntary notice under the Act with the Committee on Foreign Investment in the United States (CFIUS). Ralls sought approval to acquire four wind farm projects in Oregon.
CFIUS, an inter-agency committee chaired by the Treasury Department, reviews foreign nationals’ acquisitions of US businesses to determine whether the acquisitions would affect US national security. Companies involved in transactions likely to be reviewed can file a voluntary notice seeking review under the Act.
About CFIUS's review process
Filing starts a 30-calendar-day review, after which CFIUS can also open an additional 45-day investigation. At the end of that investigation, CFIUS may recommend that the President bans a transaction, opening an additional 15-day review period.
Ralls, a wind project development company, identifies US investment opportunities for Sany’s wind turbine generator business. According to a Treasury Department statement, the wind farms that Ralls sought to acquire ‘are all within or in the vicinity of restricted air space at Naval Weapons Systems Training Facility Boardman in Oregon’.
According to Ralls, it got approval from the Federal Aviation Administration for each of its planned turbines and moved one of its projects to address the Navy’s concerns.
But before the end of the first 30-day review, CFIUS issued an order concluding that the transaction posed national security risks and establishing ‘Interim Mitigation Measures’ requiring Ralls to stop all construction on the sites and remove stockpiled items from the sites. Ralls then informed CFIUS that it was considering selling the sites. CFIUS issued another order requiring all items produced by Sany to be removed before any sale, and setting other terms and conditions on any sale.
Ralls sues CFIUS
On 12 September 2012, in what is the first-ever legal challenge to a CFIUS action, Ralls filed a federal lawsuit against CFIUS seeking declaratory and injunctive relief. Ralls claims that CFIUS’s actions violated established administration procedures and effectively constituted a ‘taking’ of Ralls’s property without due process, in violation of the US Constitution. Ralls complained that CFIUS’s actions exceeded its authority and that CFIUS acted ‘without identifying any evidence or providing any explanation’ for concluding that the acquisition would threaten US national security or for its mitigation orders.
On 28 September 2012, within the review period triggered by Ralls’s filing, President Obama issued an order to ban the transaction. The order says only that there ‘is credible evidence that leads me to believe that Ralls… might take action that threatens to impair the national security’ of the US. The Presidential order incorporates the mitigation measures CFIUS had promulgated, while at the same time revoking CFIUS’s prior orders.
Why this Ralls event is significant
First, Ralls’s decision to sue CFIUS is unprecedented.
Second, the dispute precipitated a rare Presidential order. The Presidential order was clearly designed to strengthen the government’s hand in the litigation. Only the President can ban transactions under the Act, no judicial review is provided for Presidential prohibitions under the Act, and courts have historically been reluctant to review Presidential actions, especially in the national security arena.
Third, the Ralls federal complaint highlights the frustration many filing parties experience with the CFIUS process, including a lack of dialog and explanation. One can infer from the mitigation orders that the US government was not so much concerned about foreign ownership of wind farm assets, but rather the installation of Ralls’s equipment so close to military assets.
CFIUS had effectively blocked a previous transaction in which foreign parties sought to acquire a gold mine near military assets.
Fourth, this continues a pattern of Chinese investors having a difficult time in the CFIUS review process. The Treasury Department issued a separate statement to try to soften the blow of the order as it might be received by foreign investors, in which it underscored that each transaction is reviewed on its own facts and that the US still welcomes foreign investment.
The litigation is pending. We will update you if it yields any meaningful rulings.