On September 12, 2012, Ralls Corporation, a U.S. corporation owned by two Chinese nationals(2), filed a lawsuit against the Committee on Foreign Investment in the United States (CFIUS), a multi-agency committee that reviews foreign acquisitions of U.S. business that could affect the national security of the United States. Timothy Geithner, the Secretary of the Treasury and the Chairman of CFIUS, was also sued in his official capacity. In addition to the Secretary of the Treasury, CFIUS is comprised of the heads of the Departments of Defense, Homeland Security, State, Energy, the Office of the Special Trade Representative, and the Office of Science and Technology Policy. The Director of National Intelligence and the Secretary of Labor also sit on CFIUS, but do not vote. Other non-voting observers are various White House advisors, including representatives of the Office of Management and Budget, the Council of Economic Advisors, the National Security Council, the National Economic Council, and the Homeland Security Council.
Although the heads of agencies are the nominal members of CFIUS, most work is done by agency staff. If CFIUS concludes that a transaction presents a threat to the national security that cannot be resolved through mitigation, or deadlocks on this question, the Committee must present the case to the President, who has the power to block the transaction (or force divestiture if review occurs after the acquisition has occurred.) CFIUS may also elect to defer to the President, without recommendation. In practice, although CFIUS has reviewed hundreds of cases, very few cases ever go the President. Most are reviewed favorably, resolved through mitigation, or withdrawn in the face of challenge. In 1990, President George H. W. Bush ordered the divestiture of China National Aero-Technology Import and Export Corporation’s acquired interest in Mamco Manufacturing Co. No company since has pushed a Presidential decision to veto, although many transactions have been withdrawn or restructured to avoid veto.
CFIUS review is ostensibly voluntary. Nevertheless, as the U.S. Government argues in its brief opposing Ralls’ motion for a temporary restraining order, there are “powerful incentives” for companies to file, because (in the words of the Government’s brief) “once parties to a transaction notify CFIUS, and the CFIUS process runs its course, the parties know that if the President did not exercise his powers under the Act he will not be able to do so in the future (absent a material misrepresentation or omission on the part of the parties)....” Nor can the parties evade review simply by refusing to file. CFIUS and its member agencies also have the authority to initiate their own reviews, without the cooperation of the parties, with the same risk of a blocking order or divestment. A CFIUS inquiry can be initiated at any time, even months or years after the deal closes. For all of these reasons, in any acquisition that implicates national security, the parties to a transaction generally file in order to ensure finality and, if nothing else, calm the investors and the lenders.
“CFIUS and its member agencies have the authority to initiate their own reviews, without the cooperation of the parties, with the same risk of a blocking order or divestment.”
The Ralls case involved the acquisition by Ralls in March 2012 (from an intermediate U.S. owner) of membership interests in four Oregon windfarm projects owned by Terna Energy USA Holding Corporation (”Terna”), described in the Ralls complaint as a US subsidiary of Terna Energy SA, a publicly traded renewable energy company listed on the Athens stock exchange. According to the Ralls complaint, Ralls intent was to construct the windfarms and enter into long-term contracts to connect them to the transmission grid in the Western United States controlled by PacificCorp, which is described as owning thousands of wind energy generating facilities.
Prior to the acquisition, the complaint states that the US Federal Aviation Administration reviewed the planned location of the turbines (then under rights held by Terna) and approved the plan (allegedly after consultation with the Department of Defense) as presenting “no hazard.” Not long after Ralls acquired the properties, however, the US Navy objected to the location of one of the wind farms and asked that it be moved on grounds that it presented airspace conflicts with low-level military aircraft training nearby in restricted airspace. Ralls agreed to relocate the problem windfarm. The Navy, in a May 17, 2012 letter to the Oregon Public Utility Commission said that they remained concerned that the placement of wind turbines in either location “may have negative national security implications” but “as we have no better options at this time,” chose the proposed new location “under protest” as presenting less of a hazard than the original plan.
The Ralls/Terna acquisition closed without either company presenting the proposal to CFIUS for review. Thereafter, in June 2012, CFIUS contacted representative of Ralls and invited Ralls to file a voluntary notice. According to declarations filed by the US Government in the later court action, Treasury Deputy Assistant Secretary Mark Jaskowiak advised Ralls to postpone construction until the review was completed and “warned Ralls representatives that, if it continued construction, Ralls would assume the risk of any loss due to any subsequent adverse CFIUS determination.”
Ralls agreed to a voluntary filing, filed on June 28, in which they (and Terna) argued that their transaction was not subject to CFIUS review because it only involved the sale of “intangible assets and rights” (as opposed to a “U.S. business”) and that the transaction presented no increase in national security risk. CFIUS responded with a finding that the transaction was a “covered transaction” and that there are national security risks to the United States that arise as a result of the transaction, and issued an Order Establishing Interim Mitigation Measures clearly designed to preserve the status quo pending resolution of the case, including an order to cease all construction and operations, remove stockpiled and stored items, and cease all access to the property (with the exception of U.S. citizens under contract to the companies and approved by CFIUS solely to remove any items from the properties in compliance with the Order). Thereafter, when Ralls informed CFIUS that it was considering sale of the property to a U.S. buyer, CFIUS issued an amended order on August 2 including, among other things, a prohibition on sale or transfer to any third party for use or installation on the windfarm properties of any items made or produced by the Sany Group, and a prohibition on sale of the properties to any third party until all items “deposited, installed, or affixed (including concrete foundations)” on the properties subsequent to the Ralls acquisition had been removed, CFIUS had been notified of the intended recipient or buyer, and CFIUS had not objected within 10 days.
The lawsuit was subsequently filed, challenging the CFIUS order as a violation of the Administrative Procedures Act, which governs the conduct of administrative agencies, and as an unconstitutional “taking” of Ralls’ property without due process of law. Initially, the lawsuit sought a temporary restraining order (TRO) and preliminary injunction, in addition to a declaratory judgment and injunctive relief, but the motion for the TRO and preliminary injunction (both emergency measures) was withdrawn after the parties agreed to allow “certain preliminary construction activities” at one of the projects. Notably, Ralls is represented in the lawsuit by several key members of the George W. Bush Administration, including Paul Clement, the former Solicitor General of the United States, Viet Dinh, former Assistant Attorney General for Legal Policy and one of the authors of the Patriot Act, and H. Christopher Bartolomucci, former Associate White House Counsel. Notwithstanding the ties of the legal team to the Bush Administration, however, the challenge is best understood as a legal challenge and not as a political challenge.
“The lawsuit was subsequently filed, challenging the CFIUS order as a violation of the Administrative Procedures Act.”
Putting aside a demonstrably politically motivated lawsuit (later withdrawn) by the Governor of New Jersey in the wake of the notorious Dubai Ports case (in which CFIUS initially approved an acquisition that would have given a Dubai entity ownership of a firm that managed several major U.S. ports), CFIUS has never been the subject of a serious court challenge to its authority. Briefly stated, the Ralls lawsuit challenges the CFIUS order as arbitrary and capricious. Further, because CFIUS refuses to detail the national security concerns that are the basis of the order, Ralls argues that it cannot effectively defend itself:
“CFIUS’s path to its vague but consequential determination that ‘there are national security risks to the United States that arise’ from Ralls’s acquisition cannot ‘reasonably be discerned’; to the contrary, it is a mystery to everyone -- Ralls, this Court, the public -- except CFIUS. In issuing the bare-bones yet far-reaching Amended Order, CFIUS ‘has passed from the ‘tolerably terse to the intolerably mute,’ in violation of the [Administrative Procedures Act].” --Memorandum in Support of Motion for Temporary Restraining Order and Preliminary Injunction, at 23 (citations omitted).
Ralls also argues that the order has seriously damaged their property interest in the windfarms, and that the “Near-Total Absence of Process Leading Up to the Order Is Not Even Close to What is ‘Due’ Here.”
“Because CFIUS refuses to detail the national security concerns that are the basis of the order, Ralls argues that it cannot effectively defend itself.”
Finally, Ralls argues that, by ordering Ralls to cease construction, remove equipment, and cease access, CFIUS has not merely “mitigated” national security risks, as it is allowed to do under law, but has engaged in activity “tantamount to prohibiting the transaction entirely,” a power reserved to the President. Ralls also argues that CFIUS overstepped its authority in barring installation at the windfarms of items made by third parties -- and in completing sale of the windfarms to a third party, even a U.S. party, since its authority is limited to reviewing foreign acquisitions.
The President will decide whether or not to veto the transaction on September 28, unless the parties can come to some resolution short of Presidential action.
A Presidential veto may well moot the lawsuit, although Ralls will argue otherwise. Presidential actions on CFIUS matters, by law, are not subject to judicial review. Ralls counsel has argued that CFIUS’s actions are “capable of repetition, yet evading review” if there is no judicial intervention. That argument may or may not prove persuasive to the Court, but regardless of Ralls’ fate, there are already important lessons to be learned from the Ralls litigation.
“A Presidential veto may well moot the lawsuit...Presidential actions on CFIUS matters, by law, are not subject to judicial review.”
First, the Ralls case vividly demonstrates the importance of filing for CFIUS review in any case where there is any question respecting the national security implications of a transaction.
Second, the Ralls case further demonstrates that a decision by an individual agency, here the Federal Aviation Administration, coupled with the acquiescence of another agency (here, the Navy) “under protest” on matters involving national security, will not be viewed as a substitute for CFIUS review, even if one of the agencies is a defense agency. CFIUS was established as a multi-agency body precisely to ensure that foreign acquisitions get broad review. Further, the fact of the FAA and Navy reviews in this case were ample warning that CFIUS would take an interest in this case.
Third, companies that proceed with transactions in the absence of CFIUS review, do so at their risk. The law is clear that transactions that are not reviewed and cleared by CFIUS are open to scrutiny in perpetuity. Divestment is a costly remedy.
“The Ralls case vividly demonstrates the importance of filing for CFIUS review in any case where there is any question respecting the national security implications of a transaction. “
Fourth, the Ralls lawsuit opens the CFIUS process to unprecedented scrutiny, but it is not at all clear that a Court (if it elects to enter the battle) will find that the orders entered here went beyond the mitigation authority granted to CFIUS by Congress. In essence, the orders represent an attempt to restore the status of the properties before the acquisition. What CFIUS is saying is that a party may not proceed with a transaction that (in their view) threatens the national security -- a transaction that they knew could be subject to challenge -- without running the risk that they will be required, in mitigation of the risk, to un-do whatever unauthorized changes to the property they may have made.
Fifth, although Chinese acquisitions are subject to close scrutiny, because (among other things) China is subject to a U.S. arms embargo, it should not be assumed that this transaction proceeded as it did merely because the buyer was Chinese. CFIUS has cleared numerous Chinese acquisitions. Further, CFIUS has issued harsh mitigation orders against buyers from numerous countries, including companies headquartered in countries that are staunch allies of the United States.
“It should not be assumed that this transaction proceeded as it did merely because the buyer was Chinese. CFIUS has cleared numerous Chinese acquisitions.”
Sixth, although some commentators have opined that this case drew special attention because it involved wind energy, we do not believe that wind energy was the deciding factor, or even a relevant factor in the decision. Like Ralls, we have no special knowledge of the national security factors that drove the CFIUS decision, but there are strong indicators that the key concern was and is the proximity of the windfarm to restricted military airspace, and to sensitive military installations. The issue is squarely raised in the declaration of Marisa Lago, the Assistant Secretary for International Markets and Development, who notes that one of the four properties is in restricted airspace, and the other three “within five miles” of the restricted airspace. Further, the amended interim order prohibits the company from depositing, stockpiling, or storing any new items at “any location that is closer to the R-5701 Restricted Airspace than the lay down site that is farthest from the R-5701 Restricted Airspace.” It also requires the removal of “*a+ll items deposited, installed, or affixed (including concrete foundations)” on the acquired properties. If wind energy were the real issue, it is fair to assume that a change of owner would suffice, and would not require such comprehensive efforts to prevent or remove all physical items placed or left behind by Ralls. The lesson here is that the location of an acquired property can be the critical factor in a national security review even if the business itself is entirely benign.
Seventh, whether or not President Obama vetoes this transaction, and whether or not the District Court elects to decide the declaratory judgment action before her, the Ralls case may have the salient benefit of (a) forewarning future investors against avoiding CFIUS review on transactions that have national security implications, and (b) forewarning CFIUS itself that it can and may be called to account if it overreaches. The truth is that there are no real guideposts for CFIUS as it construct mitigation orders, and the secrecy within which the Committee must operate (not only reasons of national security but also because transactions often involve publicly traded companies and highly sensitive financial information) makes it difficult, if not impossible, for the Committee to benefit from constructive criticism of its practices. Ralls fairly asks how hard CFIUS should be asked to try at mitigation measures before it opts for divestment.
“The lesson here is that the location of an acquired property can be the critical factor in a national security review even if the business itself is entirely benign.”
All of these issues merit scrutiny, and are likely to be the subject of discussion and debate long after the Ralls case is resolved.
This article originally appeared in China Legal Review on September 27, 2012