Ralls v. CFIUS: U.S. Appellate Court Finds Procedural
Protections Inadequate for Blocking Foreign Investment
in the United States
By Sylwia Lis and Joseph Schoorl
On July 15, 2014, the U.S. Court of Appeals for the District of Columbia
Circuit (“D.C. Circuit”) issued an opinion in Ralls Corporation v. Committee
on Foreign Investment in the United States, et al. (“Ralls v. CFIUS”) analyzing
the process by which the Committee on Foreign Investment in the United
States (“CFIUS”) reviews foreign acquisitions of U.S. businesses for
national security concerns. The case involves a CFIUS review initiated
after Ralls Corporation (“Ralls”), a Chinese-owned company, acquired
several wind farm projects in Oregon. The review concluded with the U.S.
President issuing an order (“Presidential Order”) requiring Ralls to divest
its newly acquired interest in these projects on national security grounds.
In reversing an earlier district court decision, the D.C. Circuit ruled that
the Presidential Order deprived Ralls of its constitutionally protected
property interests without due process of law because Ralls did not
receive certain procedural protections before the Presidential Order was
issued. The Ralls v. CFIUS decision does not undermine, in any respect,
CFIUS’s authority to review foreign acquisitions on national security
grounds or the President’s authority to suspend or prohibit foreign
acquisitions on such grounds. The decision also explicitly confirms that
the President’s determination that a transaction threatens to impair the
national security interest of the United States and the measures taken
by the President upon such determination are not subject to judicial
review. Depending in part on the outcome of further legal proceedings
in this case, however, this ruling could lead to changes to certain aspects
of the CFIUS review process that would benefit foreign investors in the
Focus on CFIUS
What is the Committee on Foreign Investment in the United States?
Originally established by executive order in 1975, CFIUS is an interagency committee chaired by the U.S. Treasury Department that is tasked with a national security review of foreign acquisitions and certain other transactions. In 1988, the U.S. Congress enacted the Exon-Florio Amendment to the Defense Production Act of 1950. The Exon-Florio Amendment authorizes the President to investigate foreign acquisitions and investments that could have national security implications and, if necessary, block such transactions for national security reasons.
This presidential authority is delegated to CFIUS. In 2007, the President signed the Foreign Investment and National Security Act (“FINSA”). This statute institutionalized many aspects of the CFIUS review process by, among other things, formalizing CFIUS and its membership and enhancing congressional oversight. The Treasury Department issued regulations implementing FINSA’s changes that took effect in December 2008.
Although the initiation of a CFIUS review is characterized as voluntary, CFIUS may commence a review on its own initiative at any time, even after a transaction has closed. Once completed, a CFIUS review generally provides a “safe harbor” for the transaction. Failure to notify CFIUS of a proposed transaction can result in the transaction being blocked or unwound pursuant to an order from the President. While a presidential order issued after a transaction had been completed is an extraordinarily rare step in the CFIUS context, this is what happened in the Ralls transaction, giving rise to the lawsuit that followed.
What Are the Key Facts in Ralls v. CFIUS?
The Ralls v. CFIUS case relates to the 2012 acquisition by Ralls, a U.S. company owned by two Chinese nationals, of several wind farm projects in Oregon. The project sites are located near restricted airspace and bombing zone maintained by the U.S. Navy. The transaction closed without the submission of a voluntary notice to CFIUS. Ralls subsequently submitted a notice to CFIUS as a result of a post-closing inquiry from CFIUS.
CFIUS’s investigation resulted in an order (“CFIUS Order”) that established “interim mitigation measures”—measures that included ceasing all construction and operations on several of the acquired projects—pending a determination by the President. In September 2012, President Obama took the rare step of issuing the Presidential Order instructing Ralls to divest its interest in the acquired wind farm projects.
What is the D.C. Circuit’s Holding?
Ralls brought suit in district court challenging both the CFIUS Order and the Presidential Order, arguing, among other things, that these orders deprived Ralls of its constitutionally protected property interests without due process of law. The district court dismissed Ralls’s claims regarding the CFIUS Order on jurisdictional grounds. It later dismissed the claims regarding the Presidential Order after determining that Ralls was provided the opportunity to present evidence in its favor when submitting its notice to CFIUS and during follow-up communications with CFIUS officials.
On appeal, the D.C. Circuit reversed the district court’s decision on Ralls’s due process claim regarding the Presidential Order and remanded the case. The D.C. Circuit held that the U.S. Government had not provided due process to Ralls before issuing the Presidential Order because Ralls was not made aware of the factual basis for the President’s determination in the matter and did not have an opportunity to provide a rebuttal. Although it recognized the importance of protecting classified information used in the CFIUS review process, the D.C. Circuit concluded that due process required that Ralls be provided with the relevant unclassified information. The D.C. Circuit also rejected the district court’s jurisdictional arguments regarding the CFIUS Order and remanded the case for further litigation on these claims.
What Does Ralls v. CFIUS Mean for Foreign Investors in the United States?
The Ralls v. CFIUS decision is narrow in scope. The decision reviews and applies to the process by which unreviewable Presidential determinations are made. The decision does not call into question the authority of the President or CFIUS to review foreign acquisitions of U.S. businesses for national security reasons. Nor does anything in the opinion suggest that U.S. courts have jurisdiction to review the merits of CFIUS’s or the President’s national security determinations. Indeed, the decision is very clear that the national security determinations in the context of the CFIUS process are not subject to judicial review.
At a high level, the significance of Ralls v. CFIUS likely lies in its unequivocal affirmation that, notwithstanding the president’s broad authority in matters of national security, parties to transactions that are blocked by the President on national security grounds are entitled to the same types of constitutional due process protections as are parties subject to U.S. Government actions in other regulatory contexts. From the perspective of foreign investors who might find themselves before CFIUS, the significance of the Ralls v. CFIUS decision is harder to gauge at this point. The decision may ultimately lead to procedural changes in at least some aspects of the CFIUS review process. Such procedural changes could increase the transparency of CFIUS’s decision-making in the context of transactions determined to pose significant national security concerns and provide opportunities for the parties to address specific concerns related to unclassified information.
Even these procedural changes could be limited. The decision focuses on the Presidential Order, which is a final and, as a practical matter, rare step in the CFIUS review process. The decision does not necessarily have to be interpreted so narrowly but, if it were, the procedural protections called for by Ralls v. CFIUS would not necessarily translate into material changes to the CFIUS review process prior to the presidential order stage. Nonetheless, this ruling may encourage CFIUS to increase transparency at other stages in the review process—for instance, in circumstances in which CFIUS requires foreign acquirers to take certain steps or accept certain conditions to mitigate national security risks. The implications of the D.C. Circuit decision regarding Ralls’s due process claim will also depend on the outcome of any further litigation in this case, including a possible appeal by the U.S. Government.
As a general matter, the policy of the U.S. Government is openness toward foreign direct investment. CFIUS’s mandate is narrow and generally viewed by CFIUS as such—i.e., it is limited to the review of certain transactions to determine the potential effects on U.S. national security that are not addressed by other existing U.S. statutes, regulations, or rules. Parties to proposed acquisitions in the United States involving foreign investors should include a CFIUS risk assessment as part of their transaction due diligence and consider whether a voluntary notice to CFIUS would be prudent.
In this respect, it is important to keep in mind that, even based on limited publicly available information, the Ralls transaction clearly presented a number of unique circumstances and concerns that ultimately led to the Presidential Order at the conclusion of the CFIUS process, the law suit, and most recently the D.C. Circuit decision. That said, if this decision stands, it could result in changes to certain aspects of the CFIUS review process that would benefit foreign investors in the United States.
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If you have any questions about this ruling or about the CFIUS process in general, please contact:
Baker & McKenzie LLP
+1 202 835 6147
Baker & McKenzie’s CFIUS Team:Nicholas Coward
Washington D.C.Edward Dyson
Washington D.C.Gary Edson
Managing Director of Strategy and Policy
Washington D.C.Bart McMillan
Washington D.C.David Clanton
Washington D.C.Janet Kim
Washington D.C.Sylwia Lis
Washington D.C.John McKenzie
San FranciscoSteven Hill
Washington D.C.Alison Stafford Powell
Palo AltoAlexandre Lamy
Washington D.C.Joseph Schoorl
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