On September 12 a U.S. wind project development company, Ralls Corporation ("Ralls"), owned by two Chinese nationals, filed suit against the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency U.S. government body charged with assessing the potential national security effects of foreign acquisitions of U.S. businesses. The Ralls complaint alleged that CFIUS exceeded its authority by blocking Ralls's investment in and development of a proposed 40-megawatt wind project in Oregon, through its acquisition of four Oregon limited liability companies (the "Oregon Projects").

Ralls subsequently filed a motion requesting that the U.S. District Court for the District of Columbia issue a temporary restraining order ("TRO") to permit Ralls to resume construction of the Oregon Projects so that Ralls could benefit from approximately $25 million in federal investment tax credits. On September 19, Ralls withdrew its motion for a TRO following an agreement with CFIUS regarding the resumption of preliminary construction activities.

The CFIUS order to which the lawsuit responds marks an unprecedented intervention by the U.S. government in renewable energy project development, which, since its inception, has benefitted from substantial investment by foreign investors.


Ralls is owned by Dawei Duan, the chief financial officer of the Sany Group ("Sany"), and Jialiang Wu, a vice president of Sany and the general manager of a wholly owned subsidiary of Sany. Sany is a China-based global manufacturing company that manufactures wind turbines, among a substantial variety of other construction-related machinery. Sany's heavy manufacturing arm currently has a significant presence in the United States, which Ralls seeks to expand through the development of projects that utilize Sany's wind turbines. The acquisition of the Oregon Projects, which own various development rights such as wind easements, power purchase agreements, permits, and related assets, was intended to further this purpose.

Prior to the acquisition of the Oregon Projects, Ralls had acquired at least two U.S. wind projects, a 10-megawatt operational wind farm in Crosby, Texas, and a test project in Massachusetts. We are not aware of a CFIUS challenge to Ralls's acquisition of the Texas or Massachusetts projects.

Summary of CFIUS and the Exon-Florio Review Process

  1. Brief History of CFIUS

President Ford created CFIUS by Executive Order 11858 in 1975, in response to an influx of investment from the Middle East, to monitor the impact of and coordinate U.S. policy on foreign investment in the United States. In 1988, in response to concerns over the acquisition of Fairchild Semiconductor International, Inc., by Fujitsu Limited, Congress passed the Exon-Florio Amendments to the Defense Production Act of 1950 ("Exon-Florio") granting the President the express authority to block proposed mergers, acquisitions, and takeovers that threaten national security. Exon-Florio was subsequently amended by the Foreign Investment and National Security Act of 2007 ("FINSA").

  1. Scope of Review Under Exon-Florio

Exon-Florio applies to "covered transactions", which include mergers, acquisitions, and takeovers involving "foreign persons" that could result in foreign control of U.S. businesses, transfers of ownership of a U.S. business from one foreign owner to another, and transactions that result in foreign ownership of a part of an entity or of assets constituting a U.S. business (such as a division).

The regulations implementing FINSA identify certain types of transactions, including leases, start-up or "greenfield" investments, and lending transactions that are not considered covered transactions. However, the regulations provide that long-term leases and lending transactions may be considered covered transactions if the foreign lessee or lender makes significant business decisions, characteristic of an owner. In addition, start-up or "greenfield", investment is narrowly construed to mean investment involving such activities as "separately arranging for the financing of and the construction of a plant to make a new product, buying supplies and inputs, hiring personnel, and purchasing the necessary technology." Further, a start-up investment "may involve the acquisition of shares in a newly incorporated subsidiary." Accordingly, in most cases, these exceptions are unlikely to benefit foreign investors in U.S. renewable energy projects.

Under Exon-Florio, the President is authorized to suspend or prohibit any covered transaction if there is credible evidence that the foreign person exercising control might take action that threatens to impair U.S. national security.

The term "national security" is not defined in the statute or implementing regulations and is construed broadly by CFIUS to include all facts and circumstances that have potential national security implications. Factors that will heighten CFIUS's interest in a transaction include whether the acquisition target:

  • has contracts with the U.S. government, particularly sole- or single-source defense contracts, classified contracts or contracts with U.S. government agencies that have national security responsibilities (e.g., homeland security, intelligence);
  • possesses sensitive or classified technologies, particularly with defense or law enforcement applications, or produces goods, services, or technologies subject to export controls;
  • controls "critical infrastructure," including major energy assets; or
  • is engaged in operations that involve nuclear energy.

In addition, the prospective purchaser's nationality and whether it is controlled or owned (in whole or in part) by a foreign government are important factors in determining whether a CFIUS review may be appropriate.

In light of these factors, national security concerns may arise in a number of ways when a foreign entity acquires a U.S. renewable energy business:

  • If the U.S. business holds sensitive, classified, or export controlled information or technology, or provides power or energy-related products directly to a U.S. government agency, CFIUS approval should be sought.
  • Transactions involving foreign control over "major energy assets" are subject to heightened scrutiny. A transaction involving "major energy assets" is subject to a mandatory 45-day investigation unless CFIUS concludes during its initial review that the acquisition will not impair national security. To the extent that a renewable energy project is integrated into traditional energy transmission and distribution networks, the possibility that a foreign owner of the project could materially disrupt an energy supply chain likely would raise national security concerns.
  • The nationality of the acquirer likely influences the CFIUS process. Transactions involving acquirers based in China, Russia, certain countries in the Middle East, and other countries perceived as "non-cooperative" with respect to national security-related matters likely will be subject to greater scrutiny than transactions involving acquirers based in the E.U. or other G20 nations.
  1. Summary of CFIUS Procedure

Parties to an acquisition involving a foreign person may notify CFIUS voluntarily about a proposed transaction. CFIUS review commences upon receipt of a completed notice from the parties to the transaction. CFIUS has 30 days after receipt of the completed notice to determine whether to allow the transaction (based on its initial review and, if applicable, measures adopted by the parties to mitigate any national security risks identified by CFIUS) or to conduct a full investigation. If an investigation is not begun within the initial 30-day period, then the CFIUS review is terminated.

If an investigation is undertaken, it must be completed within 45 days after the initial determination to investigate. CFIUS concludes action under Exon-Florio only if it has determined that a proposed transaction raises no unresolved national security concerns (with or without mitigation measures). Otherwise, CFIUS will refer the transaction to the President with a recommendation that it be suspended or prohibited. The President must make a determination relating to the transaction within 15 days after CFIUS has made its recommendation.

If the parties to a proposed transaction elect not to file a notice voluntarily, then CFIUS may review the transaction on its own initiative at any time and impose measures to mitigate security risk, including requiring divestiture following a completed acquisition. The only formal Presidential divestiture order under Exon-Florio involved an acquisition of a U.S.-based aerospace parts manufacturer by a Chinese government-owned acquirer. At least one other transaction, involving a Chinese telecommunications equipment manufacturer, was voluntarily divested upon CFIUS's recommendation.

CFIUS Order Regarding Ralls

Ralls did not notify CFIUS prior to completing its acquisition of the Oregon Projects. However, Ralls submitted a voluntary notice of the transaction on June 28, 2012, after the U.S. Navy requested that Ralls move the location of the wind project to prevent disturbances of military aircraft training. According to the complaint, Ralls satisfactorily complied with the U.S. Navy's request.

On July 25, 2012, CFIUS issued an Order Establishing Interim Mitigation Measures requiring Ralls to cease further construction and operation of the Oregon Projects, remove all stockpiled or stored items from the Oregon Project sites, and cease access to the sites except to the extent required to remove stored or stockpiled property. In an amended order, dated August 2, 2012, CFIUS modified its prior order, adding further restrictions on Ralls's activities, including a prohibition on the sale or transfer of the Oregon Projects to any third party for the purpose of installing any Sany products and restrictions on the sale or transfer of the equity or assets of the Oregon Projects.

CFIUS did not articulate the rationale for imposing these restrictions or identify the specific national security concerns it sought to address in its mitigation order.

Subsequent to Ralls's filing of the lawsuit, on September 18, CFIUS made a recommendation to the President regarding the Oregon Projects and, by September 28, President Obama is expected to decide whether to let the Oregon Projects proceed or to require divestiture on terms specified by CFIUS. Ralls will bear the financial risk for any losses associated with divesting of the Oregon Projects and the inability to qualify for federal incentives.


To our knowledge, the Ralls acquisition of the Oregon Projects is the first reported example of CFIUS review of foreign investment transactions in the renewable energy industry. CFIUS filings and dispositions are confidential, however, and several investors in the renewable energy and clean tech industries have required notification to CFIUS prior to completing investments. In contrast, a significant number of transactions in the traditional energy sector have been approved after extensive CFIUS review and, in some cases, implementation of mitigation measures, including acquisitions in the oil and gas, energy transportation infrastructure, and electricity generation and transmission sectors.

The implications of the CFIUS order regarding Ralls's investment in the Oregon Projects are potentially significant. According to the Wilson Center, an independent think-tank based in Washington, D.C., China has invested approximately $6 billion in clean energy projects in the United States since 2006, and the numbers are growing fast. In 2011, Chinese investment in the U.S. clean energy sector reached $264 million, a 130% increase over the prior year.

Although the CFIUS mitigation order and the court filings do not specifically address national security risks, the proximity of the Oregon Projects to a U.S. Naval Weapons System Training Facility likely was a significant factor in the CFIUS assessment. CFIUS reportedly expressed concerns regarding a recent proposed acquisition of a U.S. mining business by a Chinese government-owned company due to the proximity of the target company's facilities to a military installation. Otherwise, CFIUS has not clarified what, if anything, differentiates the Ralls acquisition of the Oregon Projects from any prior or pending foreign investment in renewable energy projects.

In light of the CFIUS order, it appears that "national security" may be a greater risk to renewable energy transactions than previously understood. Non-U.S. investors should be prepared for national security reviews and should carefully consider whether CFIUS clearance should be a condition to closing renewable energy development transactions.