On Friday, September 28, 2012, the President issued an order to block the Ralls Corporation (“Ralls”), a Chinese-owned wind-farm developer, from proceeding with the development of four wind farm projects in Oregon.1 The President’s order requires Ralls not only to divest itself of all ownership in the project companies, but also requires the removal of all equipment on the sites, bars access to the sites by employees of the companies, and bars any non-U.S. citizens from carrying on the dismantling of installed equipment. It is exceedingly rare for the President to make such a decision as most foreign investors will abandon their transactions when it appears likely that such an order will be issued.
The matter began earlier this year when Ralls bought four small Oregon companies with assets consisting of wind-farm development rights, land rights, power purchase agreements, and government permits. The projects reportedly had received other federal regulatory approvals, including a determination by the Federal Aviation Administration (“FAA”) that the turbine towers presented no hazard to aviation, in particular to nearby airspace used by the U.S. Navy. After learning of the transaction through press accounts and later through a voluntary notice filed by Ralls, the Committee on Foreign Investment in the United States (“CFIUS”) reviewed the transaction and issued two orders, pending approval of the President, to stop the construction and operation of all of Ralls' four wind farms on the grounds of national security, while also requesting that the company remove all its equipment from the site within five days and prohibiting Ralls from divesting any of the assets. The President was given until September 28 to make a determination as to whether to approve CFIUS’ order or allow the project to proceed.
In an unprecedented move, the Chinese owners then pursued a legal challenge through U.S. courts by seeking a temporary restraining order to prevent CFIUS from imposing these restrictions on the projects.2 The President’s decision and the developments revealed by Ralls’ legal challenge are noteworthy for several implications specific to ongoing or future acquisitions of U.S. businesses by Chinese companies or nationals.3
Chinese Investors Face Special Scrutiny
The U.S. Government maintains that the CFIUS process does not single out Chinese companies for special attention and that the U.S. remains open to Chinese investment.4 While this assertion may be true with respect to economic sectors that have no apparent national security implications, the Ralls matter seems to confirm an apparent emerging trend that CFIUS will subject transactions by Chinese investors to heightened scrutiny.
CFIUS’ response also highlights the U.S. Government’s concern that allowing Chinese companies proximity to certain military installations may pose an espionage threat, regardless of the underlying type of business involved. This is evidenced by the fact that CFIUS’ main concern with the Ralls acquisition pertained to the proximity of the project properties to airspace used by the Defense Department—mirroring similar CFIUS reactions to two prior Chinese company efforts to acquire mining operations near a U.S. Navy base in Nevada. The Government’s orders do not appear to implicate any of the general concerns that usually arise in the CFIUS context, such as impact on critical infrastructure, access to energy supplies, and technology transfers — all of which are largely moot in the context of this transaction. Chinese investors in particular therefore appear to face the difficult challenge of anticipating a broad range of U.S. national security concerns specific to them, many of which are challenging to assess because they may be classified or otherwise difficult for an outsider to discern.
Taken together with the ongoing controversy over the CNOOC-Nexen transaction that is also pending CFIUS review, and with allegations of espionage by several Chinese telecommunications companies, the political climate of sensitivity around Chinese investment in the United States is at an all-time high. This overall trend will likely continue as it is fueled by bipartisan concerns over cyber-threats, economic espionage, and the trade imbalance. Therefore, any significant Chinese investment in the United States that could implicate the acquisition of control by a foreign person over a U.S. business must be carefully assessed against the FINSA requirements and national security concerns, as well as political dynamics at the state and local level.
CFIUS Casts a Wide Net...
According to CFIUS’ filings in the Ralls litigation, the acquisition came to the Government’s attention through a report in a wind power trade publication. This statement confirms the practice of CFIUS agencies aggressively monitoring media in the United States to flag deals that have not been voluntarily presented to the Committee. Chinese companies seeking to acquire a company or business in the United States must therefore anticipate that their transactions, regardless of value, are likely to come to CFIUS’ attention.
...But Internal Coordination Can Pose a Challenge
The Ralls litigation also has surfaced the unfortunate reality that the U.S. Government does not always coordinate its own activities in areas of interest to CFIUS — in this matter, Ralls reportedly engaged in a long process to secure FAA permits, which included close consultations with the Defense Department to mitigate the impact on U.S. Navy flight operations. Ralls may have assumed that such approvals lessened any need to consult CFIUS. The record suggests instead that neither CFIUS nor the DOD representative on the Committee were made aware of these discussions or the final FAA approval at the time. Further, it does not appear that these approvals carried much weight with CFIUS or even with the Defense Department, as it was a different component of the Defense Department that requested that CFIUS contact Ralls to suggest it initiate a voluntary filing, after the FAA process was completed, and apparently only after being tipped off by the aforementioned press report. This underscores that vetting a transaction with other agencies of the U.S. Government is not a substitute for direct discussions with CFIUS. The parties to a transaction need to assume the burden of ensuring that all of the necessary touch-points with the U.S. Government are covered, including with CFIUS directly.
CFIUS Broadens the Definition of a U.S. Business
On a more general point, CFIUS has moved to adopt a much more expansive view of what constitutes a U.S. business under FINSA in the Ralls case, and this arguably extends beyond CFIUS’ own guidance issued in 2008. As described in the filings with the court, Ralls acquired the rights to develop several wind-farm installations (permits and some contracts, primarily). The acquisition as described by Ralls does not appear to involve the bundle of tangible assets that would normally constitute a business, such as employees or buildings. This suggests that where a Chinese investor is involved, CFIUS is likely to view its jurisdiction as broad enough to cover almost any investment short of a complete greenfield project.
The Only Defense is Effective Advance Notice
As the Ralls case illustrates and our experience confirms, when considering transactions that involve nationals from certain countries or that may implicate some element of national security, broadly defined, the best approach is to engage CFIUS early and often. By not undertaking such an approach, Ralls lost some of the advantage of timing and control over the CFIUS process that engaging in a voluntary filing or an early pre-filing notice typically provides. Recent developments also suggest that the Committee will treat a non-disclosed acquisition much more skeptically, particularly when a Chinese investor is involved.