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Court: US Must Explain Why It Rejects Foreign Deals

Jul. 27, 2014 - 03:45AM   |  
By AARON MEHTA   |   Comments
US Secret Service Uniform Division offic
A court decision in mid-July could lead to greater transparency from the Committee on Foreign Investment in the United States. (Paul J. Richards / AFP)
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WASHINGTON — Since its inception in 1975, the Committee on Foreign Investment in the United States (CFIUS) has decided whether foreign acquisitions or investments in US companies could raise national security concerns.

Powerful, if little-known outside the national security insiders, CFIUS has the ability to scuttle multimillion dollar deals that committee members feel pose a threat to US security. And it has been largely unchallenged — until July 15, when the Chinese-owned Ralls Corp. won a court case against the committee.

The case was notable as the first real challenge to CFIUS in court, but also for its potential long-term impact. Experts said the decision sets a fascinating precedent for how CFIUS has to disclose its decision-making process at a time when international acquisitions of US companies, particularly by Chinese firms, are trending upward.

“I think it’s a big deal,” said Christopher Brewster, an attorney with Washington-based Stroock & Stroock & Lavan, adding the decision injected a “bolt of due process” into the CFIUS system.

“During all this time there has been no significant legal challenge to the authority of the executive branch on this,” he said. “So, effectively, it has operated without judicial oversight.If this decision is upheld, it says there are limits, there is a baseline you have to meet, and if you don’t do that the parties are entitled to take the issue to the court and get a hearing. That cannot help but have an impact on the review process.”

While chaired by the Treasury Department, CFIUS, which operates under the Defense Production Act, is made up of representatives from 16 government agencies, including the Departments of Defense, State, Justice and Homeland Security.

The committee rarely has blocked a deal, but not because it is a pushover. Many companies, knowing a rejection is coming, simply withdraw. Ralls proved to be the exception, pushing against CFIUS in a way previously unheard of.

In February 2012, Ralls purchased the Butter Creek wind farm project, located in Oregon. A company news release notes this was the third wind farm purchased by the firm.

The company began work on the project until July of that year when CFIUS ordered a halt to construction. The government’s reason? Ralls is affiliated with the Sany Group, a Chinese company, and the wind farm is located near a US Navy bombing range.

The proximity of a Chinese-owned program so close to a Navy base was enough of a concern for CFIUS to turn down the deal — and for them to require the company to take out any construction it had already begun, at its own cost.

In September 2012, Ralls filed suit against CFIUS in the US District Court for the District of Columbia. After President Obama signed off on CFIUS’ objections, the suit was amended to include the president as a defendant. It also pulled out the proverbial big guns, hiring former solicitor general Paul Clement to argue the case.

On July 15 of this year, a three-judge panel unanimously declared that Ralls had the right to know why they were rejected.

“We conclude that the Presidential Order deprived Ralls of constitutionally protected property interests without due process of law,” the court found.

“Ralls is heartened that the court today upheld Ralls’ arguments in every respect and ordered the government to disclose the reasons why it deprived Ralls’ property,” Tim Xia, an attorney for the company, said in a statement after the decision. “We look forward to further vindicating Ralls’ right to be treated fairly and equally under the law.”

However, the finding does not overturn the CFIUS ruling, nor did it touch on the right of Obama to reject a deal on national security grounds. In fact, legal experts said they see almost no chance the Ralls decision will be overturned.

“There’s no way it’s going to happen,” Chris Griner, also of Stroock, said.

Mario Mancuso, a former CFIUS member who is now chair of the international trade and investment practice at law firm Fried Frank, agreed. “I don’t really think so. That train has left the station.”

The government may appeal the decision. A Treasury spokeswoman directed a request for comment to the Department of Justice; a DoJ spokesman declined to comment aside from saying the agency is reviewing the ruling.

Assuming the ruling is upheld, what does this actually mean for the CFIUS process?

The biggest change is that companies can now request nonclassified information from CFIUS on why they were turned down. It also gives the companies a chance to argue their case in hopes of having a CFIUS decision overturned.

“Parties before CFIUS will have an incentive to make queries of the CFIUS committee as to concerns about their particular transaction,” Mancuso said. “CFIUS is already resource-constrained ... this will put tremendous procedural pressure on CFIUS’ already constrained resources.”

The New Chinese Market

Chinese-owned companies like Sany are increasingly looking to acquire and invest in US assets, which means CFIUS oversight will loom large in the coming years.

CFIUS covered 318 cases from 2010-2012, according to its most recent report to Congress. The jump in Chinese cases is notable, rising from six in 2010 to 10 in 2011 to 23 in 2012 — the most of any country that year. The majority of those cases involved manufacturing, mining, utilities or construction.

Those 39 Chinese cases over the three-year period are second only to the United Kingdom’s 68.

“That’s an indicator of the overall trends of Chinese foreign direct investment, not just in the US but in our allies as well,” said Brett Lambert, former deputy assistant secretary of defense for manufacturing and industrial base policy. “They have a lot of capital to deploy, and they are deploying it aggressively here in the United States; and from time to time the targets are companies the government feels are sensitive enough to warrant a CFIUS investigation.”

It’s not just China investing, Lambert said. Foreign firms are looking to move into the US market at higher rates than ever before.

“I believe we’re seeing an uptick, and we’re particularly seeing the increase in investments in advanced technology firms,” Lambert said. “What you’re seeing an increase in over the last few years is small and midsized firms being acquired in the US by multinational companies or foreign companies, or if not acquired at least taking investments.”

The ruling likely will not change interest by investors, said Steven Grundman, a former Pentagon industrial policy chief now with the Atlantic Council.

“The unique circumstances of Ralls combined with the due process basis for the court’s ruling strikes me as a combination that does not hold a great significance for the general conduct of foreign investment reviews of aerospace and defense mergers,” he said.

“I think the factors that drive investment, that bring companies over here, that drove those decisions a year ago, will continue to be the factors to drive the decisions today,” Brewster said.

At the same time, customers preparing for the CFIUS process may breathe a bit easier knowing they will get what Brewster called “a fair shake” and the ability to find out, at least in part, why their acquisition has been rejected.

“If anything, particularly with the Chinese, it gives them some comfort that they have more access and information,” Griner said.

“The principals [of Ralls] will vindicate the interest of non-US buyers if they are victorious,” Mancuso said. “It will break new ground. It will benefit the Chinese in particular because there are frankly many Chinese enterprises seeking to invest in the United States, but it won’t be limited to them.” ■


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