By: Henry T. Chou, Esq.
Ralls Corp – a Chinese-owned renewable energy company – has won a significant victory over the Committee on Foreign Investment in the U.S. (CFIUS), the interagency government body responsible for reviewing national security concerns implicated by “transactions that could result in control of a U.S. business by a foreign person.”
CFIUS, which is a part of the executive branch and is directly supervised by the President, has broad power to veto all or parts of international transactions involving the acquisition of U.S. businesses by foreign entities. In 2012, President Obama, relying on CFIUS’ advice, signed an order blocking Ralls Corp from acquiring wind farms in Oregon, citing a threat to national security based on the proximity of the wind farms to a U.S. Navy weapons training facility. The order stated that “there is credible evidence” indicating that Ralls Corp and its owners “might take action that threatens to impair the national security of the United States,” even though it provided no actual evidence of such threats.
Ralls Corp filed suit, claiming that its due process rights had been violated because President Obama’ order offered no “evidence or explanation” for its decision and that Ralls Corp had not been given an opportunity to respond to the administration’s concerns. The U.S. Court of Appeals for the District of Columbia has now ruled in favor of Ralls Corp, finding that due process requires foreign companies to be given access to unclassified evidence used in the decision-making process, as well an opportunity to rebut that evidence.
Historically, the courts have granted broad discretion to the executive branch concerning national security matters. Using its broad discretion, CFIUS has heavily scrutinized business transactions involving Chinese companies in recent years, including a prolonged review of Shuanghui International’s bid to acquire Smithfield Foods in 2013. The Smithfield transaction, which CFIUS ultimately approved after a long delay, prompted concerns that political considerations, rather than national security concerns, was the driver of CFIUS decisions. The circus involving the Smithfield transaction, including Congressional hearings on whether Chinese control of pork supplies posed a threat to national security, sparked complaints of discrimination by many.
Until now, foreign companies seemed to have little recourse against decisions by CFIUS. Moving forward, the Ralls Corp decision should have the effect of eliminating political and other arbitrary considerations from CFIUS’ decision-making process. The decision is likely to stimulate Chinese investment in more U.S. industries, including hi-tech sectors that Chinese companies have previously avoided due to CFIUS concerns.