On July 15, 2014, the United States Court of Appeals for the District of Columbia determined that the Committee on Foreign Investment in the United States (CFIUS) violated Ralls Corporation’s right to due process under the Fifth Amendment. Significantly, the court held that the CFIUS process was deficient under the Fifth Amendment, and that Ralls was entitled to access unclassified evidence relied on by the president and the opportunity to rebut that evidence. If sustained, this decision may have significant implications for the CFIUS process. The case should be closely monitored by companies involved in or considering transactions within the committee’s jurisdiction, and counsel representing those companies.
Background on CFIUS
CFIUS is an interagency committee of the U.S. government with jurisdiction to review transactions that could result in control of a U.S. business by a foreign government, entity, or person. In short, for the committee to have jurisdiction to review a transaction: 1) a foreign person must be the buyer or investor; and 2) that foreign person is acquiring control over the U.S. business. CFIUS reviews are intended to determine the effect of such transactions on U.S. national security. While the decision to notify CFIUS of the transaction is initially voluntary, a transaction may be reviewed by the committee when no voluntary notice has been filed if the committee believes that it may raise national security issues.
The CFIUS review process may consist of four phases. For companies that choose to proactively file with the committee, there is generally an informal five-day pre-filing period during which a draft of the Joint Notice is presented to the committee. In addition, for all transactions reviewed by the committee, there is an initial 30-day review period that commences once a Joint Notice is filed and accepted by CFIUS. At the close of the 30-day review period, the committee must determine whether the transaction poses a threat to national security. It will then either approve and clear the transaction or proceed to a 45-day investigation. If, at the close of the 45-day investigation period, the committee continues to have concerns about the national security issues raised by the transaction, and the concerns cannot be mitigated through the execution of a mitigation agreement with the parties, the committee will send a report recommending that the president utilize his or her authority to block or unwind the transaction. The president will have an additional 15 days to make a decision on the transaction at issue. Importantly, once a transaction is approved by CFIUS, the parties are entitled to a safe harbor, meaning the government is then barred from exercising its ability to divest or unwind the transaction.
All materials filed with CFIUS and otherwise provided to the committee are confidential by law, and the committee review is confidential and exempt from public disclosure under the Freedom of Information Act. Therefore, CFIUS filings and decisions generally become public only if the companies choose to release the information themselves, including through public filings or, as in the Ralls matter, the filing of a lawsuit. If there is a decision by the president in response to the committee’s recommendation for blocking or divestment of the transaction, then the presidential decision is also made public.
Background on the Ralls Transaction Reviewed by CFIUS
Ralls is an American corporation owned by two Chinese nationals who are officers of the Chinese Sany Group. In March 2012, Ralls acquired four Oregon wind farms (project companies) located in and around airspace restricted by the U.S. Navy. The parties to that transaction chose not to proactively file with CFIUS before the transaction was formally closed, and Ralls took legal possession of the project companies. Subsequently, Ralls learned that the U.S. Department of Defense planned to file its own notice to trigger CFIUS review of the deal. With the CFIUS review apparently inevitable, Ralls filed with the committee in June 2012. During the initial 30-day review period, CFIUS determined that the acquisition threatened the national security of the United States and issued an interim order to impose mitigation measures, including requiring Ralls to cease construction and operations at the project companies, remove anything stored on the sites, as well as discontinue their access to the sites. When the case transitioned to the 45-day investigation phase, CFIUS issued an amended order prohibiting Ralls from selling any of the project companies until all items, including concrete foundations, were removed from the sites. The amended order also required Ralls to give the committee notice and 10 days to object to any proposed sale of the project companies. At the end of the 45-day investigation period, CFIUS recommended that President Obama block the transaction as it believed the national security risks had not been mitigated. In September 2012, the president issued an order (Presidential Order) prohibiting the transaction on the basis of unresolved national security concerns. The order required Ralls to divest all of its interests in the project companies, remove all items from the wind farms, cease access to the wind farms, and abstain from selling any items produced by Sany Group to a third party for use at the wind farms. The order also imposed certain restrictions on the sale of the project companies and their assets. As is typical, Ralls was not given access to the evidence submitted to the president or the specifics of the committee’s national security concerns.
District Court Decision
Ralls filed suit in the United States District Court for the District of Columbia arguing that the CFIUS orders violated the Administrative Procedure Act, and that the Presidential Order exceeded the president’s statutory authority and violated Ralls’ rights under the due process clause of the Fifth Amendment and equal protection clause of the Fourteenth Amendment. The district court ruled in favor of CFIUS, finding that Ralls’ claims regarding the committee’s orders were rendered moot by the Presidential Order, and its claims on the Presidential Order failed on their merits. The district court also held that Ralls had no constitutionally protected property interest, as Ralls’ interests in the project companies were subject to the known prospect of a presidential veto through the CFIUS process. The district court further stated that Ralls waived its opportunity to procure a CFIUS determination before entering into the transaction, as it choose to consummate the acquisition prior to the committee’s clearance.
Circuit Court Decision
The Court of Appeals reversed the decision, finding in favor of Ralls’ due process argument, and remanded the company’s claims on the CFIUS orders for hearing on the merits.3 Importantly, the circuit court held that the text of the Defense Production Act (DPA),4 the statutory foundation for the CFIUS regime, while including a statutory bar to judicial review of presidential decisions made pursuant to the DPA, did not preclude judicial review of constitutional due process questions arising from the process preceding presidential action. The court went on to rule that Ralls’ property interests in the project companies, which vested upon the completion of the transaction and prior to CFIUS review, were constitutionally protected, and Ralls was entitled to due process protections from that point forward. The court further held that Ralls had not waived its property interest by failing to have the transaction pre-approved by the committee.
Ultimately, the court found that the CFIUS process violated Ralls’ due process rights as the company had not been provided access to the unclassified evidence the president relied on to make his decision and, thus, lacked the ability to supplement its submission to address the committee’s concerns or counter the factual premises on which the president relied. The court ruled that Ralls was entitled to: (1) notice of the official action; (2) access to the unclassified evidence relied on by the president in his determination; and (3) the opportunity to rebut that evidence.
What Does This Decision Mean for CFIUS?
The circuit court’s decision is significant and may have implications for the CFIUS process going forward, though the decision will not be the final word on the matter. The Obama administration will likely petition for an en banc review of the decision at the circuit court, and potentially, eventual review by the Supreme Court of the United States. In the highly likely event that the decision is appealed, the administration is expected to seek a stay of the court’s decision as the appeals process continues.
Regardless of the final judicial outcome, there are important issues that must now be considered by those contemplating a CFIUS review:
- In light of the circuit court’s holding that Ralls’ property rights and accompanying due process protections only vested upon the consummation of the acquisition:
- Parties will need to determine whether to close or consummate a potential transaction prior to CFIUS review and clearance. In the past, parties generally avoided closing prior to review to avoid the harmful consequences of potential unwinding, as well as the committee’s heightened concerns. In light of the court’s decision, foregoing closure may act to waive a due process claim should the review end in a presidential order against the transaction.
- The decision to close will pose additional risks, as CFIUS has repeatedly made clear to parties that the committee prefers that parties not close on a transaction until the committee has completed its review and determined there are no unresolved national security risks.
- In light of the circuit court’s holding that Ralls was entitled to access the unclassified evidence on which the president relied, parties may have increased leverage in potential mitigation negotiations if the committee seeks to avoid disclosure.
Regardless of the eventual outcome of the Ralls case, it remains important that parties involved in potential transactions covered by CFIUS engage with counsel early in the transaction to determine the jurisdictional issues and strategic decisions raised by a potential CFIUS review.