A Chinese conglomerate’s bid to knock down America’s foreign-investment barriers

March 4, 2013
March 4, 2013

The agency that polices the national security risks of foreign companies buying US firms may be about to get its wings clipped. Last week a US judge, while dismissing most of a lawsuit brought by Chinese-owned Ralls Corporation against the Committee on Foreign Investment in the US (CFIUS), surprisingly allowed one count claiming violation of constitutional due process rights to go forward. If Ralls succeeds on that count, it could curb the powers of CFIUS and force it to become more transparent.

CFIUS reviews any foreign bids to buy US firms on national-security grounds. Its deliberations are secret, it doesn’t have to disclose its reasoning, and before the Ralls case, its decisions had never been legally challenged. Its broad powers have caused other foreign firms to drop their acquisition efforts rather than try to fight it. Chinese telecoms firm Huawei, for instance, backed away from a $2 million acquisition of assets of the server technology firm 3Leaf in 2011.

Ralls, which is owned by the Sany Group, a global Chinese-owned conglomerate, had concluded a deal for four wind farms in Oregon, for which it says it paid $6 million. But last July, CFIUS  ordered Ralls to stop construction and remove its people and equipment from the wind farms. The wind farms, like hundreds of other wind turbines in the area, are near or within the restricted airspace used by the Naval Air Station at Whidbey Island. CFIUS was also concerned that the turbines would be connected to PacifiCorp’s power transmission grid, people familiar with the matter said. Access to US power sources could potentially be used to shut down electricity in parts of the country, they added.

Ralls then offered to sell the farms to a US buyer, but CFIUS rejected that deal, saying it could only sell to a buyer approved by CFIUS and only after Ralls fulfilled other conditions. In September, President Obama issued a broader order prohibiting the deal because Ralls and Sany “might take action that threatens to impair the national security of the United States.” According to the terms of the order, US officials can inspect and copy any ledgers and correspondence, examine equipment or technical data and interview employees or other representatives of Ralls and Sany.

So in September Ralls sued CFIUS, as well as President Barack Obama and former Treasury secretary Tim Geithner (the Treasury secretary also chairs CFIUS), accusing them of exceeding their powers and failing to provide evidence or an opportunity to respond to the claims. On Feb. 22, federal district court judge Amy Jackson threw out most of Ralls’ complaints. But she ruled that it could move forward with a case accusing the government of violating its constitutional right to due process, because authorities allegedly deprived the company of its property without an adequate hearing or explanation.

The lawsuit will create a unique opportunity to get an inside look at how CFIUS’s secret review process works. And if the suit succeeds, it could force the government to reimburse foreign companies that lose property because of decisions made by CFIUS and the president. “If they win any part of their argument, it will signal a tectonic shift,” said Timothy Keeler, an attorney based in the Washington DC office of Mayer Brown, a corporate law firm.

The lawsuit comes at a sensitive time for US-China relations. A rash of recent cyber attacks are believed to have come from China, according to media reports. US firms are seeking capital investments, and Chinese and other foreign companies increasingly want to meet that need. But CFIUS’s secrecy has frustrated them.

Chinese company officials also often feel unfairly targeted. The attempt by China National Offshore Oil Corp (Cnooc) in 2005 to acquire Unocal for $18.5 billion caused an uproar in the US Congress. But since then, Cnooc and other Chinese companies have expanded their investments in the US, and Cnooc did get CFIUS’s go-ahead for its $15 billion deal to acquire Canada’s Nexen (which required US approval because Nexen has oil platforms in the Gulf of Mexico).

So a lot hangs on the Ralls case. Its CEO, Jialiang Wu, said at a press conference in Beijing in October that his company’s case will influence the “faith of Chinese investors who are looking forward to investing in the U.S.” In a sign of how seriously it is taking the fight, Ralls has hired a string of legal heavyweights: Paul Clement, a former US solicitor general; Viet Dinh, a former senior official in the Justice Department; and Steven Honigman, who was general counsel of the Navy in the 1990s.

Still, it will be a tough case for Ralls to win. The authorities have expansive powers when it comes to national security. CFIUS can require parties in a deal to take certain measures to mitigate security concerns. If the committee thinks there the concerns can’t be alleviated, it can recommend to the president that the deal be barred. Treasury spokeswoman Holly Shulman said the Treasury Department believes the lawsuit has no merit, and “we intend to defend the case vigorously.”

But even if Ralls doesn’t win its case outright, and gets a partial judgment, it will still make an impact by showing that CFIUS can be legally challenged. If, on the other hand, Ralls loses, Chinese and other foreign firms that have their deals shot down by CFIUS will once again have little option but to retreat with their tails between their legs.

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