“Sany has achieved initial success in lawsuit against Obama” trumpets the home page of the website of China’s Sany Group, a global corporation based in Changsha, Hunan, and one of the world’s largest manufacturers of construction machinery.
Indeed, the US Court of Appeals in Washington, DC, has stunned US lawyers by ruling that Sany’s US-based subsidiary Ralls Corporation had a constitutional right to see and rebut the unclassified evidence relied on by the secretive Committee on Foreign Investment in the US (CFIUS) in ordering Ralls to sell property that raised national security concerns. The ruling has challenged the accepted view that CFIUS’s decisions are beyond review in a case that has implications for other foreign investors.
Ralls’ property consisted of four wind farms located in or near US Navy restricted airspace in the state of Oregon. The company had not sought prior CFIUS approval for the deal. While CFIUS filings are not mandatory, in cases where national security is an issue, experts say companies are well advised to seek CFIUS approval before proceeding with an acquisition.
After CFIUS asked the company, owned by two Chinese nationals, to submit the deal for review, Ralls complied. However, CFIUS rejected their submission on national security grounds, without explanation, a decision upheld by president Barack Obama, who prohibited the transaction and ordered Ralls to remove any installations on the site and dispose of the properties.
By law, the president’s decision is not subject to review. Nevertheless, Ralls appealed unsuccessfully to the US District Court in Washington, DC, and then to the appeals court, claiming it was denied due process.
Though the Appeals Court agreed, sending the case back to the lower court for determination, its ruling only applies to “unclassified” information, says Jonathan Poling, a partner with the law firm Akin Gump Strauss Hauer & Feldand, and former representative for the US Department of Justice on CFIUS. “Already much of the CFIUS work is classified,” he says, and “this ruling will make CFIUS all the more reluctant to generate unclassified information in its analysis”.
Impact for business
Anne Salladin, a special counsel with the law firm Stroock & Stroock & Lavan and former US Treasury official advising CFIUS on legal matters, says the impact of the decision remains unclear but is unlikely to produce great change. Speaking during a webinar hosted by the Practising Law Institute, she said it could make the government assert executive privilege more often or it could encourage CFIUS to communicate more closely with applicants. “If in doubt, file,” advised her colleague Christopher Brewster.
CFIUS’s 2012 annual report, its most recent, shows that by far the highest number of filings between 2010 and 2012 in the US were by UK companies (21%), followed by Canada and France. Filings from China rose to 12% of the total, and more investors from China filed in 2012 than from any other country.
Some experts believe filings involving Chinese owners are always scrutinised more closely. But Nova Daly, a senior public policy advisor with Wiley Rein law firm and former manager of the CFIUS process, denies this. “The process is the same no matter what country the company comes from. [CFIUS] will look at the analysis of the threat from the foreign buyer, the risk, and the vulnerability,” he says.
Whether the Ralls case is the landmark some experts claim or just an annoying speed bump for CFIUS to clear is still not certain. What is certain is that CFIUS and the US president still retain unfettered power to veto foreign investments they consider a threat to national security.