What Foreign Investors Can Learn from President Obama’s Prohibition of Ralls Corporation’s Acquisition
On October 1, 2012, Ralls Corporation (Ralls)(羅爾斯), a U.S. corporation owned by two Chinese nationals, took the unprecedented step of suing President Obama as a co-defendant in a lawsuit, challenging the Committee on Foreign Investment in the United States (CFIUS or the Committee) for exceeding its authority in blocking Ralls from acquiring a wind farm project near a Navy base in Oregon. In its Amended Complaint filed in the U.S. District Court for the District of Columbia (Amended Complaint), Ralls alleged that President Obama, through an Executive Order he issued on September 28, 2012 (the September Executive Order), acted in an unlawful and unauthorized manner in citing national security grounds to order it to halt its acquisition and divest all related assets without providing Ralls the opportunity to present evidence in response to the allegation.
CFIUS, established through section 721 of the Defense Production Act of 1950 (Section 721), is an interagency committee headed by Treasury Secretary Timothy F. Geithner that reviews the national security implications of foreign transactions that could lead to a non-U.S. citizen controlling a U.S. business (Covered Transaction). The heads of the Departments of Justice, Homeland Security, Commerce, Defense, State and Energy, among others, sit on the committee. If CFIUS concludes that a transaction presents a threat to the national security that cannot be resolved through mitigation, the Committee must present the case to the President, who has the power to block the transaction or force divestiture if an acquisition has already occurred.
Although the regulations promulgated by CFIUS provide no clear definition of what constitutes a national security risk, CFIUS’s consideration of a Covered Transaction’s national security threat tends to focus primarily on three aspects: 1) nature of the U.S. business, including whether it has governmental contracts or operations relevant to national security; 2) identity of the foreign person, specifically the foreign person’s record of acquiring control of U.S. business and the non-proliferation record of the person’s country of origin; and 3) foreign government control, which may be less of a concern if the transaction is an investment decision made based solely on commercial grounds, independent of any foreign government control, and the investor complies with applicable regulatory and disclosure requirements of the countries in which they invest. 
CFIUS administers a Voluntary Notice System covering both proposed projects and completed projects. Apart from the Voluntary Notice System, CFIUS has the authority to initiate review of transactions on its own; even after the transaction has been concluded, if it believes that a transaction presents national security considerations. A Covered Transaction which is determined by CFIUS to have no unresolved national security concerns will qualify for a “safe harbor”. Such transactions can proceed without the concern of a subsequent suspension or prohibition under Section 721.
Ralls is a Delaware corporation privately owned by two executives from China-based Sany Group Co. (Sany), a wind-turbine manufacturer. According to its Amended Complaint, Ralls is in the business of identifying U.S. opportunities for the construction of wind farms in which Sany’s wind turbines can be used. In March 2012, the company purchased four small Oregon companies, owned by Terna Energy USA Holding Corporation (Terna), near the vicinity of restricted airspace at the U.S. Naval Weapons System Training Facility in Boardman, Oregon (the Ralls’ March Transaction). According to the Naval base’s official website, U.S. Navy conducts training in air combat maneuvers and electronic combat and bombing and missile exercises for Navy and Oregon National Guard personnel on the base.
Although Ralls initially acquired the interests in the four wind farm projects in March 2012, it did not voluntarily notify CFIUS of the transactions until after it consummated the acquisition in June 2012. In a July 24, 2012 order (the July CFIUS Order), finding that “there are national security risks to the United States that arise as a result of” the Ralls’ March Transaction, CFIUS ordered Ralls to cease operations and provide access to its acquired wind farms except for removal of stockpiled or stored items from the windfarms (the Removal Requirements). Later, in a August 2, 2012 order, CFIUS further restricted Ralls from selling the assets in question to any third parties until Ralls was in complete compliance with the Removal Requirements.
On September 28, 2012, following an unanimous recommendation by CFIUS, President Obama issued the Executive Order prohibiting the Ralls’ acquisition. The President found that there is “credible evidence” to believe that parties to the transaction “might take action that threatens to impair the national security of the United States.”  President Obama ordered Ralls to divest all interests in the acquired companies within 90 days under the supervision of CFIUS. This is only the second time in history that a sitting U.S. President has exercised his authority under Section 721 to formally prohibit a foreign acquisition on national security grounds; the first time was 1990 when President George H.W. Bush prohibited China National Aero-Technology Import and Export Corporation’s acquisition of MAMCO Manufacturing, Inc.
Ralls initially brought suit against CFIUS on September 12, 2012 in federal court, alleging that it violated the Administrative Procedure Act (APA) by exceeding its authorized power under Section 721 and failed to provide evidence or explanation for its decision. Immediately after President Obama’s issuance of the Executive Order, Ralls filed an Amended Complaint to challenge the President’s decision claiming that the “President has committed ultra vires acts in violation of the law by imposing restrictions far beyond the limited scope of the powers specifically granted to him.” Ralls further alleges that CFIUS and the President violated its Due Process and Equal Protection rights through unconstitutionally depriving it of its property and by “unfairly and unjustly singling out Ralls for differential treatment compared to similarly situated parties.”
Chinese Investments Not Necessarily Scrutinized
Although the Ralls case serves to highlight for foreign investors the importance of proper planning and appropriate communication with CFIUS, it does not necessarily mean there will be heightened scrutiny for other Chinese investments in general. The Treasury Department has commented that the decision by CFIUS regarding the Ralls transaction should not be viewed as a precedent for any other investment from China.
Importance of Filing for CFIUS Review
The Ralls case highlights the significant risks foreign investors face when closing a transaction without CFIUS’ prior approval, especially where there are any questions as to the national security implications of the transaction. Even if the business is not directly related to national security issues, the location of a facility or the identity of a buyer can sufficiently raise national security concerns. Therefore, it is highly recommended that non-U.S. investors be prepared for national security reviews and should consult with their advisors as to the most effective way to initiate discussion or voluntarily file notice with CFIUS prior to consummating a transaction. Pursuing a transaction without any form of communication with CFIUS may result in the Committee imposing divestment consequences as in the Ralls case.
The Five Steps of CFIUS Review
CFIUS review consists of the following five steps:
- Informal conversations with the Committee or member agencies (Optional). Although not mandatory, under certain circumstances it is recommended that investors initiate informal conversation with CFIUS to better prepare for CFIUS’s initial 30-day review prior to the formal filing. This informal conversation can assist investors, helping them estimate the likelihood that their transaction will be prohibited by CFIUS.
- A voluntary notice of a Covered Transaction with CFIUS. The formal CFIUS procedure starts with a voluntary notice of a Covered Transaction filed by its foreign investor with CFIUS.
- The initial 30-day review. After CFIUS accepts the voluntary notice of a Covered Transaction, it is required to complete its review within 30 days. CFIUS will conclude its review if it finds that no unresolved national security concerns of the Covered Transaction exists. Prior to the conclusion of its review, CFIUS is authorized to impose and enforce agreements or conditions to mitigate any national security risk posed by the Covered Transaction. Nevertheless, CFIUS is not entitled to suspend or prohibit a Covered Transaction during the initial 30-day review.
- The 45-day investigation. In limited cases where CFIUS is not able to conclude its investigation during the initial 30-day review, CFIUS may extend the review to a subsequent 45-day period. After the 45-day investigation, CFIUS will either conclude the Covered Transaction and terminate the investigation or recommend the decision to the President; however, only a few cases are actually sent to the President for further action.
- The President’s decision. Upon completion or termination of the 45-day investigation, CFIUS sends a report to the President requesting the President’s decision in the event that: 1) the Committee recommends that the President suspend or prohibit the Covered Transaction; 2) the Committee is unable to reach a decision on whether to recommend that the President suspend or prohibit the Covered Transaction; or 3) the Committee requests that the President make a determination with regard to the Covered Transaction.
The President has the sole authority to suspend or prohibit a Covered Transaction if he finds: 1) that there is credible evidence that leads the President to believe that the foreign interest exercising control might take action that threatens to impair the national security; and 2) that provisions of law, other than Section 721 and the International Emergency Economic Powers Act (IEEPA), do not provide adequate and appropriate authority for the President to protect the national security.
It is important to note that a party (or parties) to a Covered Transaction that has filed a voluntary notice with CFIUS may request in writing, at any time prior to the conclusion of all action under section 721, that such notice be withdrawn. Such requests will ordinarily be granted, unless otherwise determined by the Committee.
The Uncertain Judicial Review of CFIUS’ Decisions
In general, parties who are not satisfied with a ruling by a federal administrative agency may appeal to U.S. courts for judicial review under the Administrative Procedure Act. Using the same mechanism, Ralls is hoping to overturn the decision by CFIUS and the President through direct intervention of the U.S. District Court. However, considering the fact that Ralls’ challenge is the first in history to bring the CFIUS process under judicial review and that the case involves highly sensitive political issues of national security and foreign policy—areas that courts prefer to defer to the decisions of the executive branch, it remains unclear what role the judicial review will play in future CFIUS decisions.
Actions and Findings of the President Non-Reviewable
Although rarely issued, an Executive Order formally prohibiting a foreign transaction is considered final. In general, courts lack jurisdiction to review President Obama’s findings in accordance with Section 721, which provides that “the actions” and “findings of the President” pursuant to the statute “shall not be subject to judicial review.” Although Ralls successfully added President Obama as a co-defendant in its suit against CFIUS, it is likely that the U.S. District Court will dismiss the counts against the President.
Regardless of the success of the Ralls lawsuit, there are lessons under the Ralls case that a foreign investor should consider in providing notice to CFIUS of a Covered Transaction. To avoid, or at least reduce the risks encountered by Ralls, non-U.S. investors should: 1) consult knowledgeable advisors when seeking to make a transaction that may be considered a Covered Transaction so as to fully assess the risks of such an acquisition, 2) carefully structure a transaction involving a possible national security issue, and 3) consider the appropriate engagement with CFIUS prior to consummating a closing that involves an acquisition of control by a foreign person over a U.S. business.
White and Williams has successfully advised a Chinese client in the CFIUS review process involving an acquisition of equity interest in a U.S. public oil and gas company. White and Williams works closely with its Tianjin and Beijing, China-based strategic alliance partner, Winners Law Firm, in advising Chinese companies and investors in pursuing commercial opportunities in the U.S.
For additional information regarding our China Practice, please contact Gary Biehn (215.864.7007 or email@example.com) or Chunsheng (Tony) Lu (215.864.7006 or firstname.lastname@example.org).
 "Obama Bars Chinese-Owned Company from Building Wind Farm," Business Week, October 2, 2012
 Amended Complaint for Declaratory and Injunctive Relief in Ralls Corporation v. Obama, case no: 1:12-cv-01513 (D.D.C. Oct. 1, 2012) (Amended Complaint).
 50 U.S.C. App. 2170, as Amended by the Foreign Investment and National Security Act of 2007 (FINSA).
 Amended Complaint, at 5-6.
 See Guidance Concerning the National Security Review Conducted by the CFIUS, Fed. Reg. 73, 236 ( Dec. 8, 2008), at 74568.
 See id., at 74569.
 See id.
 See Amended Complaint, at 11-3. One project that Ralls is interested in acquiring is located within the Navy’s restricted airspace; other projects range from 0.2 to 11.5 miles away from the Navy’s restricted airspace..
 See http://nwstfboardmaneis.com/TrainingActivities/TrainingActivities.aspx, last visited October 15, 2012.
 See CFIUS’s July 25, 2012 “Order Establishing Interim Mitigation Measures Regarding the Acquisition of Certain Assets of Terna Energy USA Holding Corporation by Ralls Corporation.”
 See id.
 See CFIUS’s August 2, 2012 “Amended Order Establishing Interim Mitigation Measures Regarding the Acquisition of Certain Assets of Terna Energy USA Holding Corporation by Ralls Corporation.”
 Order Signed by the President regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, Sept. 28, 2012, available at http://www.whitehouse.gov/the-press-office/2012/09/28/order-signed-president-regarding-acquisition-four-us-wind-farm-project-c.
 Amended Complaint, at 4.
 See Guidance Concerning the National Security Review Conducted by the CFIUS, Fed. Reg. 73, 236 ( Dec. 8, 2008), at 74568.
 See id.
 Section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007. Section 721 applies to U.S. businesses and foreign persons that are parties to transactions that have presented national security considerations.
 The IEEPA, Title II of Pub.L. 95-223, 91 Stat. 1626, enacted October 28, 1977, is a United States federal law authorizing the President to regulate commerce after declaring a national emergency in response to any unusual and extraordinary threat to the United States which as a foreign source.
 See Guidance Concerning the National Security Review Conducted by the CFIUS, Fed. Reg. 73, 236 ( Dec. 8, 2008), at 74569.
 See section 721(e) of the Defense Production Act of 1950, 50 U.S.C. App. 2170.