Chinese Investors Sue CFIUS Over Rejection of Wind Farm Acquisition

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On September 12, the Ralls Corporation, a Chinese-owned wind-farm developer, sued the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”), raising statutory and constitutional challenges to recent CFIUS orders that effectively require Ralls to unwind its acquisition of four wind-farm projects in Oregon.

The suit is a rarity, and there have been no significant instances of judicial review of CFIUS decisions in the past. (Vinson & Elkins)

Wow, this is big news (if you’re into this sort of thing).

When it comes to foreign investment, there is perhaps no hotter topic these days than Chinese outward direct investment. Yes, the number and size of these deals is still relatively small, but unlike other commercial areas, Chinese ODI is actually growing. These days, that’s huge.

And if one were to write a short list of issues effecting Chinese ODI to the U.S., one of the top destinations, it would be national security review. That’s been on the agenda for almost a decade now, gaining the most prominence when CNOOC had to pull out of the deal to purchase UNOCAL.

While only a few deals have been formally nixed by CFIUS, quite a few others have been quietly abandoned when the investors ascertained that the politics just weren’t lining up the right way. In particular, when certain members of the U.S. Congress want to kill an M&A deal, it gets done.

I’ve always wondered what would happen if some of these companies called the bluff of the U.S. government, saying essentially “You’re going to torpedo my deal? OK, tough guy, I’m going to force CFIUS to not only formally reject the deal, but also justify it.”

No one has really tried to do this before, and the underlying statute here does exempt the president’s actions from judicial review. But what about the decision of CFIUS itself?

Maybe this lawsuit will shed some light on how all this works. That would be nice, although it’s a longshot.

For the record, the deal in question here involved two Chinese national investors and some small wind farm projects, but it sounds like the real money behind the deal comes from Sany, a ginormous machinery company headquartered in Changsha:

According to Ralls, its primary business purpose is to develop wind energy products for which wind turbines manufactured by Sany could be used. The Ralls complaint alleges that in early 2012, Ralls bought four small Oregon companies whose assets consisted of wind-farm development rights, land rights to construct wind farms, power purchase agreements, and government permits. The projects — which collectively would produce a mere 40 megawatts of power — allegedly had received other federal regulatory approvals, such as a determination by the Federal Aviation Administration that the turbine towers presented no hazard to aviation. The U.S. Navy had initially requested that Ralls voluntarily re-locate one of the turbines, apparently due to proximity to certain restricted military airspace. The complaint contends that after Ralls complied with the request, the Navy recommended that Oregon issue the necessary state regulatory approvals.

So why did CFIUS ultimately decide that not only should the deal be unwound, but that it would attach conditions on Ralls’ ability to transfer assets to third parties, including equipment made by Sany? No one knows, or at least they’re not saying so in public.

Ralls is now suing CFIUS on several grounds, including a classic “regulatory taking” complaint:

The suit raises a host of challenges, asserting that CFIUS exceeded its authority by (a) failing to give reasons for its actions; (b) prohibiting the transaction outright, rather than imposing conditions to mitigate national security risks; and (c) prohibiting Ralls from selling items produced by Sany even to U.S. buyers and the sale of the wind-farm projects without CFIUS approval, even to a U.S. buyer.  The suit also alleges that the order deprived Ralls of property without due process by prohibiting further construction, use of (or even access to) the property, and sale of assets on the property to which Ralls holds project development land rights.

I’ve read the initial order handed down to Ralls, which is all of four pages and doesn’t say squat. This is unfortunately how CFIUS works. They find a national security issue and then can kill the deal without explaining exactly why, with the decision normally not even subject to judicial review. There are shades here of China’s prosecution of individuals under the auspices of the ill-defined law concerning “State Secrets.”

It’s possible that CFIUS’ problem here is with Sany and its equipment, or perhaps it’s just the nationality of the investors – heck, maybe there is actually a reasonable argument here. Who knows?

However, as these are wind-farm projects, I’m finding it very difficult coming up with a national security angle to this whole thing. And if there isn’t one, then I naturally start thinking that a domestic U.S. company or industry is being somehow protected by this decision. Wouldn’t be the first time.

Do I know for sure this is protectionism? Not at all. The point is that this looks odd on its face, and it would be nice to have more information. It’s possible, for example, that if Ralls knew what the hell the problem was, it could assist in suggesting a mitigation plan. It already voluntarily complied with the orders of the U.S. Navy.

Can you imagine what would have happened if last month, MOFCOM, instead of issuing an approval, had announced that it was rejecting Wal-mart’s acquisition of Yihaodian outright, with absolutely no justification whatsoever except for an oblique reference to “national security”? Heads would have exploded on Capitol Hill.

The U.S. government complains about transparency in China and other nations all the time (for good reason), but it might be a good idea to back that up with a bit more transparency at home.

I would really like to see this suit move forward, but it’s unlikely. Although Ralls did file a federal case, the decision now rests with President Obama (it’s rare that these cases go to the president), who now has until September 28 to uphold CFIUS’ decision. If he does, the courts may not review it. If he does nothing, the deal would go ahead.

One response on “Chinese Investors Sue CFIUS Over Rejection of Wind Farm Acquisition

  1. Hua Qiao

    Wow! I agree with you. This is pretty outrageous that there is no explanation or review. 40 megawatts is hardly of national security concern. Thanks for bringing this to light.