Ralls legal victory may impact US review of foreign investments

Court victory by Chinese company could signal changes in secretive US government reviews of foreign investment in sensitive industries

PUBLISHED : Friday, 18 July, 2014, 2:57am
UPDATED : Friday, 18 July, 2014, 2:57am

Big changes may be in store for the secretive government review of foreign investments in the United States, after Chinese-owned Ralls Corp won its lawsuit against President Barack Obama's decision to block its wind farm project in Oregon as a national security risk.

The US Circuit Court of Appeals for the District of Columbia handed down on Tuesday a ruling that said the Committee on Foreign Investments in the United States (CFIUS) failed to provide Ralls with constitutional due process.

CFIUS is the inter-agency committee that assesses national security implications of mergers, acquisitions and takeovers that could result in foreign control of any US business.

Knowing that court review is even possible will chasten government reviewers

In September 2012, Obama issued an executive order that required Ralls' divestment of all interests in the acquired wind farm assets and removal of all other structures from the site, which was near a US naval facility.

Ralls is a Delaware-based company controlled by Duan Dawei, the chief financial officer at mainland construction machinery conglomerate Sany Group, and Wu Jialiang, the general manager at subsidiary Sany Electric.

Ralls sued, marking the first-ever legal challenge to a presidential veto, but saw its case dismissed in February last year by the US District Court for the District of Columbia based on the CFIUS statute. This law prevents judicial review of a presidential decision.

"If upheld, the Court of Appeals decision in the Ralls case has far-reaching implications for the way CFIUS does business," Washington-based Anne Salladin, the special counsel for national security, CFIUS and compliance practice in the law firm of Stroock & Stroock & Lavan, told the South China Morning Post.

"The decision addresses one of the key complaints of foreign investors and their domestic counterparts - the lack of transparency in the CFIUS process. Knowing that court review is even possible will chasten government reviewers."

It is not known whether the ruling will be appealed or whether the Obama administration will seek a re-hearing. Appellate courts in the US sometimes grant re-hearing of a case before all the judges of a court.

According to a March report by the US Congressional Research Service, the potential negative publicity associated with a CFIUS investigation has had a big impact on deals put under review. Since 1990, nearly half of the cases probed by CFIUS were terminated by the companies involved.

China National Offshore Oil Company, the country's biggest offshore energy explorer, decided to drop its proposed US$18 billion acquisition of oil company Unocal in 2005, partly owing to the mainland firm's concerns about an impending CFIUS investigation of that deal, the report said.

In a report, Stroock pointed out that if the CFIUS fact-finding is open to challenge, the committee "may also kick up its demands for information, increasing the burden on filers and lengthening reviews".

It added that the US president retains the authority - immune from judicial review - to approve or disapprove transactions.