In a stunning ruling issued on July 15, 2014, the U.S. Court of Appeals for the D.C. Circuit held that review by the Committee on Foreign Investment in the United States (“CFIUS”) and the subsequent unwinding of the investment deprived the foreign investor of due process under the 5th Amendment to the U.S. Constitution. Ralls Corp. v. Comm. on Foreign Investment in the United States, No. 12-cv-01513 (D.C. Cir. Jul. 15, 2014) (a copy of the opinion is here). If upheld, the ruling may require fundamental changes in how CFIUS conducts its reviews and may enhance foreign investors’ ability to influence or challenge the outcome of a review.
CFIUS. CFIUS is a multi-agency committee chaired by the Secretary of the Treasury that reviews and advises the President on transactions involving acquisitions by foreign persons of U.S. businesses which may raise national security issues. Section 721 of Title VII of the Defense Production Act of 1950, as amended (the “Exon-Florio Amendment”), authorizes the President to suspend or prohibit transactions where there is credible evidence to suggest that the foreign acquiror might take action that threatens to impair U.S. national security. Parties to a transaction may voluntarily seek CFIUS review; there is no mandatory requirement to do so. But CFIUS may also review any transaction, including completed transactions, on its own initiative. The initial CFIUS review period lasts 30 days, after which CFIUS may commence an additional 45-day investigation if it determines that the transaction raises national security concerns. Upon completion or termination of the 45-day investigation period, the Committee may clear the transaction, advise the President to suspend or prohibit the transaction, or require the parties to implement measures to mitigate any national security concerns as a precondition to approval of the transaction. Given the potential disruption of Presidential action in case CFIUS is not satisfied with a transaction, parties to transactions that could draw the interest of CFIUS generally opt to obtain CFIUS clearance as a condition to closing the deal, even though the process is technically voluntary. As noted below, however, the Ralls decision may provide a good reason to alter that practice.
Ralls. Ralls Corporation is a U.S. company that is ultimately owned by Chinese nationals. In approximately March 2012, Ralls purchased a series of companies with wind farm development rights in Oregon. The parties to the transaction did not voluntarily seek CFIUS review. As described previously in this blog, (here and here) CFIUS initiated review after the acquisition, and the President issued an order prohibiting the transaction and requiring the divestiture of assets by the foreign investor. CFIUS typically shares no information about its reviews with the public (with the exception of annual reports published well after reviews are completed). In its public statements about the matter, Ralls indicated that the reason the President issued the blocking order was related to the wind farms’ proximity to restricted airspace maintained by the U.S. Navy. CFIUS did not share with Ralls the evidence it relied upon to determine that the transaction threatened national security, nor was Ralls given an opportunity to rebut that evidence. As any CFIUS practitioner knows, this is not surprising given how opaque the CFIUS process historically has been.
In September 2012, Ralls filed suit in the U.S. District Court for the District of Columbia, unsuccessfully seeking an injunction to prevent the blocking, and challenging, among other claims, the lack of constitutional due process in CFIUS’s review of its transaction and the President’s issuance of the divestiture order. The District Court dismissed Ralls’s claims, stating that Ralls acquired its property rights in Oregon knowing that it might be subject to Presidential veto, and also failed to voluntarily submit a filing to CFIUS at the outset of the transaction. Ralls appealed.
The Circuit Court Opinion
On appeal, the Circuit Court held that it had judicial authority to review the Presidential order to block the transaction and that the suit was not a non-justiciable political question, citing, among other authority, the cornerstone constitutional opinion of Marbury v. Madison. The Court then moved on to the merits of the due process claim.
The Court found that Ralls possessed state law property interests in its acquisition of property, and that those interests were protected by the 5th Amendment’s due process clause. The Court noted that due process ordinarily requires notice of an official action and the opportunity to be heard at a meaningful time and in a meaningful manner, including the right to know the factual basis for an action and the opportunity to rebut evidence supporting the action. The Court observed that Ralls did not receive any such evidence or any opportunity to rebut.
The Court thus held that Ralls was deprived of due process, and that due process required “at the least” that Ralls be informed of the official action, given access to unclassified evidence relied upon by the President to make his determination, and be afforded an opportunity to rebut the evidence. The Court stated that Ralls was not given any of these required procedural protections “at any point.” (The Court acknowledged that “due process does not require disclosure of classified information supporting official action.)
The opinion represents a potential sea change in how CFIUS reviews are conducted. While parties typically provide a great deal of information to CFIUS and have the opportunity for meetings and other communications with CFIUS, they currently receive very little information about the basis of CFIUS’s decisions or concerns. Negotiations with CFIUS on mitigation proceedings can take on the form of “take it or leave it” offers from the government, with little explanation beyond a plain assertion that the measures are necessary for national security. The due process requirements laid out by the Circuit Court suggest that CFIUS may not only be required to provide more information, but that the entire CFIUS review may need to become more of a two-way street, with adequate opportunities during the review process for responses from the parties. It is not clear at what stage such steps are required (during the CFIUS review, the CFIUS investigation, or at the Presidential Order stage). But at a minimum those parties facing an adverse determination must be “informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence.” The opinion thus opens the door for at least somewhat informed advocacy before CFIUS, which is in itself a significant improvement.
Of course, much of the information that CFIUS relies on to make adverse determinations, particularly those that seem otherwise difficult to explain (such as a wind farm acquisition) may be classified. In those cases parties may not receive significant additional information – though even knowing that there is classified information on which a CFIUS determination is based might be helpful.
There is at least one potential procedural point that warrants mention. Perhaps ironically, the Court noted that the state-law property rights and attendant due process protections “fully vested upon completion of the transaction.” Thus, the fact that Ralls did not seek CFIUS review prior to completing its transaction not only did not harm its claims before the Circuit Court (in part because the CFIUS statutory scheme allows for review either before or after a transaction is completed), but actually may have facilitated them by establishing its property rights before they were removed by CFIUS. Depending on how CFIUS reacts to the decision, it may be in parties’ best interests to first complete transactions, and then proceed with CFIUS review in order to secure their 5th Amendment due process rights. This could significantly alter how parties time and structure transactions. Under existing procedures, many companies make CFIUS approval a pre-condition to closing of their transaction. The Ralls decision could make companies and their counsel consider the strategic merits of closing transactions first, then proceeding to CFIUS for review or, more dramatically, not seeking CFIUS review at all.
It seems likely that the Government will appeal the decision to the U.S. Supreme Court, so this may not be the last word on CFIUS and due process. In the interim, this decision provides the potential promise of a reformed review process that gives room for better and more informed negotiations by foreign investors, and a very solid foundation for parties undergoing CFIUS review to seek more information about the review process.