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U.S. Court’s Final Rejection of Sany’s Claims: Lessons for Chinese Companies Looking to Invest in the United States

January 1, 0001

 

On October 9, 2013, the United States District Court for the District of Columbia dismissed what remained of China’s Sany Group’s well-known lawsuit against President Obama, finding that Ralls Corp. (“Ralls”), an affiliate of Sany Group, waived its opportunity to obtain a determination whether its transaction would have been prohibited by the Committee on Foreign Investment in the United States (“CFIUS”) and the President before Ralls finalized its acquisition of wind farms near a U.S. military base.

The court rejected Ralls’ argument that the President’s order to prohibit the transaction unlawfully deprived Ralls of its property without providing either an adequate opportunity to be heard or an adequate explanation of the reasons for the decision. Essentially, because Ralls (and the seller) chose not to take advantage of the CFIUS rules and to obtain a CFIUS review before closing the transaction, and because Ralls voluntarily acquired its property rights subject to the known risk that the President could later block the transaction, the court determined that Ralls did not have a protected property interest and that in any case, the opportunity provided Ralls for review was sufficient.

This decision serves as a reminder to Chinese investors that they must promptly identify and address U.S. national security concerns in order to win over increasingly cautious U.S. governmental authorities, especially when they plan to invest in sensitive sectors in the United States (e.g., energy, telecommunication, equipment manufacturing, critical infrastructure, cutting-edge information and technologies, etc.).

This alert reviews the decision in the Sany case, and offers a strategy Chinese companies should approach regarding the legal and political aspects of an acquisition of a U.S. business.

Unusual Presidential order and even rarer lawsuit

The dispute arose from Ralls’ efforts to acquire four wind farm projects in the State of Oregon from Terna Energy. The parties closed the transaction in March 2012 without notifying CFIUS. Later, after CFIUS contacted Ralls, the company filed a notice in June 2012. Following the ensuing investigation, CFIUS issued orders imposing interim mitigation measures that effectively blocked Ralls from proceeding with the projects. In September, President Obama issued an order blocking the transaction and ordered Ralls to divest its interests in the project companies, as well as to remove the physical improvements that the companies had already installed.

Although the law is quite clear that the actions and findings of the President are not subject to judicial review given his broad discretionary power to protect national security matters, Ralls sued President Obama and requested an explanation as to why the deal raised national security concerns. The lawsuit was the first effort by a Chinese-owned investor to challenge the President acting on a CFIUS recommendation. The suit argued that the President and CFIUS exceeded their authority and deprived Ralls of property without due process. In February 2013, a D.C. federal court dismissed all of Ralls’ claims challenging the power of the President and CFIUS to issue their respective orders, but the court also ruled that it has jurisdiction to review Ralls’ due process claim related to the process that was followed in implementing the Presidential order. The effect of the court’s initial decision meant that if Ralls would have succeeded on its due process claim, it might have been entitled to hear the reasons why the President blocked the acquisition. This final decision means that Sany Group will not hear the full reasons behind the Presidential order.

Overview of CFIUS review

CFIUS implements the U.S. President’s authority by reviewing the national security implications of transactions where a non-U.S. investor could acquire a controlling interest in a U.S. business. CFIUS review is becoming a larger concern for Chinese investors because of a few well-known decisions by CFIUS to block Chinese transactions combined with the entirely discretionary authority of CFIUS and its confidential review process. Some Chinese investors have quietly abandoned planned transactions upon becoming aware that the deal would be subject to CFIUS review.

The CFIUS review process typically begins with the parties filing a voluntary joint notice with CFIUS. It is best practice to notify CFIUS of a pending transaction well before closing and to condition closing of the transaction on clearance by CFIUS. Considering that CFIUS can unilaterally initiate a review of any sensitive transaction after learning of any potential security concerns from other sources (e.g., competing bidders, public notices, CFIUS’s own monitoring), most parties to transactions that might trigger CFIUS review elect to file a joint notice voluntarily.

The risks associated with the parties failing to file a voluntary notice with CFIUS are mainly on the buyer. For example, if CFIUS contacts the parties before closing to request a filing, the closing of the deal could be delayed or compromised if the buyer had failed to consider such government clearance or filings when drafting the purchase agreement and the CFIUS review extends beyond the purchase agreement's planned closing date. In the worst case, CFIUS may force dissolution of the deal, resulting in the buyer losing relevant business opportunities without compensation and incurring damage to its reputation in the United States.

Lessons for Chinese companies looking to invest in the United States

Chinese investors should not be overly concerned that Sany’s case is representative of new hostility towards Chinese direct investment in the United States. Any investment in the United States from a foreign country (including from major U.S. allies like the United Kingdom) is subject to the same rules and potential scrutiny as those in Sany’s case. Although the trend is for CFIUS to conduct more thorough investigations, most of the deals voluntarily reported to CFIUS – including Chinese deals – are routinely cleared. If a national security risk is found to exist, it may be possible to mitigate the potential concerns by making adjustments to the deal structure. Adjustments are far easier to make before a bid is final than after the transaction documents are signed. Accordingly, it is generally advised that Chinese investors consult with their experienced U.S. counsel on any CFIUS issues in advance and voluntarily initiate CFIUS review by filing notice with CFIUS well in advance of any planned closings, if necessary.

Another recent high profile case, BGI-Shenzhen’s acquisition of Complete Genomics, marked the first time that a Chinese company acquired a publicly traded U.S. company (see Law 360 and New York Times descriptions here, and here). This other transaction provides an excellent counter-example to the Sany rejection for how Chinese companies can successfully navigate the CFIUS review process. A good strategy for how a Chinese company should approach the legal and political aspects of an acquisition of a U.S. business is to engage experienced lawyers specialized in relevant areas, and under the instruction of the lawyers:

  • Start early and make careful judgments about the legal, regulatory and political issues that might be associated with a U.S. investment, while keeping in mind that not all foreign investments in the United States will raise CFIUS concerns.
  • Identify stakeholders and understand the political landscape in which a transaction will be reviewed and all of the potential opponents of the investment.
  • Be transparent and explain the background and rationale for the transaction before opponents can offer a negative, or even false story. Never remain silent until the transaction is final.
  • Tell your story and publicly identify the concrete and expected benefits of the transaction to the United States.

Recent transactions have demonstrated that Chinese companies can succeed in investing and carrying out acquisitions in the United States, even in potentially controversial transactions. Early work to design a comprehensive strategic approach to regulatory and political issues is the key ingredient in developing a successful investment and acquisition strategy.

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