US lawsuit reveals Cfius review defects, ChinaCo fears

Author: Danielle Myles | Published: 20 Sep 2012
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The first lawsuit against the US foreign investment regulator reveals a spike in US protectionism, and problems with the national security review of inbound investments.

The plaintiff’s claim reflects the lack of transparency and dialogue that has marked the Committee on Foreign Investment in the US’ (Cfius) review processes over the past 12 months, lawyers told IFLR.

Today Chinese-owned Ralls Corporation dropped its complaint, which it had filed in a US district court last week. But it sheds light on the procedural inadequacies making it increasingly difficult to predict which deals will be blocked for national security reasons.

“They’ve become more aggressive over the past year – it’s clearly been evolving,” said Vinson & Elkins antitrust partner Billy Vigdor.

“The process has become less transparent in terms of the interaction between Cfius and the parties. There is a lot less dialogue as to the precise nature of the security concern,” Vigdor said.

Cfius’ ability to explain why a deal is problematic is limited because revealing the concern can itself be deemed a security risk.

“For many years Cfius has been able to articulate more concerns than it has done recently,” Vigdor said. In the past, parties were told enough to be able to engage in a constructive dialogue to help persuade Cfius there was no security concern or facilitate a mitigation agreement.

Today’s more stringent approach has frustrated lawyers, and made it more difficult to advise clients on whether their deal would be approved.

Ralls v Cfius

Ralls’ lawsuit was filed on September 12 and challenged Cfius’ order to effectively unwind its acquisition of four US windfarm operators.

The transparency issue was at the centre of Ralls’ complaint. It alleged that Cfius exceeded its authority by, among other things, providing no evidence or explanation why the deal posed a security risk.

The complaint speaks for itself, plaintiff’s counsel Tim Tingkang Xia, partner with Morris Manning & Martin, told IFLR yesterday.

“It is worthy to note that although Ralls felt strongly it had been treated unfairly and selectively with respect to the Butter Creek Project, Ralls has been cooperating and will continue to cooperate with Cfius,” he said. Ralls filed the lawsuit to preserve its rights and show its confidence in the US legal system, he added.

Today, Ralls dropped the lawsuit contesting the interim order.

President Obama will decide by the end of next week whether the deal should be permitted and Cfius’ order overturned, or if the deal must be blocked.

China-US trade-war

Ralls’ situation reflects the more aggressive approach taken by Cfius recently in issuing orders to hold separate or mitigate national security concerns.

The vast majority of deals that come before Cfius are not blocked, and it’s highly unusual for a deal to be referred to the President.

But of the handful of deals the Committee has rejected, many have involved Chinese buyers, said Haynes and Boone M&A partner George Wang. Huawei’s purchase of 3Leaf assets and Far Eastern Golden’s deal with a Nevada companyare recent examples. Cnooc’s proposed acquisition of Nexen assets is also facing Cfius difficulties.

“I think the lesson learnt [from Ralls] is if you have doubts, you probably want to go ahead and make the filing or speak with a member of the Committee – particularly if you are a Chinese company,” Wang said.

Chinese companies are well aware that Cfius’ stricter approach to approvals has been most obvious in relation to Chinese acquirers, he added.

Comparing the outcome of two pending aviation deals could be a test of the US’ anti-China sentiment. The first is British BAE System’s merger with EADS, which would expand the European target’s US presence. The second is Superior Aviation Beijing’s bid to buy Hawker Beechcraft.

“It will be interesting to see if Cfius allows BAE to acquire EADS, but blocks the Beechcraft deal,” Wang said.

Moot point?

As the first party to sue Cfius, Ralls had the potential to be a test case for US protectionism, and the potential to create – from the filer’s perspective – a more workable review process.

Judging from lawyers comments to IFLR earlier this week, it seems the substantial issues of the case would have been given little consideration in court in any event. Whether judicial review of agency rulings is possible would have been the determinant factor.

“Most courts will not accept challenges to US national security determinations,” said Morgan Lewis partner Stephen Mahinka. Traditionally, courts don’t get involved in these matters as it requires them to make determinations on security conclusions, he said.

“Responding to a request for comment on the transparency of its review processes, Cfius directed IFLR to recent speeches by Treasury deputy secretary Wolin and assistant secretary Marisa Lago.

See here for IFLR’s coverage of CFIUS’s impact on the Cnooc/Nexen deal

And here for tips on how to close China/US mergers