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 plaintiffs 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.
Theyve become more aggressive over the
past year its 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
Todays 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, plaintiffs
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
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.
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 its 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. Huaweis purchase of 3Leaf assets and Far Eastern Goldens deal with a Nevada
companyare recent examples. Cnoocs proposed
acquisition of Nexen assets is also facing Cfius
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 Systems merger with EADS, which would
expand the European targets US presence. The second is Superior Aviation Beijings bid to buy Hawker
It will be interesting to see if Cfius allows
BAE to acquire EADS, but blocks the Beechcraft deal, Wang
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 filers 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 dont 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
IFLRs coverage of CFIUSs impact on the Cnooc/Nexen
And here for tips on
how to close China/US mergers