In December 2013, the Committee on Foreign Investment in the United States (“CFIUS”) released its annual report to Congress (the “Report”) covering transactions it reviewed in Calendar Year 2012. (Yes, Calendar Year 2012 – CFIUS takes its time publishing its annual reports.) CFIUS is the U.S. interagency government body that reviews acquisitions of U.S. businesses or substantial business assets by non-U.S. parties for national security considerations.
The Report, which contains details about transactions reviewed by CFIUS during 2012, depicts a year in which many transactions encountered turbulence during review by CFIUS. The Report also suggests that there has been a significant uptick in transactions involving Chinese buyers.
These statistics alone portend the possibility of more choppiness in the future; what really underscores that possibility was CFIUS’s determination, in late 2012, to block the proposed acquisition by Chinese-controlled Ralls Corp. of a wind farm in Oregon. As discussed further below, Ralls has sued the United States to try to block the unwinding of its acquisition and, as that case moves through the U.S. court system on appeal, the plot thickens.
Overview of CFIUS
Section 721 of Title VII of the Defense Production Act of 1950, as amended (“Section 721”), authorizes the President to suspend or prohibit a transaction that could result in control of a U.S. business by a foreign person (a “covered transaction”) if there is credible evidence that the foreign person might act in a manner that threatens U.S. national security. CFIUS, which is chaired by the Secretary of the Treasury, reviews and advises the President on the national security implications of such transactions.
In addition to reviewing the acquisition of U.S. businesses by non-U.S. parties, CFIUS considers transactions involving the acquisition of substantial business assets by such parties. While filing a notice of transaction to CFIUS is generally voluntary, CFIUS may – as it did to Ralls – instruct parties to submit transactions for review. CFIUS is required to complete its review within 30 days of receiving a completed filing, although the review period may be extended to an additional 45-day investigation. Under the regulations, a 45-day investigation should only be instituted when certain circumstances are present that suggest heightened national security concerns related to a transaction. In practice, CFIUS may extend a review to an investigation for a host of reasons, including when the committee simply has not completed its review in the 30 days allotted to do so.
If CFIUS identifies national security concerns related to a transaction, it may require the parties to implement mitigation measures as a condition precedent to allowing the transaction to proceed. In very rare instances, CFIUS may recommend that the President block a transaction.
In 2012, 114 notices of proposed transactions were filed with CFIUS for review, a slight increase over 2011 (when 111 notices were filed) and a fairly significant increase over 2010 (when 93 notices were filed). Of the 114 transactions in which notices were filed in 2012, two notices were withdrawn during the initial 30-day review period, while 45 notices went to a 45-day investigation. The 45 investigations represented only a moderate increase over 40 cases that went to investigation in 2011, and 35 cases that went to investigation in 2010.
But then we get to the drama: in 2012, 20 notices were withdrawn after an investigation was commenced. This is the highest number of withdrawals after investigation commenced since records began to be kept in 2008. According to the Report, of those 20 transactions in which withdrawal occurred during investigation, 10 parties re-filed their cases in 2012, and CFIUS concluded action in those cases. Two other parties re-filed in 2013. In the eight remaining cases, the parties abandoned the transaction for either commercial reasons or due to CFIUS’s national security concerns.
In a further eight transactions, CFIUS imposed mitigation measures meant to address national security concerns identified during its review. These measures ranged from ensuring that only U.S. citizens handle certain products and services, to establishing guidelines for handling future U.S. government contracts and other sensitive information, to terminating specific activities of the U.S. business. (And as stated above, one transaction, the Ralls transaction, resulted in a Presidential block.)
The significant number of withdrawn transactions and mitigation measures in 2012 may indicate that non-U.S. parties are becoming more aggressive about pursuing targets operating in areas affecting national security. It could also be that CFIUS is taking an ever expanding view of what constitutes a threat to national security.
In addition, as described below, the growing number of Chinese acquirors may give rise to more CFIUS concerns than where proposed acquirors hail from countries like the United Kingdom or Canada.
Increasing Chinese Investment. Indeed, the Report observes the growing number of acquisitions of U.S. businesses by Chinese investors in 2012. Specifically, Chinese buyers were involved in 23 notices reported to the Committee in 2012, in addition to 2 transactions involving Hong Kong buyers. This more than doubled the number of Chinese transactions in 2011, when 10 notices were filed by Chinese buyers and none by Hong Kong buyers, and more than tripled the number of Chinese transactions in 2010, when six notices were filed by Chinese buyers and one by a Hong Kong buyer. In 2012, more Chinese buyers notified CFIUS of a transaction than buyers from any other country, the first time that has happened since CFIUS started recording statistics.
Areas for Chinese investment are relatively diverse, although manufacturing is prominent. For the past three years, Chinese buyers have been involved in 20 proposed transactions involving the Manufacturing sector, seven proposed transactions involving Finance, Information, and Services, 12 proposed transactions involving Mining, Utilities, and Construction, and none involving Wholesale, Retail, and Transportation.
Of course, one of the most notable developments of 2012, which continues even now, also involved a Chinese-controlled buyer whose proposed transaction was blocked by CFIUS altogether. As we reported in late 2012, the proposed transaction by Ralls Corp., which is controlled by the Chinese company Sany Corp., of a windfarm located in Oregon resulted in President Obama blocking the transaction under the auspices of CFIUS. Ralls Corp. sued, alleging a violation of its due process and property purchasing rights, but lost the case in U.S. District Court. Both arguments were rejected by the District Court and the case was dismissed.
In October 2013, Ralls appealed its case with the U.S. Circuit Court of Appeals for the District of Columbia Circuit. In January 2014, the D.C. Circuit allowed the company to accelerate the appeal after the U.S. government moved to enforce President Obama’s order that would force Ralls Corp. to divest its acquisition. The appeal is currently pending.
The outcome of the appeal will help to either reinforce the legitimacy of the CFIUS process, or provide limits within which CFIUS must operate. In the context of developments outlined in the Report, including increasing Chinese investment in the United States, more withdrawn notices, and mitigation proceedings, the outcome of the appeal may shape the tenor of CFIUS operations in the years to come.