U.S. Court to Decide Whether National Security Trumps Foreign Investment and
Due Process. - Background Article According to Roel Campos
WASHINGTON, July 10, 2013
WASHINGTON, July 10, 2013 /PRNewswire/ -- In the global economy, one of the
great prizes is the capital and boost to a country's economy provided by
Chinese foreign investment. The importance of Chinese direct investment to
the U.S. is evident from the over 30,000 American jobs produced by Chinese
firms at the end of 2012, as chronicled by the Rhodium Group's China
Investment Monitor. Additionally, Rhodium reports that direct investment from
China into the U.S. since 2007 is up as high as 1,300%, and that there are
over $2.3 billion in deals in the U.S. pipeline from China in 1Q 2013 alone,
the highest ever reported.
However, in spite of the obvious benefits, there is an uneasy tension with
respect to Chinese investment in the U.S., given serious concerns about
espionage, theft of intellectual property and cyber-security. Last week, for
instance, a federal grand jury indicted Sinovel Wind Group Co. of Beijing on
charges of stealing technology from American Superconductor Corp. of Devens.
Earlier, Congress and domestic business leaders were loud in condemning
Chinese practices after the private security firm Mandiant in February
released areportthat indicated systematic cyber-attacks originating from a
military address in Shanghai.
Of course, the recent announced takeover of US pork producer Smithfield by
China's Shuanghuihas also stirred public concern that Chinese ownership might
somehow affect food safety in the U.S. Politicians on both sides are
concerned about the business climate, as witnessed by the recent California
Sunnyland summit between President Obama and China's President Xi Jinping.
Many experts such as Thilo Hanemann and Dan Rosen of the Rhodium Group worry
that foreign investment review in the U.S. may become politicized by the
rhetoric emanating from Congress. (the Hill's Congress Blog, June 8, 2013).
It is within this backdrop, that a little noticed lawsuit has significant
implications to the way that the U.S. will review national security concerns
for proposed foreign purchases of U.S. businesses. In an unprecedented
lawsuit, a DC federal court will hear arguments on Thursday, July 11, about
whether the Committee on Foreign Investment in the United States (CFIUS) (the
U.S. gatekeeper for foreign investment) owes some type of due process to Ralls
(an affiliated company of the Sany Group, a Chinese construction equipment
manufacturer). Ralls acquired wind farm sites in Oregon last year, which were
near a U.S. Naval installation and flight testing zone. No party has ever
challenged in a lawsuit the extremely broad discretion of CFIUS and the
President to make a formal finding of a national security threat.
"In every instance prior to Ralls, these issues have been settled without a
lawsuit, with the foreign company agreeing not to acquire the American
business or divesting its ownership," according to Chris Simkins, a CFIUS
specialist in Washington DC. Indeed, The President's order to divest the wind
farm assets was the first to be issued in over 22 years. The Ralls case and
the rough treatment given Ralls by CFIUS raises issues of whether the American
review process is fair and whether Chinese companies, given the current
background, are more likely to viewed as national security risks. According
to court papers, after the CFIUS investigation began, Ralls proposed selling
the wind farm interests to an American group to cure the concern. No reason
was ever provided by CFIUS as to why Ralls' offer to voluntarily divest its
ownership of the site to Americans with the improvements would not have been
Instead, CFIUS's orders, later adopted by the President, directed that Ralls
could not divest ownership without CFIUS approval and ordered Ralls, in
sequence, to destroy first all construction and the expensive concrete
foundations on the site, and then required that ownership of the site be
transferred to an approved buyer. Because Ralls did not notify CFIUS in
advance of closing its purchase and constructed the concrete foundations on
the site without approval, CFIUS seemingly showed Ralls no mercy.
"CFIUS appears to have taken some pretty drastic action by not only unwinding
the deal, but requiring Ralls to essentially leave no trace after its exit,
and then to restrict even which U.S. company could buy the asset from Ralls,"
added Simkins. "That's unprecedented and many would argue is overreaching by
CFIUS, especially because Ralls could turn around and sell its equipment and
services to the wind farm after divestment without CFIUS having any authority
to stop it."
After considering Rall's lawsuit in February, the DC U.S. District Court
dismissed most of Ralls' claims of violations, holding that the President's
broad authority to make national security findings permitted the actions taken
against Ralls (including CFIUS's order to destroy the construction on the
site), since no permission was sought in advance. However, the court allowed
Ralls to proceed to the next hearing on Thursday with the novel claim that the
President's divestiture requirements were unconstitutional because they were
not done through due process of law - essentially that Ralls may have been
denied its constitutional rights to have an opportunity to review, respond to,
and rebut any evidence that takes away private property. The Judge was
careful to state that she was not ruling that such a right existed or that due
process might already have been satisfied in these circumstances, but simply
that Ralls was not precluded from making that claim under the statute.
If the Court finds that Ralls has some form of due process rights, it could
significantly change how CFIUS conducts its review of foreign investors
wishing to acquire American businesses. Roel Campos, a former SEC Commissioner
who oversaw international matters and whose law firm represents Chinese
companies, points out that due process rights would require CFIUS to establish
procedures providing notice of a potential taking of private property and to
offer the foreign investor the opportunity to present evidence that no threats
In a legal note, Dan Pickard, a CFIUS expert in DC, observed that, even if due
process rights exist, such due process rights may not be very meaningful,
since the facts underlying the finding of a national security threat are
classified and cannot be disclosed to Ralls or other parties in that
situation. However, Campos points out that, even if the chances of prevailing
with CFIUS are small, due process is an extremely valuable right to any
foreign investor and is one of the hallmarks of the universally admired
American Rule of law.
For example, with due process rights, Campos explained, Ralls might be able to
challenge the CFIUS's taking of the improvements it constructed (e.g., the
concrete foundations build by American contractors) and argue that
transferring the site and improvements to an American owner could not possibly
impact national security. Ralls could present other evidence – e.g., that the
concrete foundations in fact had nothing in them other than concrete and
therefore as a factual matter posed no plausible threats to military
installations. "If the equipment and concrete were examined at the time of
divestment and shown to be 'clean,' then transfer of control to a U.S. owner
should have dispelled national security concerns," stated Simkins.
"Thereafter, it's a matter of enforcement of the various espionage statutes to
make sure there is no post-divestment national security threat emanating from
the wind farm."
After making a record that evidence presented by the foreign investor was
considered, CFIUS would make its finding as before, without explaining or
revealing classified information. In that due process context, Campos points
out, CFIUS's decision regarding national security would remain - essentially
unassailable and immune from any court review, as the DC Court already held.
However, due process rights are never meaningless. Even in the face of low
odds, having the right to be heard and to present evidence provides an
important sense of justice to the proponent, Campos notes. Importantly, he
contends, accommodating due process in the CFIUS review would not compromise
the national security analysis which could still be done efficiently, without
disclosing classified information. "Imposing due process procedures upon CFIUS
ultimately would show the strength and fairness of our system to all foreign
investors and would help continue to attract capital into the U.S."
After hearing oral argument this Thursday, the eventual decision of the Court
is not expected for several months. If the Court's ruling ultimately requires
due process, CFIUS's procedures may change substantially to provide foreign
investors notice and to permit evidence to be presented. Chinese companies,
as well as other foreign investors, will be watching with great interest.
SOURCE Roel Campos
Contact: Roel Campos, email@example.com
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