July 15 (Bloomberg) -- A Chinese-owned company blocked by President Barack Obama from developing a windfarm near a Navy base in Oregon opened a crack in the secret process used to weigh national security risks posed by foreign investors.
The U.S. Court of Appeals in Washington today ruled that Ralls Corp., owned by two Chinese nationals, must be allowed to challenge evidence the president drew on to decide that the company had to sell all assets and operations connected to the Oregon wind-farm project.
“The presidential order deprived Ralls of significant property interests,” the unanimous three-judge panel of the court said. “This lack of process constitutes a clear constitutional violation.”
The ruling is a win for foreign companies that confront national security concerns raised by the Committee on Foreign Investment in the U.S., an interagency panel that reviews acquisitions of U.S. businesses by non-U.S. investors.
Companies undergoing a CFIUS review will gain some advantage in preventing a transaction from being blocked because now they can get access to unclassified information used by the committee and try to rebut it, said Harry Clark, an attorney at Orrick, Herrington & Sutcliffe LLP in Washington and a specialist in CFIUS representation. They can also go public with that information, he said.
The case is the first to challenge the CFIUS process in court.
“At this point, the private-sector parties have very little leverage,” Clark said. “They submit what they submit, and they get a thumbs up or thumbs down.”
Holly Shulman, a spokeswoman for the U.S. Treasury Department, the lead agency on CFIUS, referred a request for comment to the Justice Department. Nicole Navas, a spokeswoman for the department, said it was reviewing the decision.
Tim Tingkang Xia, an attorney for Ralls, said the company is “heartened that the court today upheld Ralls’ arguments in every respect.”
The appeals court decision comes as Lenovo Group Ltd., the world’s largest maker of personal computers, is subject to a CFIUS review to acquire International Business Machines Corp.’s low-end server business. Lenovo, based in Beijing, and IBM, sought more time to complete the review following an initial investigation by CFIUS, Bloomberg News reported in June.
CFIUS rarely recommends blocking a deal. Acquisitions are approved with conditions that address national security concerns or they’re cleared without changes. Companies can also withdraw a filing seeking CFIUS approval if they encounter opposition.
The last transaction blocked on CFIUS grounds was by then-president George H.W. Bush in 1990 in the proposed acquisition of MAMCO Manufacturing Inc., a maker of motors and generators based in Washington state, by China National Aero-Technology & Export Corp.
Chinese investors underwent more than double the number of CFIUS reviews in 2012 than the previous year, overtaking the U.K. as the most scrutinized foreign buyers of American assets, CFIUS said in its most recent annual report to Congress.
Ralls, a Delaware-based company owned by executives of China-based Sany Group Co., sued Obama and CFIUS in 2012 for barring the wind-farm development near an area where the Navy conducts training for bombing and air combat maneuvers, according to the base’s website.
Ralls was seeking to place Sany-made wind turbines at the Oregon installations after purchasing land and other rights. The assets consist of four locations, all of which are near or within the restricted Navy airspace, according to the Treasury Department.
The appeals judges, overturning a lower court, said Ralls’s constitutional rights to due process were violated because it never had access to information the government used and wasn’t able to address its specific concerns.
The appeals court sent the case back to the district judge and ordered that Ralls be provided the unclassified evidence the president relied on and be given an opportunity to respond to it.
The case is Ralls Corp. v. Committee on Foreign Investment in the U.S., 13-5315, U.S. Court of Appeals for the District of Columbia (Washington).
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