The Wall Street Journal: Appeals Court Faults Government Order Prohibiting Ralls Corp. Wind Farm Deal
Type : Press Release
Date of Release : 2014-07-16


Source: The Wall Street Journal


A Chinese-owned company scored an unprecedented legal victory over the White House on Tuesday in a ruling that could shake up the secretive government review process that weighs the national-security implications of foreign acquisitions in the U.S.

A federal appeals court ruled the Obama administration violated Ralls Corp.'s rights when it reviewed the company's purchase of several wind-farm projects near a naval-weapons training facility in Oregon. The president prohibited the purchase in 2012, the first such action in 22 years.

The decision is a setback for the Obama administration and for the Committee on Foreign Investment in the U.S., which reviews foreign acquisitions of American companies to ensure the deals don't pose a national-security threat.

The ruling may not change the bottom-line outcome in the Ralls dispute, in which the president ordered the company to sell its wind-farm assets. Nor will it likely have implications for past reviews by the 39-year-old body.

The president retains the power to block the Ralls deal, though he must give the company a chance to make its case to the administration before the White House makes a final determination.

Tuesday's decision could give foreign firms more leverage and greater legal protections as they seek to expand in the U.S. Foreign companies for decades have had virtually no say in the review process, but the ruling could require the administration to give them access to the unclassified evidence it considers in making its decision.

Several high-profile deals are now before the review board.

Russia's state-controlled oil giant, OAO Rosneft, recently put to the board its bid to buy Morgan Stanley's MS +0.60% oil-trading unit. The ruling could also affect China's Lenovo Group Ltd. 0992.HK +0.92%, which is seeking to buy the computer-server business of International Business Machines Corp. IBM -0.72% for $2.3 billion as well as Google Inc. GOOGL -0.20%'s Motorola Mobility phone business. IBM and Lenovo in May refiled their application with CFIUS to gain more time.

Last year, CFIUS cleared the biggest purchase ever of a U.S. company by a Chinese firm, the $4.7 billion acquisition of Smithfield Foods Inc. by Shuanghui International Holdings, despite vocal complaints from members of Congress about risks to the national food supply.

In the Ralls case, the U.S. Court of Appeals for the District of Columbia Circuit said the company should be given access to any unclassified evidence the president relied on to make his decision. It also said the company should have a chance to respond to that evidence.

"Ralls never had the opportunity to tailor its submission to the [government's] concerns or rebut the factual premises underlying the president's action," the appeals court said in its opinion.

Companies previously haven't been entitled to such procedural protections during the review process, said Harry Clark, a lawyer with Orrick, Herrington & Sutcliffe LLP. "Nothing like this has ever been available," he said. "Transacting parties have had virtually no leverage."

A lawyer for Ralls said the company was heartened that the court "ordered the government to disclose the reasons why it deprived Ralls' property. We look forward to further vindicating Ralls' right to be treated fairly and equally under the law." He said the company was evaluating its options regarding the wind-farm assets, which he said still haven't been sold.

Sany Group, the Chinese construction and machinery firm whose executives control Ralls, couldn't immediately be reached for comment. An executive of Sany previously accused the Obama administration of blocking the deal to support U.S. industry.

The Justice Department said it was reviewing the ruling, but U.S. officials declined to comment further. The administration has more legal options: It could ask the appeals court to rehear the case, with all active judges participating, or it could appeal to the Supreme Court.

The decision is a victory for the Chinese government, which has pushed hard—even in recent days—to win more transparency in the national-security review for companies looking to buy American firms. In 2012, Chinese entities, led by manufacturing companies, filed 23 deals with CFIUS, up from 10 in 2011 and six in 2010.

The review board doesn't publicly disclose the cases it considers or their outcomes. In most cases, companies that trigger national-security concerns work with the committee's lawyers to mitigate the perceived risks. Foreign companies buying businesses in the U.S. often file with the committee voluntarily, though they can also be forced to file.

If no agreement is reached, the president can issue an order barring the transaction. Companies ordinarily have no way to appeal the decision.

The ruling "will help create some transparency in the CFIUS process," said William Vigdor, a lawyer with Vinson & Elkins LLP who represents companies that go through the national-security review for proposed transactions.


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