A Chinese-owned company won an unexpected court victory over the Obama administration on Tuesday. In 2012, President Obama blocked the Ralls Corporation from acquiring wind farm projects in Oregon, on the grounds that the acquisition posed a threat to national security. The wind farms were located close to a U.S. Navy weapons training facility. In issuing his decision, Obama said that “there is credible evidence” indicating that Ralls Corp. and its owners “might take action that threatens to impair the national security of the United States.”
Ralls Corp. immediately filed a lawsuit claiming that the decision had violated the company’s due process rights. The lawsuit said that the Obama administration had offered no “evidence or explanation” for its decision, and thus Ralls Corp. had not been given a chance to respond to the concerns. This week, a federal appeals court ruled in favor of Ralls Corp. “Due process requires, at the least, that an affected party be informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence,” the judges wrote in their ruling.
The ruling is a major step in reining in the power of the Committee on Foreign Investment in the U.S. (CFIUS), the government body responsible for reviewing “transactions that could result in control of a U.S. business by a foreign person.” CFIUS has the power to veto all or part of business deals, such as the Ralls Corp. takeover of Oregon wind farms, based on national security concerns (although such power is rarely exercised—the 2012 decision against Ralls Corp. was the first such move in decades).
Until this week’s court decision, companies seemed to have little legal recourse should CFIUS decide against them. Traditionally, the courts have granted broad leeway to the executive branch in deciding on matters of national security. By requiring that CFIUS must provide evidence for its determination, and allow companies a chance to respond, the appeals court won a major victory not just for Ralls Corp. but for future foreign companies looking to expand their U.S. holdings — especially Chinese firms.
CFIUS has paid special attention to Chinese business transactions in recent months, a trend that has sparked complaints of discrimination from the Chinese government. Last year, as CFIUS reviewed a bid by Shuanghui International to take over the U.S. pork company Smithfield Foods, concerns rose that political pressure rather than security concerns was driving CFIUS. Congress held hearings alleging that Shuanghui’s control of Smithfield could somehow put U.S. food supplies at risk, a move some saw as a transparent attempt to pressure the Obama administration to block the deal. The Shuanghui deal went through, but the incident highlighted uncertainty as to CFIUS’s powers. As a result, there’s been increasing suspicion among foreign investors (particularly the Chinese) that CFIUS functions fairly and objectively.
In this sense, the court case might actually benefit CFIUS in the long term. The court did not necessarily rule that CFIUS and Obama had no power to block the Ralls Corp. deal. Instead, the decision holds that CFIUS must make its rationale clear, including providing the company with all unclassified information used in making its decision. The company must then be given a chance to respond. As the court noted, this is basic due process. By setting a precedent that CFIUS must operate according to already established legal rules, the court helped stripped away some of the barriers obscuring CFIUS’s function without actually restricting CFIUS’s ability to carry out its duties.
A CFIUS that functions as a clearly regulated legal body is far less likely to spark complaints of discrimination against companies of a particular nationality. By accepting the court decision, CFIUS can actually bolster its position in the long run. Providing companies will clear legal recourse to unfavorable decisions will only legitimize CFIUS in the future should it once again rule that a business transaction threatens national security.
On a broader level, ironing out procedures and precedents for Chinese companies investing in the U.S. is crucial for the future of a possible bilateral investment treaty (BIT) between China and the U.S. Complaints of trade protectionism and other prejudice against Chinese investment had begun to cast a shadow over CFIUS and the future BIT. The court case can help clear the air.