CFIUS Annual Report: National Security Trends in Foreign Investment and M&A in the United States

The Committee on Foreign Investment in the United States (CFIUS) recently issued its 2012 Annual Report to Congress. My colleague CJ Voss has summarized some of the report's key findings.

CFIUS is charged with reviewing acquisitions of U.S. businesses for national security implications. As we reported last fall, President Obama blocked Chinese-owned Ralls Corporation’s acquisition of wind farm projects in Oregon following intervention by CFIUS in the deal.

According to CJ, the report provides important insights for foreign companies considering investment and M&A transactions that could raise national security considerations, including:

  • CFIUS believes foreign governments or companies likely have a “coordinated strategy” to acquire U.S. companies involved in research, development and production of critical technologies
  • Filings with CFIUS have increased 70% since 2009
  • Filings involving Chinese buyers have increased
  • CFIUS has imposed various mitigation measures on transactions
  • Certain industry sub-sectors accounted for more than half of all filings between 2009-2011

Read on for CJ's detailed summary of the report and its implications.

Justice Department Moves to Dismiss Ralls Corp Lawsuit over Blocked Oregon Wind Projects

On October 29, 2012, the U.S. Justice Department filed a motion to dismiss the lawsuit filed by Ralls Corp (“Ralls”), an affiliate of Chinese-owned Sany Group, challenging President Obama’s September 28, 2012 order that blocked four planned Oregon wind projects on national security grounds. See our previous posts for more background on the Ralls Corp. v. Committee on Foreign Investment in the U.S. case.

In its filing, the Justice Department argued the Defense Production Act prohibited judicial review of presidential orders that suspend or prohibit the acquisition of a U.S. business by a foreign person. “Neither the president’s findings nor his actions in the presidential order fall outside his extremely broad discretion, and Rall[s]’s constitutional claims are nothing more than disguised challenges to his exercise of that discretion,” wrote U.S. Attorney Joel McElvain in the filing.

Ralls has argued the Presidential Order could cost the company $20 million in lost design and construction costs. Ralls also argues it will also lose $25 million in federal tax incentives if the wind projects are not placed in service by December 31, 2012.

Stay tuned to Renewable + Law blog for more developments in this case.

Video Interview: Discussing the Obama-Blocked Chinese Wind Energy Project with LXBN TV

Following up on our posts on the subject, I had the chance to speak with Colin O'Keefe of LXBN regarding President Obama's blocking of a Chinese-owned wind energy project out of concerns for national security. In the brief interview, I explained what exactly happened and whether or not the companies involved have any kind of legal recourse. 

Ralls Corp. Challenges Presidential Order Blocking Chinese-Owned Wind Projects

From my colleagues Alexandra Mertens and CJ Voss.

Ralls Corp. (“Ralls”), a company owned by two Chinese nationals and affiliated with the Sany Group, a global heavy manufacturing company (“Sany”), amended its lawsuit on Monday in an effort to overturn President Obama’s executive order requiring Ralls to divest itself of four 10 megawatt wind projects under construction near restricted airspace in Oregon (the “Oregon Projects”). Prior to the divestiture, Ralls is required to dismantle and remove all physical structures that have been installed on the site of the Oregon Projects, including at least 12 concrete foundations that have been fully or partially constructed. Citing national security concerns, the executive order gives the multi-agency Committee on Foreign Investment in the United States (“CFIUS”) broad authority to enforce its terms, including by accessing the premises and facilities of Ralls, the Oregon Projects, and Sany. 

For additional background, please see our prior posts: Obama Blocks Chinese-Owned Wind Project and CFIUS Intervenes in Chinese-Owned Wind Project.

In response to both the executive order and a prior order issued by CFIUS, neither of which identify the specific nature of the national security risks arising from Ralls’s ownership of the Oregon Projects, Ralls alleges that CFIUS and the President exceeded their statutory authority by issuing the orders and asserts constitutional challenges to the orders, including that the orders violated the Due Process Clause of the Fifth Amendment. In its complaint, Ralls "emphatically denies that its acquisition of the [Oregon Projects] was intended to or will have or raise any risks or threats regarding the national security of the United States, and it denies that any credible evidence of such intent or effect exists.” The complaint goes on to assert that the development of the Oregon Projects will benefit the U.S. by creating jobs and providing a source of clean, renewable energy, albeit a small enough source of energy so as not to significantly impact the local utility’s supply one way or another. The complaint notes that, if constructed, the Oregon Projects would constitute about 0.37% of the utility’s total generating capacity. CFIUS and the President are expected to defend the orders which, according to the authorizing statute, are not subject to judicial review.

Obama Blocks Chinese-Owned Wind Project

President Obama issued an order on Friday blocking the construction and ownership of a wind project by Ralls Corporation (“Ralls”), due to national security concerns including “credible evidence” that Ralls or its affiliates, including the Sany Group (“Sany”), “might take action that threatens to impair the national security of the United States.”  Ralls was in the process of developing a proposed 40-megawatt wind project in Oregon, through its acquisition of four Oregon limited liability companies (the "Oregon Projects"). The President’s order imposes numerous requirements on Ralls, its two owners, both of whom are Chinese nationals, and Sany, including:

  • within 90 days, Ralls must divest of all interests in the Oregon Projects and the assets of the Oregon Projects;
  • within 14 days, Ralls and Sany must remove all structures and installations of any kind (including concrete foundations) on the Oregon Projects’ property, and the owners of Ralls must provide CFIUS with a signed statement certifying that such requirements have been met;
  • Ralls, Sany and any of their affiliates and representatives may not access the site, except for U.S. citizens contracted by Ralls or Sany and approved by CFIUS, who may access the site solely for the purpose disassembling the facility;
  • Sany, Ralls, and the owners of Ralls may not sell or facilitate the sale of any Sany equipment for use at the Oregon Projects’ sites, and
  • a sale of the Oregon Projects or their assets may not be completed until all structures and installations have been removed, Ralls notifies the Committee on Foreign Investment in the United States  (“CFIUS”) in writing of the intended buyer or recipient, and CFIUS does not object. 

Although the order does not specify the basis of the concern, it is likely due to the proximity of the Oregon Projects to a U.S. Navy facility that conducts training missions with unmanned drones and electronic-warfare planes.   In response, Sany has accused the President of electioneering, according to a report in WindPower Monthly, and Sany may continue to pursue a legal challenge to the order.  This may prove to be an uphill battle for Sany, given that the Defense Production Act bars judicial review of presidential orders issued upon recommendation by CFIUS.  In light of the presidential order, foreign investors should consider making CFIUS approval a condition to closing under any agreement by which they acquire US energy assets, particularly if the acquisition involves a project located near military facilities and regardless of whether the project or company has defense-related contracts or owns sensitive information. 

For more background, see our prior post regarding Ralls’s lawsuit in response to the initial CFIUS mitigation measures:

CFIUS Intervenes in Chinese-Owned Wind Project

On September 12 a U.S. wind project development company, Ralls Corporation ("Ralls"), owned by two Chinese nationals, filed suit against the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency U.S. government body charged with assessing the potential national security effects of foreign acquisitions of U.S. businesses. National security concerns may arise in a number of ways when a foreign entity acquires a U.S. renewable energy business. However, the CFIUS order to which the lawsuit responds marks an unprecedented intervention by the U.S. government in renewable energy project development, which, since its inception, has benefitted from substantial investment by foreign investors.

The Ralls complaint alleged that CFIUS exceeded its authority by blocking Ralls’ investment in and development of a proposed 40 megawatt wind project in Oregon, through its acquisition of four Oregon limited liability companies (the "Oregon Projects"). Ralls and CFIUS subsequently reached an agreement regarding the resumption of preliminary construction activities but, by September 28, President Obama is expected to decide whether to let the Oregon Projects proceed or to require divestiture on terms specified by CFIUS. In light of this order, such "national security" risks may potentially prove a greater risk to renewable energy transactions than previously understood.

Click here to read more on the scope of a CFIUS review and what puts a transaction at risk.

New Army Corps Nationwide Permits for Renewable Energy Facilities

Stoel Rives partner Aaron Courtney will speak about the New Army Corps Nationwide Permits for Renewable Energy Facilities during a one-hour expert analysis telebriefing on Wednesday, April 25.

Learning objectives include:

  • How the nationwide permit program works
  • The scope and limitations of the two new nationwide permits for renewable energy facilities
  • Other nationwide permits that remain available to authorize renewable energy facilities
  • How the general, regional, or state Clean Water Act could affect the use of the nationwide permits
  • Implications for the development of onshore and offshore renewable energy facilities

Click here for full details.

Solar Development Guidelines Released by Arizona Game and Fish Department

On March 12, 2010, the Arizona Game and Fish Department ("AGFD") released finalized guidelines for solar development in Arizona ("Solar Guidelines"), the objective of which "is to assist energy developers in identifying potential impacts to wildlife and wildlife habitats from their proposed development and potential alternatives to avoid, minimize, and/or mitigate for these negative impacts."  The AGFD encourages local governments and permitting authorities to integrate the recommended study proposals described in the Solar Guidelines.  The document is organized around five basic project development steps:

  1. Wildlife Protection Regulations
  2. AGFD Regulations and Review
  3. Gather preliminary information and conduct site screening
  4. Identify potential impacts to wildlife
  5. Mitigation

The Solar Guidelines were compiled by the AGFD employees and have not undergone any external public review or input from the solar energy industry.  It should be noted that some of the information contained in the Solar Guidelines was taken from the AGFD's wind guidelines.  In light of the fact that county officials often defer to the AGFD in matters of wildlife concerns, special attention should be given to the section of the Solar Guidelines focused on "Avoiding or Minimizing Impacts" and the recommendations contained therein.

In addition, AGFD identified several areas in which information regarding the impacts of utility-scale solar development on wildlife and habitats is lacking.  Specifically, AGFD believes that research is needed on the following topics:

  • Determine the "effective footprint" of utility-scale solar development so mitigation strategies can be implemented at the spatial extent of the impact.
    • Need to determine the potential effects of a proposed solar project on the demographics of select wildlife species.
  • Evaluate the alteration of vegetation and micro-climate adjacent to solar facilities.
  • Identify the impact that utility-scale solar development has on wildlife corridors.
    • Evaluate the movement and behavior patterns of select wildlife species (e.g., ungulates, grassland passerines, raptors) pre- and post-construction.
  • Examine the impacts to migratory birds and bats.
  • Develop mitigation strategies to reduce the impacts of water impoundments associated with solar facilities.