DC Circuit Finds Buyers In Transactions Under Exon-Florio Review Are Entitled To Due Process Protections

In a sweeping decision in Ralls Corporation v. Committee on Foreign Investment in the United States,1 a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit (DC Circuit) unanimously concluded that, among other things, the due process rights of Ralls Corporation (Ralls), as buyer, were violated as a result of the failure of the Committee on Foreign Investment in the United States (CFIUS) and the President (1) to share with Ralls the unclassified materials on which they relied in concluding that the buyer might pose a threat to U.S. national security and (2) to provide Ralls with an opportunity to rebut the allegations in those unclassified materials. This decision reverses a ruling by the U.S. District Court for the District of Columbia (DC District Court) holding, among other things, that a buyer in a transaction subject to review under section 721 of the Defense Production Act of 1950, as amended (Exon-Florio), had no due process rights relating to the acquired property. The appellate decision thus appears to require certain changes to the way that CFIUS conducts the review of transactions under Exon-Florio.

This client alert summarizes the key components of the DC Circuit's Ralls decision. The full text of the court's decision is available here.

Background

Exon-Florio process. Under Exon-Florio and its implementing regulations, the President and CFIUS, a committee composed of the U.S. Attorney General, the heads of the Office of U.S. Trade Representative and Office of Science & Technology Policy, and the Secretaries of the Departments of Treasury, Homeland Security, Commerce, Defense, State and Energy (or their respective designees), have the power to review the national security effects of transactions that give foreign persons control over a U.S. business.2 Such review may be initiated (either before or after a transaction is consummated) by the parties to the transaction or by CFIUS sua sponte. Upon a recommendation from CFIUS, the President is authorized, among other things, to block a transaction that has not yet closed and to reverse a transaction that has already closed, in each case if the President concludes that such transaction may adversely affect U.S. national security and other laws are not adequate to protect the United States from such danger.3

Ralls transaction. In March 2012, Ralls, the plaintiff-appellant, purchased four limited liability companies (Project Companies) with wind farm projects in north-central Oregon. Ralls, a Delaware corporation, is owned by two Chinese nationals who are also senior executives of Sany Group, a Chinese manufacturing company (Sany). Three of the wind farm sites owned by the Project Companies are near restricted airspace used by U.S. military aircraft. The fourth is within that restricted airspace. Ralls did not submit the transactions to CFIUS for pre-acquisition review, but did make a "voluntary" post-acquisition notification to CFIUS after being asked to do so by the government. CFIUS issued an interim order (CFIUS Order) broadly requiring Ralls to cease all activities at the four wind farm sites, to remove items from those sites, to restrict access to those sites to U.S. citizens...