After a three-year legal battle, Ralls Corp. and the U.S. government have settled the case over a controversial acquisition of wind projects.
According to a recent announcement from Ralls, the Committee on Foreign Investment in the United States (CFIUS) has agreed to let the company sell the development rights to four wind farms in Oregon to a third-party purchaser to whom the government previously objected. Ralls says the investor is Dr. Xieuxin Tang.
In March 2012, Ralls bought the wind projects from Greek company Terna Energy. However, the U.S. Navy soon after expressed concerns about the location of one of the projects, which was near a naval base that trains pilots of drone aircraft. Ralls agreed to move the project to a different site.
Ralls had failed to notify the CFIUS when it made the wind farm purchases. The CFIUS is an interagency committee of 16 federal agencies that reviews foreign investments in U.S. businesses for national security concerns. Ralls is Chinese backed.
Although submission of proposed deals is voluntary, the committee has authority to unwind transactions that were not submitted for review if the deals raise national security concerns.
After the Navy expressed concerns, the CFIUS contacted Ralls and suggested it file a notice. It did so in June 2012. On Sept. 28, 2012, President Barack Obama issued an order requiring Ralls to remove everything from the sites within 14 days and divest the projects within 90 days. The order also blocked the future use of any turbines made by Sany – a Chinese manufacturer – at the project sites. The two individuals who own Ralls are connected to Sany. Furthermore, the order blocked sale of the projects to any third party unless the buyer complies with the same conditions.Â
Ralls sued in federal court to have the order set aside. It lost the first round, but a U.S. appeals court said in July 2014 that the company should have been shown all unclassified information that led to the government order and given a chance to respond. The court called the refusal by the U.S. government to share any information with Ralls a "clear constitutional violation" of the company's right to due process.
The case has now been settled. Terms of the settlement have not been released, but Ralls said in its recent announcement that it will be able to use Sany turbines in its other U.S. projects. The company has projects in Colorado and Texas.
The long legal process of the Ralls case likely will cause other foreign acquirers to wonder whether they should file a CFIUS notice before closing a deal.
The threshold question in any CFIUS review is whether it involves a covered transaction – a deal that would result in a foreign person having "control" of a U.S. trade or business. Control is broadly defined in the CFIUS regulations, but essentially means the power to direct or decide important matters affecting the business.
For example, the power to appoint and dismiss officers, select new lines of business or control the finances of a company are indicative of control. The control can be direct or indirect, and side agreements or disproportionate voting rights could cause a minority interest holder to control the business. The regulations specify certain minority shareholder protections that do not convey control, such as the power to prevent the sale of all or substantially all of the company's assets. If there is no covered transaction, then the CFIUS does not have the authority to review the deal.
The CFIUS focuses on the national security implications of foreign investments in the U.S. that constitute covered transactions. "National security" is not defined for CFIUS purposes. However, the enabling statute lists factors considered by the CFIUS in determining whether a covered transaction poses a national security risk. Such factors include the potential national security effects on U.S. critical technologies, the long-term projections of U.S. requirements for sources of energy, and other critical resources and critical infrastructure. Critical infrastructure means a physical or virtual system or asset so vital to the U.S. that its incapacity or destruction would have a debilitating impact on national security. Large wind farms should be considered critical infrastructure.
Guidance issued by the U.S. Department of the Treasury makes it clear that the concept of national security should be broadly interpreted and that it includes acquisitions of U.S. businesses outside of the traditional defense sector. The CFIUS does not focus on any particular U.S. business sector. The guidance focuses on two characteristics of a deal: the nature of the U.S. business being acquired and the identity of the foreign person acquiring control of the business. The CFIUS has found that transactions present national security considerations because they involve U.S. businesses that provide goods or services that directly or indirectly contribute to U.S. national security.
The Ralls case also lets us know that proximity to defense or other national security sites is an important factor. The acquirer's identity is particularly relevant if it is controlled by a foreign government.
John Marciano and Keith Martin are partners and Amanda Rosenberg is an associate at the law firm Chadbourne & Parke. They can be reached at jmarciano@chadbourne, kmartin@chadbourne and arosenberg@chadbourne.com, respectively.
