CFIUS post-Ralls: Ramifications for Sovereign Wealth Funds

Abstract

Global capital is on the move and sovereign wealth funds, with significant assets, are uniquely positioned to take advantage of the increase in mergers and acquisitions activity, especially in the United States. At the same time, major acquisitions in the US by foreign investors, including sovereign wealth funds, face a key challenge in the Committee on Foreign Investment in the United States (CFIUS or the Committee). CFIUS vets foreign acquisitions of US businesses for national security concerns, and “national security” is a term that is not defined by CFIUS statute or regulation. With increased sovereign wealth fund investments in the US, it is important for policymakers and investors alike to understand the potential roadblock that the Committee presents to foreign investment and for investors and potential US targets to develop an appropriate strategy to approach CFIUS when contemplating an acquisition. In a recent appellate court decision, Ralls v. Committee on Foreign Investment in the United States, the US Court of Appeals for the District of Columbia Circuit held that the Ralls Corporation (a Chinese-owned and controlled company) had been deprived of its property without due process when the President (at the recommendation of CFIUS) ordered Ralls to divest its interests in certain US wind farm projects on national security grounds. The court held that under the Fifth Amendment Due Process Clause of the US Constitution, Ralls was entitled to receive both the unclassified evidence that was the basis for the government’s decision and an opportunity to respond to this evidence. The case is still ongoing at the time of this writing; thus, the full impact of the decision remains to be seen. It is noteworthy, however, as the first legal case ever brought against CFIUS, and because the court’s holding is relatively unusual in an area – national security – in which US courts traditionally defer to the executive branch. Part I of this article provides the history of CFIUS’s statutory and regulatory authority; how CFIUS determines jurisdiction over a particular transaction; and the review and investigation process, with special emphasis on the treatment of sovereign wealth fund transactions. Part II examines the recent D.C. Circuit Court decision in Ralls v. Committee on Foreign Investment in the United States and analyzes the decision’s implications for foreign investors, including sovereign wealth funds. It concludes by emphasizing that although the Ralls litigation is ongoing at the district court level, the proceedings should, at minimum, result in an opportunity for foreign investors to have increased engagement with CFIUS, which may lead to more informed decision-making by CFIUS. At the same time, as Part III discusses, the decision does not at present change the importance of certain strategies for sovereign wealth funds navigating the CFIUS process to maximize the opportunity for success.