A recent lawsuit, in which a Chinese manufacturing company is suing President Barack Obama for blocking the development of its four wind farm projects, may set a precedent for challenges to U.S. regulatory practices about foreign investment, lawyers say.

Ralls Corp. claims President Obama overstepped his bounds by allowing the U.S. government to inspect all aspects of its operations and subsequently ordering the company to stop the projects. President Obama maintains that when Ralls purchased the assets from Athens-based Terna Energy SA in March, the deal posed a national security risk, because construction would be located close to a military training site, according to court documents made public on Oct. 2.

"It’s historic,” says Mario Mancuso, a corporate partner at Fried Frank Harris Shriver & Jacobson LLP, regarding the rare presidential order. The last time a U.S. President blocked a cross-border transaction was in 1990 when President George H.W. Bush squashed the sale of Mamco Manufacturing to a Chinese agency.

Ralls and the Sany Group executives that own the company — CFO Dawei Duan and vice president Jialiang Wu—initially sued the Committee on Foreign Investment in the United States (CFIUS) on Sept. 13 for ordering the company to halt operations until the committee completed its regulatory process.

“To the extent that there is even a marginal victory with that lawsuit,” Mancuso says, “it may make the CFIUS process more transparent, and that would be a significant change.”

In other words, should the court allow the case to proceed, companies will gain insight on CFIUS procedures, which are always confidential, Mancuso explains.

“It will put CFIUS on notice so that in the future it may be subject to additional litigation,” he adds. Mancuso has worked with CFIUS in the past on various initiatives during his time as Under Secretary of Commerce for Industry and Security.

Cases against the committee are a rare occurrence. Mancuso recalls one exception in 2006, when then-New Jersey Governor Jon Corzine attempted to force CFIUS to investigate the acquisition of the port of Newark by Dubai Ports World, but the case was voluntarily dismissed.

So when President Obama issued his own order on Sept. 28 over fears that the planned wind farms are too close to the Naval Weapons Systems Training Facility in Boardman, Ore., details on CFIUS and its procedures were inevitably publicized.

“This, in turn, could encourage legal challenges from similarly situated foreign investors,” said Farhad Jalinous, a partner in Kaye Scholer’s National Security/CFIUS practice group.

As a result, both lawyers predict other investors may challenge the constitutionality of FINSA, or the Foreign Investment and National Security Act, which implements numerous changes in internal CFIUS procedures.

On the other hand, the lawsuit may also spur other M&A parties in cross-border deals “to approach CFIUS before closing to engage in a dialogue about the transaction and its national security implications,” says Jalinous.

“As to their chances of winning, one might describe Ralls’ suit against the President as a bit of a Hail Mary,” he adds, referring to the football play which consists of a long forward pass usually made in desperation. Courts typically afford much deference to the Executive Branch and its extensive authority on security matters.

The lawsuit comes during the final weeks of the U.S. presidential campaign in which Republican candidate Mitt Romney has criticized President Obama for not taking a stronger stance against China's trade practices.

For more on China's investments in U.S. targets, read guest article “What You Need to Know About CFIUS” and watch Editor-in-Chief Mary Kathleen Flynn’s video interview with Mancuso at themiddlemarket.com/video.

 

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