"Sany wins in US Circuit Court against President Obama!" On July 16 at 8:28 AM, Sany Heavy Industry President Xiang Wenbo (Weibo) updated this news on Weibo. This comes nearly two years after Sany Group's affiliated company Ralls filed a lawsuit against Obama in 2012.

Xue Feng, partner at Katten Muchin Rosenman LLP and chairman of its Asia Pacific and China practice, also told the 21st Century Business Herald: "This is a major procedural victory."

"We believe the presidential order, without due process of law, deprived Ralls of its property rights protected by the Constitution," the ruling said. The 47-page ruling stated that the affected party should at least be informed of the official action, given access to the non-confidential evidence on which the official decision was made, and given an opportunity to rebut that evidence.

According to the annual report submitted by the Committee on Foreign Investment in the United States (CFIUS) to Congress at the end of last year, in 2012, the number of cases involving Chinese investors undergoing national security review surpassed those of the UK, making China the country with the most cases under review for the first time. That year, a total of 23 M&A deals by Chinese investors in the US underwent CFIUS national security review. CFIUS has been questioned for reasons including its transparency issues and its lack of a clear definition of national security, the latter leading to significant discretionary power.

A Landmark Ruling

On July 15 local time, a three-judge panel of the US Court of Appeals for the District of Columbia Circuit ruled that President Obama's 2012 decision violated constitutional due process. In September 2012, Obama issued an executive order blocking the wind farm project in Oregon of Ralls, an affiliate of Sany Group, citing threats to US national security.

This was the first time in 22 years that a US president had blocked a foreign company's acquisition in the US on national security grounds. In October of the same year, Ralls filed a lawsuit in the Washington federal court, naming CFIUS and Obama as co-defendants.

In October 2013, a Washington district court judge issued a preliminary ruling that the US government's blocking of the wind farm project on national security grounds did not violate the US Constitution. Ralls then appealed.

Although the US Treasury Department had previously stated in the Sany v. Obama case that the President's decision was not subject to judicial review, the procedural issues involved in Obama's decision-making process were challenged by this appellate court ruling. The judges emphasized that they were not challenging President Obama's decision, but the manner in which he made it.

The Due Process Clause of the Fifth Amendment to the US Constitution provides that no person shall be deprived of life, liberty, or property without due process of law.

Ren Qing, partner at Zhong Lun Law Firm, told the 21st Century Business Herald that the US appellate court's reasoning was in three steps: first, under US law, the President's final decision to reject a transaction is not subject to judicial review, but the process or procedure leading up to that final decision can be judicially reviewed; the final decision itself involves a national security judgment and constitutes a non-justiciable political question, but the plaintiff is not challenging the final decision but the procedure by which it was made, which is justiciable; after the completion of the M&A transaction, the plaintiff had acquired lawful property rights, and the President's manner of depriving it of those rights violated the Due Process Clause of the US Constitution. "This is a major breakthrough and a victory for Sany's lawsuit," he said.

However, the appellate court's decision is not final; the Obama administration can still appeal to the Supreme Court. According to US media reports, the Obama administration is likely to appeal this case to the US Supreme Court.

The appellate court has now remanded the case to the trial court for retrial, and the final outcome is uncertain. Ren Qing believes that for this specific M&A transaction by Sany, the result of being blocked may be difficult to change, but the appellate court's ruling is undoubtedly good news for future investments and acquisitions in the US by Chinese companies and companies from other countries, because in future national security reviews, as long as the evidence is not classified, CFIUS should provide the reviewed party with the relevant evidence on which its decision is based and give the other party an opportunity to rebut.

Some US media have described the appellate court's ruling as landmark. According to another report by The Wall Street Journal, before this, foreign companies actually had no advantage when facing CFIUS review procedures, and the latest ruling in the Sany case will change this situation. The court held that companies should have access to the non-confidential evidence adopted by the government in making decisions and have the opportunity to respond to that evidence.

Donald Vieira, a former national security lawyer at the US Department of Justice, said in an interview with Reuters: "This is a potentially transformative decision. Previously, CFIUS did not have to explain why it recommended that the President block a transaction, but this ruling is the opposite."

Christopher Brewster, a lawyer at Washington law firm Stroock & Stroock & Levan, said: "The reason this ruling is landmark is that for the first time, the court has ruled that parties have due process rights before CFIUS." He believes the ruling is somewhat unexpected because it is generally thought that the President's decisions on CFIUS procedures cannot be interfered with by federal courts. However, the three judges also agreed that the President's decision to support or overturn a foreign acquisition on national security grounds is not subject to judicial review, but this limitation does not apply to constitutional issues arising from the transaction.

China's Investment in the US Most Subject to CFIUS Review

"Once the President ordered Sany Heavy Industry to withdraw from the Oregon wind farm project, Sany had no good options left," Noel Francisco, partner and industry head at Jones Day's Washington DC office, recently told the 21st Century Business Herald when discussing the Sany v. Obama case. Before joining Jones Day, Francisco served as Assistant Attorney General at the US Department of Justice and Associate Counsel to the President.

Francisco believes the lesson from the Sany case is the need to fully recognize the importance of the CFIUS approval process from the outset, so that the parties involved do not need to be embroiled in litigation from the beginning. In the Sany case, the wind farm was located near a sensitive military facility. This is a situation that CFIUS regards as taboo. However, Sany did not notify CFIUS of the transaction before completing it. In hindsight, Sany should have engaged with CFIUS at the beginning of the project.

The Sany case has become a special case in many respects. It is one of the few foreign M&A transactions that went through the White House. In most cases, when CFIUS determines that a foreign company's transaction is invalid for national security reasons, the foreign company usually abandons the transaction or takes measures to mitigate US national security concerns. But Ralls refused to accept CFIUS's decision, and the transaction was then submitted to the White House for Obama to make the final decision. After Obama overturned the transaction, Ralls decided to resort to legal action. Another special aspect is that CFIUS intervened in this case after the transaction was completed, whereas normally CFIUS participates before the transaction.

To win the lawsuit, Ralls hired several influential lawyers, including former US Deputy Attorney General Paul Clement and former Assistant Attorney General Viet Dinh.

"We believe that the US national security review system has vague concepts and opaque procedures, and the restrictive conditions imposed on projects involving national security review and security risks are too stringent. These restrictions have caused losses to Chinese companies and also affected the confidence of Chinese enterprises in investing in the US," said Zhang Xiangchen, Assistant Minister of Commerce of China, at a briefing during this year's China-US Strategic and Economic Dialogue.

Noel Francisco said that CFIUS regulations currently do not define "national security," although in theory CFIUS could amend the regulations to clearly define national security. "But without a congressional mandate, there is no reason to believe it will make such an amendment. We also do not believe Congress will require a clear definition of this term," he said.

In the last two China-US Strategic and Economic Dialogues, the US has made commitments to China regarding CFIUS security review issues. "China is very concerned about the US national security review. Although the US has made many commitments, how many of these commitments have been implemented remains to be seen," Ren Qing said. In last year's dialogue, the US committed that the review would be limited to national security. In this year's dialogue, the US committed that CFIUS would apply the same rules and standards to every transaction it reviews, regardless of origin. When a transaction raises national security risks, CFIUS will resolve it as quickly as possible, including, where possible, by adopting targeted mitigation measures rather than prohibiting the transaction. Both sides committed to continuing discussions and explanations on concepts in the US foreign investment review process.

National Security in the BIT

National security will also be an unavoidable topic in the negotiations of the China-US Bilateral Investment Treaty (BIT). A new round of China-US BIT negotiations will be held in Washington, DC from July 28 to August 1.

In Francisco's view, in the China-US BIT negotiations, it is likely that the representatives of both sides will discuss the CFIUS issue as part of related matters. But he also pointed out that bilateral investment treaties usually have national security exception provisions, allowing both sides to exercise national sovereignty to safeguard national security. Therefore, compared with national security exceptions, there are other areas, such as intellectual property, that will occupy a higher priority on the BIT negotiation agenda than CFIUS.

Ren Qing analyzed that the foreign investment security review system is linked to the "security exception" clause in bilateral investment treaties, meaning that for national security interests, a country can take necessary measures that are inconsistent with its obligations under the investment treaty, including conducting security reviews of foreign investment at the admission stage. However, different treaties handle "security exception" clauses differently, and the corresponding constraints on the foreign investment security review system vary in strength.

This can be roughly divided into three situations. One is the US model, for example, according to the provisions of the US 2012 Model BIT, the application of the security exception is "self-judging," meaning that as long as a contracting party considers foreign investment to be a national security threat, it can disregard provisions such as national treatment, most-favored-nation treatment, and expropriation; second, the BIT contains a security exception clause, but whether the measures taken by the contracting party fall under the security exception, whether they threaten security interests, and whether they are within necessary limits are left to international arbitration tribunals to judge; the third approach is not to include a security exception clause, but this does not mean that measures to protect security interests cannot be taken; rather, it is left to customary international law. Therefore, in order to properly address the issue of foreign investment security review, both China and the US need to find the best model for security exception clauses.

Ren Qing believes that whether it is necessary to write a special clause on national security review in the BIT is also a question worth considering. If such a clause is to be written, how to strike the right balance also tests the wisdom of the negotiators. He explained that from the perspective of Chinese enterprises investing in the US, it is necessary to constrain the US security review system at the rule level; but China also has the need to protect its own national security and has established a foreign investment security review system since 2011, so it needs to retain appropriate space for the operation of that system.

This content belongs to the text negotiation of the China-US BIT. According to the consensus reached by both sides at this year's Strategic and Economic Dialogue, the two sides will strive to complete the text stage of negotiations by the end of this year and launch negative list negotiations in early next year.