Sany Heavy Industry blocked wind power investment in the United States

Sany Heavy Industries, an American affiliate, Ralls, filed a complaint in Washington, DC against the US Investment Commission (CFIUS) and its leader, Federal Treasurer Geithner, protesting the U.S. government’s unjustifiable obstruction of the company’s investment in wind power in Oregon.

CFIUS is composed of the top leaders of 9 ministries. They are from the Ministry of Finance, the Ministry of Justice, the Department of Homeland Security, the Ministry of Commerce, the Ministry of National Defense, the State Council (actually the Ministry of Foreign Affairs), the Department of Energy, the Office of the U.S. Trade Representative, and the Office of Science and Technology Policy. Served as chairman. The committee is responsible for hearing foreign investment projects in the United States. If it is found that the project threatens the national security interests of the United States, it may require the investor to make appropriate adjustments to the investment project, or suggest that the president suspend or prohibit the transaction.

Ralls, like many US companies, chose Delaware as its place of registration. Headquartered in Georgia, its shareholders are two natural persons: Sany Group Vice President, Chief Financial Officer Duan Dawei and Sany Group Vice President, Sanyue Electric Co., Ltd. General Manager Wu Jialiang.

Around March this year, Ralls acquired four wind farms in Oregon. The total generating capacity was 40 million watts. The total purchase price was not disclosed, but according to the current market conditions, it is estimated to be between 10 million and 20 million US dollars. As an affiliate of Sany, Ralls acquired the wind power project mainly for the installation of wind turbines produced by Sany Electric.

I am afraid that it is not aware that several small wind farms will actually threaten US national security. Ralls did not report to CFIUS before its acquisition.

However, just after the acquisition was completed, the U.S. Navy expressed concern about the location of one of the “lowland wind farms” and hoped that the wind farm would be relocated to reduce the interference of wind turbines on low altitude training of local military aircraft. Ralls also actively cooperated and agreed to move the wind farm despite the high cost of relocation. The Navy appreciated this.

Undoubtedly inspired by this, Ralls, as the purchaser and the transferor, informed CFIUS on June 28, 2012 of the acquisition of the wind farm, including the above background.

On July 25th, within the 30-day reply period stipulated by law, CFIUS issued an order to require buyers and sellers to immediately stop the construction and operation of the acquired wind farm, withdraw all accumulated storage materials within 5 days, and shall not enter these sites (only Allows U.S. citizens to enter the market to move out of supplies). The order involved all four wind farms that were acquired, not just one of the low-level wind farms that the Navy was concerned about.

On the second day after receiving the order, Ralls informed CFIUS that they would transfer the acquired wind farm. CFIUS issued a further revised order on August 2 to expand the scope of the previous ban. Sany Group (including Trinity Electric and Sany Heavy Industry) is also listed as a ban. It not only requires that all materials coming into the market after the Ralls purchase be acquired. Withdrawal, it is also forbidden to sell any of Sany Group's products to third parties for installation in these wind farms. The order also prohibits the transfer of these wind farms to third parties (whether or not controlled by foreign interests) without the approval of CFIUS.

According to the original arrangement, these wind farms must be completed by the end of this year, and project developers can enjoy the federal $25 million tax incentives used to reward renewable energy investments. The heavy ban on CFIUS has made the completion of the year a complete blow.

Ralls then sued CFIUS to federal court.

Previously faced with the CFIUS disapproval, Chinese companies (including CNOOC, Huawei, and West Color, etc.) have chosen to forbade concessions even after the merger was forced by CFIUS to withdraw, such as Huawei’s acquisition of 3Leaf and Far Eastern Goldman, the former CEO of Huachen. The source group’s acquisition of the Nevada Gold Mine has also only followed the order of the Chinese and has not snagged in the court. Although Ralls, an associated company of Sany Group, was also forced into desperation this time, it set a precedent for the Chinese to follow suit with CFIUS.

Although the United States adopts the separation of executive, judicial, and legislative powers, the president (that is, the administrative side) enjoys a degree of autonomy without judicial supervision on national security issues. Ralls wants to implicate an administrative department in cases involving national security. Judging from the lawsuits, the plaintiff’s lawyers are taking great pains. There are three reasons for them to sue CFIUS: to get the legal authorization, to act arbitrarily, and to deprive the constitution.

According to the law, CFIUS can only terminate foreign-related mergers and acquisitions to the President and cannot terminate its own orders. After the President issued the order, it was a major event and it became the "recorded case" in the two countries' economic and trade contacts. Therefore, CFIUS will generally suggest that the applicant automatically withdraws the application before the President is disapproved.

So far, the U.S. president has taken the order to terminate China’s mergers and acquisitions only once. That is, in 1990 Bush had ordered China to withdraw from an aircraft parts company. When I applied for a CFIUS application with a Chinese company, I met the Deputy Minister of Finance of the Federal Republic personally and strongly suggested that the applicant withdrew his application. Therefore, when the U.S. government negotiates with the Chinese side, it can be innocently claimed that there are only a handful of mergers and acquisitions that are actually rejected in the United States.

In the Ralls case, CFIUS simply dispensed with the procedure proposed to the president and he issued an order to terminate the transaction. Moreover, CFIUS's scope of review was originally directed only to the acquisition of foreigners rather than the sale of foreign products in the United States. This order must not sell Sany's products to others, it is beyond legal authorization.

The original navy only expressed concern about a wind farm. After Ralls expressed his willingness to relocate, nothing would happen. However, CFIUS has been chasing after all 4 wind farms have been listed as prohibited, and China has to withdraw all materials within 5 days. It will not allow wind farms and power generation equipment to be sold. CFIUS gave a general reason for "national security" without any further explanation. Therefore, it was dismissed as "arbitrary".

As for how the court will decide, we will wait and see. The court can ask the government to review and explain the reasons. The government can go through the retrial procedure in a pseudo-mode and eventually reach the same conclusion. Then the “state secret” is used as a reason to threaten the court not to ask questions.

For other Chinese companies preparing to invest in the United States, this case can have at least two implications.

First, there has been misinformation in the past. It seems that private enterprises can pass CFIUS more than state-owned enterprises. As a private enterprise, Sany Group did not encounter better treatment than state-owned enterprises such as CNOOC.

Secondly, CFIUS is notified after the merger and acquisition. Once it is found to threaten the national security, it will cause great passiveness and huge losses. It now appears that whether an acquisition involves national security cannot be pre-determined. Western and Eastern Golden Resources invested in gold mines in Nevada, and the acquisition of wind farms in Oregon this March 31 has been hampered by the discovery of nearby military facilities. The business of an acquisition target, even if it is completely unrelated to the military, nobody knows whether there are any sensitive facilities or uses within a radius of tens of kilometers of the company and underground. In the case of CFIUS, which discriminated against protectionism in the name of "national security", we must still be careful.

The major Chinese mergers and acquisitions pending CFIUS approval are CNOOC's $15.1 billion acquisition of Canadian oil company Nexen. If Sany's wind power case is a warning, the prospects for the CNOOC case are not optimistic.