On July 15, 2014, the US Court of Appeals for the District of Columbia Circuit held in Ralls Corp. v. Committee on Foreign Investment in the United States that the Committee on Foreign Investment in the United States (CFIUS) and the President of the US violated a foreign buyer's Fifth Amendment due process rights by ordering the unwinding of its transaction without providing the buyer with the unclassified evidence used in reaching its determination or permitting the buyer to rebut the evidence (No. 13–5315, (D.C. Cir. July 15, 2014)).

CFIUS is the committee authorized by law to advise the President on transactions involving acquisitions by foreign persons of US businesses that may raise national security issues. Authority is granted to CFIUS under Section 721 of Title VII of the Defense Production Act of 1950, as amended (the Exon-Florio Amendment), which subjects to review "any merger, acquisition, or takeover ..., by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States" (50 U.S.C. app. § 2170(a)(3)). Parties to a transaction within the purview of CFIUS are not obligated to seek CFIUS clearance before closing, although they can voluntarily seek CFIUS review. Regardless of whether the parties initially seek approval, CFIUS can review any transaction, including completed transactions, on its own initiative, and advise that completed transactions be unwound.

Ralls Corporation, a Delaware corporation owned by two Chinese nationals, acquired four American-owned LLCs organized to develop wind farms in north-central Oregon. The four wind farms were either within or near a restricted airspace and bombing zone maintained by the US Navy. Ralls Corporation did not submit the transaction for CFIUS review before closing, but after the transaction closed, Ralls Corporation gave CFIUS detailed written notice of the deal. CFIUS chose to initiate its own review and eventually submitted a report and recommendation to the President that the transaction be prohibited. On this advice, the President issued an order directing that Ralls Corporation divest itself of its interests in the LLCs and cease operations on the sites. As is common in the CFIUS review process, neither CFIUS nor the President gave Ralls Corporation notice of the evidence relied upon or an opportunity to rebut the evidence.

Ralls Corporation filed suit in the US District Court for the District of Columbia seeking an injunction against the order. Ralls Corporation argued that it was deprived of its property rights in the assets owned by the LLCs in violation of the Fifth Amendment's due process clause. The district court dismissed the claim, ruling that Ralls Corporation did not have a constitutionally protected property interest because it knew the risk of a Presidential Order when it acquired the wind farms and waived the opportunity to voluntarily seek a CFIUS review before closing. The district court additionally held that even if Ralls Corporation had a constitutionally protected property interest, it received due process when CFIUS informed it of the review and offered it an opportunity to present evidence in its favor. (Ralls Corp. v. Committee On Foreign Inv. in the U.S, 926 F.Supp.2d 71 (D.D.C. 2013).) Ralls Corporation appealed the decision.

The court of appeals overturned the district court's decision, finding that Ralls Corporation had been deprived of its constitutionally protected property interest in the LLCs without due process. The court acknowledged that Presidential Orders are not subject to judicial review generally, but noted that Ralls Corporation had not challenged the merits of the Presidential Order itself. Within this limitation, the court held that Presidential Orders are reviewable on procedural grounds if substantial due process rights have been impaired. The court concluded that due process requires at a minimum "that an affected party be informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence."

At the same time, the court of appeals limited its ruling in several key ways. The distinction between litigating the merits of the Presidential Order and the underlying process was necessary for the court to conclude that the case was judicially reviewable, but it also had the effect of immunizing the merits of the Presidential Order from review. In addition, the court held that the due process rights extend only to access to unclassified information, which ultimately may limit the level of transparency that parties can expect from the process. The court also did not rule on whether the President may invoke executive privilege to limit disclosure.

From a substantive point of view, the Ralls decision may have limited impact. The decision could be appealed for full en banc review by the court of appeals or directly to the Supreme Court. In addition, the underlying Presidential Order may not be subject to challenge if the determination was based on classified evidence, which neither CFIUS nor the President would be obligated to provide to Ralls Corporation.

Nevertheless, assuming the decision stands, the holding can be expected to at least increase the transparency of the CFIUS review process by requiring disclosure of non-classified information and offering foreign buyers an opportunity to hear and rebut CFIUS' national security concerns and arguments. For M&A practitioners, the decision may also alter the approach to timing and closing conditions contained in the acquisition agreement. Currently, many practitioners have the custom of conditioning closing on CFIUS approval, when applicable. However, the court of appeals's decision is premised on the idea that Ralls Corporation's constitutionally protected property interests vested precisely because the acquisition was complete. Therefore, if this decision stands, practitioners should consider removing CFIUS closing conditions and allowing the transaction to close. This will allow the foreign buyer to acquire property rights that are protected by the Fifth Amendment's due process clause.