CFIUS Lacks Jurisdiction In Chines Land Acquisition

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CFIUS Determines it Lacks Jurisdiction to Review Chinese Land Acquisition

by: International Trade Practice at Squire Patton Boggs of Squire Patton Boggs (US) LLP - The Trade Practitioner

Monday, June 26, 2023

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In 2022, Fufeng USA, a subsidiary of Chinese company Fufeng Group, purchased 370 acres near Grand Forks, North Dakota, with the intention of developing the land to build a plant for wet corn milling and biofermentation,^[1] prompting opposition from federal and state politicians.^[2]North Dakota Senators, North Dakota’s Governor, and Senator Marco Rubio urged the Committee on Foreign Investment in the United States (CFIUS) to review the acquisition as a potential national security risk for being located within 12 miles from the Grand Forks Air Force Base, which is home to military drone technology and a space networking center.^[3] Following CFIUS’ review of Fufeng’s notice submission, CFIUS determined that it lacked jurisdiction over the transaction. This post summarizes the public information about that CFIUS case and provides observations about the responses by North Dakota and CFIUS in the wake of Fufeng’s proposed investment.

CFIUS Review and Determination

1. Procedural History

In conjunction with rising public opposition to its land acquisition, public reports show that Fufeng USA submitted a declaration to CFIUS on July 27, 2022.^[4] North Dakota local news outlet Valley News Live obtained a copy of the CFIUS closing letter to that declaration filing, which stated that CFIUS determined on August 31, 2022 that it lacked sufficient information to assess the transaction and requested that the parties file a full notice.^[5](CFIUS has the option under the regulations to request a full notice filing at the conclusion of the abbreviated 30-day review of a declaration filing.) Based on the CFIUS closing letter to that subsequent notice filing, which was likewise obtained and published by Valley News Live, Fufeng USA submitted a notice on October 17, 2022, and CFIUS subsequently concluded that it lacked jurisdiction to review the transaction in December 2022.^[6]

2. Why CFIUS did not Review under its Part 802 Covered Real Estate Authority

According the CFIUS Letter released by Fufeng to Valley News Live, Fufeng submitted its notice pursuant to 31 C.F.R. Part 800 (“Part 800”), which pertains to covered transaction involving existing U.S. businesses.^[7] The closing letter made no reference to the transaction being reviewed as a “covered real estate transaction” under 31 C.F.R. Part 802 (“Part 802”).^[8] A reason for this could be that, at the time the case was before CFIUS, the land acquisition by Fufeng USA was not within any of the requisite proximity thresholds and, thus, did not fall within Part 802 authority. Under Part 802, CFIUS has authority over certain real estate transactions involving property in specific maritime ports or airports, or within defined proximity thresholds to identified “military installations” listed in Appendix A to Part 802. Grand Forks Air Force Base was not included in Appendix A at that time, nor was the acquired land within the defined proximity of any other listed military installation. Accordingly, the only way for CFIUS to extend authority would be under its Part 800 authority relating to certain acquisitions of U.S. businesses.

3. CFIUS Determined It Lacked Jurisdiction Under its Part 800 Covered Transaction Authority

CFIUS’ closing letter to Fufeng stated that “CFIUS has concluded that the Transaction is not a covered transaction and therefore CFIUS does not have jurisdiction under 31 C.F.R. Part 800.”^[9] Part 800 provides CFIUS with authority to review covered control transactions (i.e., those transactions that could result in control of a U.S. business by a foreign person) or covered investment transactions (i.e., certain non-controlling investments directly or indirectly by a foreign person in U.S. businesses involved with critical technology, critical infrastructure, or the collection and maintaining of US citizen personal data). Greenfield investments, however, inherently do not involve an existing U.S. business. As such, greenfield investments would be outside of CFIUS’ jurisdiction under Part 800. Although the justification underlying CFIUS’ determination regarding Fufeng’s acquisition is not publicly available, CFIUS might have determined that it lacked authority under Part 800 because Fufeng’s purchase of undeveloped land was not an acquisition of a U.S. business, but more likely a greenfield investment.

State and Federal Response

Under state and federal pressure, the City of Grand Forks, which initially approved Fufeng’s development of the corn milling facility, “officially decided to terminate the development agreement between the city and Fufeng USA Inc.” on April 20, 2023.^[10] This decision was largely impacted by the U.S. Air Force’s determination that “the proposed project presents a significant threat to national security with both near- and long-term risks of significant impacts to our operations in the area.”^[11] As of today, the land appears to still be under the ownership of Fufeng USA.^[12]

CFIUS’ determination that it lacked authority drew sharp criticism from state and federal politicians. North Dakota Senator Cramer purported that CFIUS may have determined the jurisdictional question too narrowly and indicated that the determination may prompt federal legislative action.^[13] Senator Marco Rubio (R-Florida) concurred, issuing a statement that permitting the transaction was “dangerous and dumb.”^[14] In response to the determination, the Governor of South Dakota announced plans for “legislation potentially limiting foreign purchases of agricultural land” by investigating “proposed purchases of ag land by foreign interests and recommend either approval or denial to the Governor.”^[15]

On April 29, 2023, North Dakota Governor Doug Burgum signed Senate Bill No. 2371 into law, which prohibits local development and ownership of real property by foreign adversaries and related entities, effective August 1, 2023. Notably, these entities include businesses with a principal executive offices located in China, as well as businesses with a controlling Chinese interest or certain non-controlling Chinese interest.

On May 5, 2023, the U.S. Department of Treasury, the agency tasked with administering CFIUS, also took steps to expand its authority to cover more real property acquisitions. It published a Proposed Rule that would expand CFIUS covered real estate transaction authority over real restate located with 99 miles of the Grand Forks Air Force Base and seven other facilities located in Arizona, California, Iowa, and North Dakota. See a summary of that Proposed Rule and related implications at this TradePractition.com blog post.

FOOTNOTES

[1] See, Alix Larsen, CFIUS requesting Fufeng USA give more information on corn mill development, Valley News Live (Sep. 1, 2022), https://www.valleynewslive.com/2022/09/01/cfius-requesting-fufeng-usa-give-more-information-corn-mill-development/.

[2] See Letter from Gov. Doug Burgum to Secretaries Janet Yellen and Lloyd Austin (Jul. 25, 2022), https://www.governor.nd.gov/sites/www/files/documents/Gov.%20Burgum%20letter%20urging%20expedited%20CFIUS%20review%2007.25.2022.pdf; Letter from Senators Marco rubio, John Hoeven, and Kevin Cramer to Secretaries Janet Yellen and Lloyd Austin (Jul. 14, 2022), https://senatorkevincramer.app.box.com/s/2462nafbszk2u6yosy77chz9rpojlwtl.

[3] See id; Eamon Javers, Chinese Company’s Purchase of North Dakota Farmland Raises National Security Concerns in Washington, CNBC, July 1, 2022, https://www.cnbc.com/2022/07/01/chinese-purchase-of-north-dakota-farmland-raises-national-security-concerns-in-washington.html.

[4] See, Alix Larsen, CFIUS requesting Fufeng USA give more information on corn mill development (Sep. 1, 2022), https://www.valleynewslive.com/2022/09/01/cfius-requesting-fufeng-usa-give-more-information-corn-mill-development/.

[5] See id.

[6] See Stacie Van Dyke, Fufeng moving forward with corn milling plant in Grand Forks (Dec. 13, 2022), https://www.valleynewslive.com/2022/12/14/fufeng-moving-forward-with-corn-milling-plant-grand-forks/.

[7] See id.

[8] Id.

[9] See id.

[10] Bobby Falat, Grand Forks officially terminates Fufeng Deal (Apr. 20, 2023), https://www.valleynewslive.com/2023/04/20/grand-forks-officially-terminates-fufeng-deal/.

[11] News Release, Senator John Hoeven, Hoeven, Cramer: Air Force Provides Official Position on Fufeng Project in Grand Forks, (Jan. 31, 2023), https://www.hoeven.senate.gov/news/news-releases/hoeven-cramer-air-force-provides-official-position-on-fufeng-project-in-grand-forks.