Subscribe to our newsletter

     By signing up, you agree to our Terms Of Use.


    • About Us
    • |
    • Contribute
    • |
    • Contact Us
    • |
    • Sitemap

    How a Chinese Company Took on the U.S. Constitution

    Construction equipment-maker Sany’s landmark legal victory shows China’s businesses the benefits of following legal procedure abroad.

    Sany Group Co. Ltd. is the largest construction machinery manufacturing company in China. Based in Changsha, the capital city of central China’s Hunan province, Sany is a privately owned company.

    The group has enjoyed huge success in the last 10 years during China’s construction boom; in their peak year of 2011, the gross sale revenue reaches 80 billion yuan (about $12 billion). However, since 2012 their sales have been decreasing. Consequently, they have begun to diversify their business into other areas, including clean energy.

    Sany has also been trying to diversify geographically by investing in Africa, India, Europe, and the United States. In early 2012, Sany purchased a wind farm project, Butter Creek, in Oregon. The seller was a Greek company, and for $6 million, it seemed like a good investment.

    However, in June 2012, the U.S. Department of Defense (DoD) asked Sany to relocate the project because of its proximity to a Navy military base. Although it seemed an odd request since the project had never encountered legal issues like this under the previous company, Sany decided to comply and wrote to the DoD asking for a relocation reimbursement.

    The group then received a notice from the Committee on Foreign Investment in the United States (CFIUS) to attend a hearing on the next month on July 11 about the potential threat of the project to national security. The hearing went smoothly and it seemed that the problem would be resolved.

    But on July 25, Sany received a notification from CFIUS that the project posed a national security threat. No reason was provided. On the advice of their lawyers, Sany tried to sell off its wind farms to domestic investors, who are not regulated by CFIUS.

    The night before a transaction was finalized with a domestic U.S. company, CFIUS issued a second notice forbidding Sany to sell the project. The notice also directed the Chinese group to dismantle all of their wind turbines at the project site, and it had to be done by U.S.-born American citizens.

    This second order dealt a severe blow to Sany. Not only did it obliterate all the investment the company had put into the project, but if the investigation confirmed that the group posed a national security threat, CFIUS would have the right to investigate all Sany investments in the U.S. The Chinese entity has several other dealings in the country, all of which are much larger than the wind farms development.

    Sany’s first reaction was try to resolve the issue using connections. They contacted high-profile figures, but nothing could be worked out to change the situation. To make things worse, president Obama approved the prohibition on Sept. 28, 2012.

    CFIUS is a powerful agency whose work is often shrouded in mystery. According to Section 721 of the Defense Production Act of 1950, CFIUS does not need to provide justification for its investigation. From 1988 to 2011, CFIUS received 2,266 case reports but investigated only 161 of them.

    Out of these 161 cases, 34 prohibitions were submitted to the U.S. president for approval, and only two were approved — one by George H. W. Bush in 1990 on the defense company China National Aero-Technology Import & Export Corporation, and one on the Sany Group. Interestingly, both prohibitions have been on Chinese companies.

    Sany was backed into a corner. They had only two options left: first, they could obey the prohibition, effectively admitting guilt and hurting all future business dealings in the U.S.; second, they could sue CFIUS and the president of the U.S.

    They opted for the second choice and charged the president with violating the Fifth Amendment of the U.S. Constitution, which gives defendants the right to due process, and which Sany attested they were denied. They also sued CFIUS for discrimination, since there were seven other foreign corporations operating in the same area as Sany that hadn’t been prohibited.

    The lawsuit didn’t go smoothly. In October 2013, the court ruled against the plaintiff. Sany appealed and in November 2014, the court ruled that the presidential order violated the constitution. One year later, the Chinese group and the U.S. government reached a comprehensive settlement.

    There were two noteworthy points in the settlement. First, Sany was allowed to sell the wind farms project to a third party, effectively settling the company back where it started; second, other projects by the group in the U.S. were decided not to pose any threats to national security.

    Although the case has finished, its implications are historic. CFIUS has never been challenged since its establishment in 1975. This case helped set up a legal precedent, and the way foreign corporations are treated in the U.S. is changing.

    But what lessons can be drawn from all of this? The most important is that overseas Chinese firms must follow legal procedure and not rely on connections or other methods to resolve tenuous issues 

    Liang Wengen, the chairman of Sany’s chairman of the board of directors, was bitter before submitting the case to the court. He said that we will do our best to fight the case. It will tell us what American democracy really looks like.” But in the end, after Sany had received due process, the company legal representative commented: “It may be our victory, but it proves the justice of your legal system and the supremacy of your constitution.”

    (Header image: Sany’s excavators at the 4th China-Eurasia Expo, Urumqi, Xinjiang Uyghur Autonomous Region, Sept. 1, 2014. Zhang Yu/VCG)