July 23, 2024
Investment

Chinese Billionaire Exploits Fight Between States and Federal Government Over Foreign Investment


A U.S. company controlled by Chinese billionaire Sun Guangxin is suing Texas’ state electric grid operator, alleging that a Texas state law blocking foreign investment on national security grounds is unconstitutional.

GH America Energy, the Texas-incorporated subsidiary of Sun’s Xinjiang Guanghui Industry Investment Group, brought its lawsuit last month in the U.S. District Court for the Western District of Texas. The defendants include the Electric Reliability Council of Texas, which operates Texas’ independent electric grid, and several of its directors and board members.

The lawsuit comes after ERCOT blocked GH America’s proposed Blue Hills Wind project in 2022 under the authority of the Lone Star Infrastructure Protection Act, a state law passed in June 2021 that prohibits companies controlled by Chinese, North Korean, Iranian and Russian nationals from gaining access to Texas’ electric grid and other pieces of “critical infrastructure,” such as telecom networks and waste treatment systems.

“Foreign relations, the power to deal with national security threats posed by foreign investments that affect critical infrastructure and military installations, and the power to regulate foreign commerce, are the domain of the federal government,” GH America alleges in a 21-page complaint. Before ERCOT blocked Sun’s wind farm, the project had been approved on national security grounds by the Committee on Foreign Investment in the United States (CFIUS), an agency within the Treasury Department and empowered by Congress, and by the Department of Defense. GH America claims Texas’ law violates the U.S. constitution’s supremacy clause, which gives federal law priority over conflicting state laws, its commerce clause (which gives Congress the power to regulate foreign commerce) and under the 14th amendment’s equal protection clause.

ERCOT declined to comment in an email to Forbes. The U.S. judge overseeing the case ordered ERCOT to file its response by August 12.

GH America’s lawsuit is the latest flashpoint in a simmering jurisdictional conflict between states and the federal government following a flurry of state bans and restrictions on foreign investment in their states. In November, U.S. District Judge Donald Molloy blocked a TikoTok ban in Montana (signed by Montana’s governor in May 2023), writing that the state law was “most likely preempted by federal law.” And in February, The Eleventh Circuit Court of Appeals issued a preliminary injunction against a Florida law (also enacted in May 2023) which prohibits Chinese nationals from purchasing real estate, also on the grounds of federal preemption.

“What we’re seeing is states taking actions through regulation [and] legislation that are purporting to do something in the national security field, a field that the federal government is typically in charge of more than states,” says Kristen Eichensehr, professor at the University of Virginia School of Law who has written about CFIUS and federal preemption. GH America’s lawsuit, as well as the challenges to Montana’s TikTok ban and the Florida law, are “pressing on the question of how much can states do and how much are courts going to allow states to act in an area that’s traditionally quite federal.”

Sun Guangxin, a former People’s Liberation Army general, made his estimated $2.2 billion fortune in energy equipment, auto services and real estate in China’s Xinjiang province. Between 2016 and 2018, he purchased over 130,000 acres of land in Texas’ western Val Verde county, home to Laughlin Air Force Base, and then announced plans to erect dozens of 700-foot-high wind turbines. The local backlash quickly drew the attention of state lawmakers, culminating in the passage of the Lone Star Infrastructure Act.

Texas’ law presaged a crackdown by states and localities on Chinese land ownership and investment. Last year city officials in Grand Forks, North Dakota vetoed a proposed $700 million corn mill development by Chinese-owned Fufeng Group, after the U.S. Air Force, which has a base 12 miles away, expressed its opposition to the project on national security grounds; CFIUS had previously ruled that it did not have the authority to block the plan. In 2023 alone, 15 U.S. states enacted laws banning or partially banning foreign nationals and companies from acquiring land, according to law firm Blank Rome.

Now CFIUS is taking steps to shore up its own authority. On Monday, the Treasury Department issued a proposed rule that expands CFIUS’ coverage of real estate transactions near military installations. The rule “would add over 50 military installations, across 30 states, to the existing list of installations around which CFIUS has jurisdiction, including over land purchases.”

The idea that Sun could successfully overturn Texas law may seem far-fetched, but his company’s federal preemption argument “is pretty strong,” says Timothy Wheeler, an attorney at Mayer Brown. GH America has demonstrated “continual oversight right now by the federal government and what looks like fairly comprehensive regulation from a national security perspective.”

The lawsuit is likely to wind up in the Fifth Circuit Court of Appeals, says Christopher Swift, a partner at law firm Foley & Lardner. “There’s a reasonable possibility that the Fifth and Eleventh Circuit Courts will reach different conclusions about federal preemption,” adds Swift, referencing the Florida case stuck in the Eleventh Circuit. “That sets up an issue for the Supreme Court at some point. It’s a real possibility here.”



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