Fifth Circuit Holds That CFIUS Does Not Preempt Texas State Law Restricting Foreign Investment
The Fifth Circuit’s recent decision in GH America Energy v. Fohn serves as a reminder that investors and businesses should carefully evaluate both federal and state restrictions when considering an investment involving a foreign-owned party. The Texas lawsuit addressed the intersection of state laws governing foreign investment and the federal statutory and regulatory framework governing the Committee on Foreign Investment in the United States (CFIUS). The Fifth Circuit affirmed the dismissal of the plaintiff’s preemption claims, holding that the CFIUS regime neither conflicts with nor field preempts a Texas statute barring certain foreign-owned companies from entering agreements that provide access to or control of critical infrastructure within the state.
The October 16 decision aligns the Fifth Circuit with the Eleventh Circuit, which recently expressed skepticism toward preemption challenges to Florida’s restrictions on land acquisitions by parties affiliated with China. Together, these decisions indicate a willingness to allow certain state regulation of foreign persons on national security grounds. They also underscore the need to assess state-level restrictions on foreign investment, even after CFIUS review and mitigation.
At issue in GH America v. Fohn was Texas’ Lone Star Infrastructure Protection Act (LSIPA), which bars governmental entities and critical infrastructure businesses from entering certain agreements with companies owned, controlled, or headquartered in designated countries, including China, if the agreement would provide access to or control of critical infrastructure. GH America Energy LLC (GHAE), a Texas company majority-owned by a Chinese parent company, sought clearance from a Texas electric grid regulator, the Electric Reliability Council of Texas, Inc. (ERCOT), to connect its solar energy site to Texas’ electric grid. Although GHAE was subject to a CFIUS mitigation agreement with respect to national security risks, ERCOT denied grid access pursuant to LSIPA because of GHAE’s Chinese ownership, and GHAE sued, alleging, among other claims, that the CFIUS regime preempts Texas’ LSIPA.
Ultimately, the Fifth Circuit held that the federal CFIUS regime does not preempt LSIPA. The court concluded that CFIUS addresses limited categories of “covered transactions,” outlined in 50 U.S.C. § 4565(a)(4), and does not establish an all-encompassing framework that occupies the entire field of transactions involving foreign parties. As the court explained, “Congress conferred authority to CFIUS over a specific, narrow class of transactions – not every transaction that might involve a foreign party.”
The court highlighted the enumerated list of “covered transactions” subject to CFIUS review. These include: mergers and acquisitions that could result in foreign control of a U.S. business; certain purchases or leases of real estate by foreign persons near sensitive military areas; and certain foreign investment in critical infrastructure or sensitive technologies. The court viewed CFIUS’s “corporate control” categories as distinct from the interconnection agreement at issue. The court also reasoned that, even assuming LSIPA posed some obstacle to the federal regime, the two laws did not conflict because both advanced national security objectives and each “leaves room for the other to operate.”
Notably, the court also emphasized Texas’ strong interest in regulating its unique, wholly intrastate power grid. That feature limited the decision’s reach, however, as the court did not address whether a state law preventing foreign-controlled entities from accessing interstate critical infrastructure would be preempted. To date, no federal appellate court has answered that question.
Although the case arose from a critical infrastructure agreement rather than a conventional investment transaction, the decision has broader practical implications for transactions involving foreign-owned businesses. In light of this decision and the Eleventh Circuit’s decision, investors and businesses should evaluate applicable state restrictions alongside CFIUS requirements and account for state laws that may independently restrict investments, land ownership, or business contracts with foreign persons or entities.
Wiley’s CFIUS and National Security practices draw on senior government-level experience running the CFIUS process at Treasury, the White House, and the U.S. Department of Commerce along with extensive representations of domestic and international companies in complex transactions involving nearly every industry sector subject to CFIUS review. Should you have any questions, please contact any of the authors listed on this alert.
Leah Porter, a Law Clerk at Wiley Rein LLP, contributed to this alert.
