Columbia Law School
Sky Blog
Shuanghui International Holdings Limited (“Shuanghui”) and Smithfield Foods, Inc. (“Smithfield”) announced on Friday that the companies have received notice from the Committee on Foreign Investment in the United States (“CFIUS”) that its national security review of the proposed acquisition by Shuanghui of Smithfield is complete. Although the CFIUS process has concluded, the acquisition, which would be the largest acquisition of a U.S. company by a Chinese investor to date, remains subject to other conditions to closing, including the approval of Smithfield shareholders.
Shuanghui, a Hong Kong-based company that owns a variety of businesses in the food and logistics sectors, including a majority interest in China’s largest meat processor, entered into an agreement in May 2013 to acquire Smithfield, a Virginia-based company and the world’s largest hog producer and pork processor. The parties conditioned the closing of the transaction upon a CFIUS clearance, and submitted their voluntary notice to CFIUS in June 2013.
On July 10, while the CFIUS review of the transaction was underway, the U.S. Senate Committee on Agriculture, Nutrition and Forestry held a hearing at which various concerns about the transaction were raised, including concerns about the security and safety of U.S. food supplies, the potential impact of the transaction on U.S. jobs and food prices, and restrictions on reciprocal investment opportunities into China. In addition to the Senate hearing, a bipartisan group of federal legislators wrote directly to CFIUS to urge a heightened review process of the proposed merger.
The CFIUS review lasted for the full 75 days allowed by statute for CFIUS to complete a review (to be completed within 30 days) and investigation (to be completed (if required) within an additional 45-day period) of a transaction. Although the details of the CFIUS review process, including any discussions with CFIUS, are confidential, notice of the clearance was filed in Smithfield’s Securities and Exchange Commission proxy statement in connection with the upcoming shareholder vote to approve the transaction. It has been reported that CFIUS cleared the transaction without material mitigation measures of the sort that were employed in another recently-cleared Chinese investment, the purchase by CNOOC, a Chinese state-owned petroleum company, of Nexen, a Canada-based petroleum company. In that transaction, CNOOC was reportedly obliged to cede operating control of certain oil exploration and production assets in the U.S. portion of the Gulf of Mexico by CFIUS as a mitigation measure.
As Chinese interest in U.S. investment has risen in recent years, CFIUS reviews of Chinese investments have increased in number. Over the period 2009 – 2011, the last period for which official information is available, CFIUS review of investments involving Chinese firms has risen from four reviews in 2009 to six in 2010 and ten in 2011. During that period, transactions involving investors from China accounted for seven percent of the total number of cases reviewed by CFIUS. Only the United Kingdom, France and Canada accounted for more cases reviewed in the same period.
Several of the cases involving Chinese investment in sectors that raise more obvious national security issues than food processing, such as energy and technology, have received significant press attention in the U.S. and in China, and the national security issues identified by CFIUS in certain of those cases eventually led to investments being significantly restructured, or mitigated, abandoned or unwound.
The Shuanghui transaction, however, joins the list of Chinese investments cleared by CFIUS, including the 2012 acquisition of AMC Entertainment Holdings, Inc., a leading U.S. movie exhibitor, by Dalian Wanda Group Co., Ltd., a Chinese private conglomerate and China’s largest investor in cultural and entertainment activities, and the acquisition of most of bankrupt battery manufacturer A123 Systems, Inc. by a Chinese automotive components manufacturer, the Wanxiang America Corp. (The A123 transaction was cleared despite significant opposition linked to security concerns and U.S. federal funding received by A123.)
Although CFIUS has the authority to scrutinize any foreign investment that could result in foreign control (evaluated functionally) of a business engaged in interstate commerce in the United States under the Exon-Florio Amendment to the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007, the purpose of the review is to determine the effect of the transaction on the national security of the United States. Identifying transactions that CFIUS may view as presenting national security concerns can be more of an art than a science because “national security” is not precisely defined in the relevant statute or regulations. (The law does list certain factors that may be considered, and CFIUS has provided some public guidance about the types of national security considerations that it has reviewed, but those factors and guidance are non-exclusive, general and broad- brush, and there are no published decisions explaining CFIUS’s thinking about particular cases.) The Shuanghui transaction, however, helps to confirm that even when there may be political or other concerns about a transaction, important policy considerations such as reciprocity in foreign investment regimes or other potential obstacles, CFIUS will not raise objections where it does not identify national security issues. With proper planning, consideration of how the transaction may be viewed by CFIUS, anticipation of concerns, disclosure and cooperation, the process can be completed successfully.
The original memo, published by Sullivan & Cromwell on September 10, 2013, is available here.