Shuanghui-Smithfield tests US approach to private ChinaCos

Author: Ashley Lee | Published: 20 Jun 2013
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  • Shuanghui's acquisition of Smithfield has prompted concerns in the US related to ChinaCo agricultural investments.
  • US regulators must distinguish between Chinese state-owned and private companies: Shuanghui's shareholders include Temasek and Goldman Sachs, and it is not state-owned;
  • To complete these acquisitions smoothly, ChinaCos must focus on concerns at the local, state and federal levels.

Shuanghui's acquisition of US pork producer Smithfield Foods is the latest deal between the two countries to provoke political furor - this time in the agriculture sector.

It could test how well target jurisdictions distinguish between private and Chinese state-owned enterprises (SOEs) in permitting inbound investment. It could have an important role in signaling whether the US is open for privately owned ChinaCos, and recognises that there are successful private enterprises in China.

The Shuanghui-Smithfield deal follows Huawei's investment activity in the US, which raised national concerns regarding military links. But the ownership in Shuanghui is different from, said Jones Day partner Carson Wen.

Instead, 50% of Shuanghui's shares are held by international investors such as Temasek and Goldman Sachs, said Wen who is also the third-term Deputy of the National People's Congress.

"Shuanghui doesn't complete its acquisition in the US despite having a seemingly transparent shareholding that shouldn't give rise to suspicions and avoidance of natural resources, it will impact Chinese enthusiasm for investments in the US," he said.

ChinaCos have been wary of US acquisitions since Ralls's purchase of three wind farms earlier this year was blocked by Committee on Foreign Investment in the United States (Cfius).

The involvement of ChinaCos - showcasing China's rising economic power - often adds an extra level of complexity.

Food safety concerns

Foreign investment into agriculture can be particularly sensitive as it involves land purchases, and Chinese investments in Australia have prompted similar concerns.

The purchase of these assets by Chinese companies is especially off-putting because the country has encountered so many high-profile food safety scandals in the last few years.

For example, US reactions to the deal are thought likely to be affected by the unappetising image of 16,000 pig corpses floating down the Huangpu River, a source for Shanghai's tap water supply.

In other incidents, countries around the world have seen their canned baby formula supplies depleted following the discovery of melamine-tainted milk in 2008, killing at least six babies. One of the producers of the contaminated milk, Mengniu Dairy, announced on Tuesday that it would purchase milk powder producer Yashili International in an attempt to restore its reputation.

Wen, specifically discussing the Shuanghui-Smithfield deal, dismissed fears related to ChinaCo food standards in relation to the acquisition.

Smithfield is based in the US and has US management, he said. Shuanghui wants to invest in overseas food supplies to bring in higher quality, safer food.

"The concern that Chinese food safety concerns could, as a result of this deal, be introduced in the US is a bit farfetched," he said.

US investment regulations

The US foreign investment regulator Cfius can investigate a transaction's impact on national security.

After receiving a formal notice of a proposed transaction, it has 30 days to determine whether it will carry out a full investigation. It can require changes to transactions, or, if it believes a deal should be blocked, can refer it to the US president.

Following Cfius's negative decision on Ralls's wind farm investment in 2012, US lawyers told IFLR that the committee has become more aggressive in the past 12 month. They also said that it's been increasingly difficult to predict which deals would be blocked for national security reasons.

Although some concerns can be managed on a deal-by-deal basis, the Chinese and US governments must open a dialogue on foreign investment in both jurisdictions.

Wen recommended that, on the transaction level, companies discuss how deals are structured and whether certain issues are sensitive.

For example, he said, if there are facilities close to military bases, the parties should have the sense to carve those facilities out of a pending transaction.

But, to start with, government-to-government interactions are key, he said, such as recent summits between the Chinese President Xi Jinping and the US President Barack Obama.

They should consider whether, going forward, there should be some sort of state-to-state treaty regarding investments by American companies in China and Chinese companies in the US.

A key concern is reciprocity. US companies are restricted from investing in important sectors in China due to state security measures, leaving them out of key growth areas such as the mapping business.

"Investment approval decisions in China are not very transparent, as are Cfius decisions," said Wen. "The two countries may work out a level of reciprocity that will be acceptable."

Think locally

Aside from the federal foreign investment review, US state and local issues are a concern. For example, several US states have laws that restrict foreign businesses and governments from owning US land utilised for livestock or crop production. These may hinder the Shuanghui deal.

It’s a similar situation in Australia.

While the federal-level approvals for foreign investments are the subject of much discussion, Sullivan & Cromwell's Robert Chu said that permits, licences and other requirements at the state and local level can also impact deal completion and ongoing operations in significant ways.

This is particularly true in Australia and the US, which have federal systems in which states wield significant power.

"Let's be frank: foreign investment is political," said the Melbourne-based partner. "Regulatory approvals and political engagement go hand-in-hand."

Unless both aspects are anticipated and addressed, he warned, one risks losing a step to a reluctant target or a competing bidder.

Further, it is beneficial for an acquirer to show interest in the targetco's community in the course of an acquisition.

The investor must pay close attention to local circumstances - needs, interests, perceptions and aspirations, said Chu.

"I can't emphasise that enough," he said. "After all, developing a nuanced understanding of these circumstances is part of making, and showing, the sort of commitment that's typically asked of a foreign investor - or for that matter, any other investor."

See also

Australia mirrors China/US FDI concerns

US lawsuit reveals Cfius review defects, ChinaCo fears

How Cnooc's bid was structured for foreign investment approval

Cfius review needs greater transparency