- Shuanghui's acquisition of Smithfield has
prompted concerns in the US related to ChinaCo agricultural
- US regulators must distinguish between Chinese
state-owned and private companies: Shuanghui's shareholders
include Temasek and Goldman Sachs, and it is not
- To complete these acquisitions smoothly, ChinaCos
must focus on concerns at the local, state and federal
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
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
"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
Food safety concerns
Foreign investment into agriculture can be
particularly sensitive as it involves land purchases, and
Chinese investments in Australia have prompted similar
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
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
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.
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
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
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
"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
Further, it is beneficial for an acquirer to show
interest in the targetco's community in the course of an
The investor must pay close attention to local
circumstances - needs, interests, perceptions and aspirations,
"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
Australia mirrors China/US FDI concerns
US lawsuit reveals Cfius review defects,
How Cnooc's bid was structured for
foreign investment approval
Cfius review needs greater