On September 6, 2013, the Committee on Foreign Investment in the United States (CFIUS) closed its investigation of the $7.1 billion sale of Smithfield Foods Inc., America's largest hog producer, to Shuanghui International Holdings Ltd., a Chinese company. Although most observers did not anticipate that CFIUS would block an "ag" transaction based on national security risks, the fact that it elected to investigate the Smithfield/Shuanghui filing in the first place evidences the uncertain and potentially expansive scope of national security considerations.
What is CFIUS?
CFIUS is empowered to review acquisitions of U.S. businesses by foreign persons ("covered transactions") to evaluate whether foreign control of such U.S. businesses will have an adverse impact on U.S. national security. Although CFIUS filings are voluntary, they are increasingly common. If a covered transaction is not cleared with CFIUS, the committee has the power to unwind the transaction or impose mitigation measures or other limitations on a foreign acquirer if it finds the transaction would have an adverse impact on U.S. national security. This was the case in CFIUS's recent sua sponte decision to investigate and impose mitigation measures in the Ralls Corporation transaction.
How Does CFIUS Impact Transaction Timing?
CFIUS filings trigger an initial 30-day review period in which CFIUS decides whether to commence an investigation. Once CFIUS decides to move forward, it has 45 days to complete its investigation. As with other regulatory filings, once an investigation is commenced the timing for clearance as a practical matter is uncertain (notwithstanding the stated 45-day investigation period). Furthermore, the 30-day review period does not begin until CFIUS is satisfied that the filing is complete.
It is common practice, before proceeding with an official filing, to "pre-file" with CFIUS to determine whether a filing will be deemed complete. As a result, transaction parties can typically anticipate a 40- to 45-day period after the "pre-filing" for the expiration of the initial 30-day review period. In the absence of national security risks (or in some cases, very high profile transactions), a transaction will be cleared after the initial 30-day review period.
What Does Smithfield Mean Going Forward?
The Smithfield/Shuanghui transaction evidences the potentially expansive scope of national security concerns and the challenges of predicting whether a transaction is likely to raise national security risks. Given the high profile of the Smithfield/Shuanghui transaction, it was not surprising that CFIUS elected to commence an investigation (even though the CEO of Smithfield indicated they were filing "out of an abundance of caution"), but it is noteworthy that CFIUS "stuck to its knitting" in clearing the transaction consistent with its limited mandate to review transactions for an adverse impact on U.S. national security.
What Does This Mean For You?
Transaction parties should analyze, early in the transaction process, whether to make a voluntary filing with CFIUS regardless of the transaction size. A decision whether to file involves the parties' analysis of potential U.S. national security concerns raised by the transaction, the deal dynamics (including anticipated closing date), the relative leverage of the parties, the visibility of the transaction, and the risk tolerance of the transaction parties.
In many transactions the post-closing risk of not doing a CFIUS filing falls largely on the buyer. As a result we are seeing an increased tendency of buyers to insist on a CFIUS filing, "out of an abundance of caution," even in circumstances where there is not an obvious U.S. national security concern. Furthermore, in many instances, it is not in a foreign investor's interest to raise the potential for a CFIUS filing until late in the transaction. Sellers should be aware of both the prospects of this and its implications on timing and certainty of closing if a filing is required by the investor.