The uncertain macroeconomic conditions of recent years have created a cautious investment climate globally. In addition to that broader global challenge, transactions involving non-U.S. buyers of U.S. businesses face regulatory review by the Committee on Foreign Investment in the United States (CFIUS). CFIUS evaluates takeovers of U.S. businesses by parties outside the United States for potential national security concerns.
There are three general phases of review by CFIUS. The initial CFIUS review period lasts for 30 days from the time a potential acquisition transaction is reported. After the 30-day initial review period, CFIUS can extend its investigation for another 45 days. Finally, if CFIUS rejects a proposed transaction, a third phase of review starts, in which the president has two weeks to confirm or overturn the rejection. For example, in September 2012, CFIUS and President Obama blocked the acquisition of four wind farm companies by Chinese acquirer Ralls Corp. following the closing of the proposed transaction. In that case, CFIUS raised national security concerns because the wind farms were located near a U.S. Navy airbase.
While there is generally no requirement that parties to a cross-border M&A transaction submit notice of such a transaction to CFIUS, such a voluntary submission may be advisable, depending on the acquirer’s jurisdiction and the nature of the acquirer’s assets, since CFIUS or the president may block a transaction that threatens to impair national security at any time during the negotiation process and potentially unwind a transaction post-closing in the interests of national security. In the cautious investment climate following the global financial crisis, incidents of voluntary notification of CFIUS for cross-border M&A transactions have shown an upward trend, as parties seek to avoid the costs of remediating the structure of a late-stage transaction or abandoning such a transaction altogether.
In reviewing possible transactions, CFIUS has commonly focused on military, physical infrastructure and law enforcement issues posed by a non-U.S. ownership of the target business. In 2013, plans by China’s Shuanghui International to acquire Smithfield Foods, a large U.S. meat producer, for $4.7 billion, in what would be the largest takeover of a U.S. company by a Chinese acquirer, was subject to CFIUS review and political scrutiny. The salient issues concerning the federal government in the contemplated Smithfield Foods transaction were food safety and the potential for food-borne pathogens in the national food supply, as well as the proximity of Smithfield Foods facilities to U.S. military bases.
The Smithfield Foods deal was initially announced May 30, 2013. In addition to the initial CFIUS review, the U.S. Senate Committee on Agriculture held hearings regarding the proposed transaction, increasing the political involvement in the transaction process. On July 29, 2013, Smithfield Foods announced that CFIUS would carry out a second-phase 45-day review of the proposed acquisition.
On September 6, 2013, CFIUS granted approval of Shuanghui International’s proposed acquisition of Smithfield Foods. Smithfield Foods held a shareholder meeting on September 24, 2013, at which the shareholders of the company overwhelmingly approved the proposed acquisition. Smithfield Foods and Shuanghui International completed the acquisition on September 26, 2013.
Parties engaging in cross-border M&A transactions must be cognizant of the potential negative outcomes in the CFIUS review process and take appropriate measures to protect their interests. Although it is uncommon for a transaction to be blocked by the issuance of a formal blocking order, parties abandon a number of transactions every year as a result of unfavorable CFIUS reviews. Additionally, CFIUS often issues proposed modifications to the structure of a transaction for parties to implement in order to avoid potential conflicts with national security and a potentially unfavorable CFIUS review.
Given that the CFIUS review process involves the confluence of two sensitive political issues in the United States—national security and foreign investment in U.S. enterprises—foreign acquirers can expect a politicized and often contentious review process that underscores the need for strategic pre-announcement and transaction planning.