This post was written by Bethany Brown, Michael J. Lowell, and Leigh T. Hansson.
What does pork have to do with national security? Companies contemplating cross-border investment in the United States should be asking themselves this question in the aftermath of recent action by the Committee on Foreign Investment in the United States (“CFIUS”). Last month, CFIUS completed its review of China’s Shuangui International Holdings Limited’s acquisition of Smithfield Foods. Smithfield, headquartered in Smithfield, Virginia, is the world’s largest pork producer and processor, employing approximately 46,000 people and reporting more than $13 billion in global sales last year. Although CFIUS ultimately cleared the acquisition, the Smithfield review is a cautionary tale for any company involved in investing across United States borders.
CFIUS is a federal interagency committee comprised of the U.S. Departments of Treasury, Justice, Homeland Security, Commerce, Defense, State, and Energy, as well as the Office of the U.S. Trade Representative and the Office of Science & Technology Policy. It is tasked with reviewing the national security implications of transactions that may result in foreign ownership of a U.S. entity. The review process is designed primarily as a voluntary exercise initiated by companies involved in investment transactions. However, CFIUS also has authority to initiate reviews on its own, and may do so even after a deal has been concluded. When it finds that a particular transaction poses a national security risk to the United States, CFIUS is empowered to order mitigation measures or complete divestiture. This means that even months after a deal has concluded, CFIUS has the power to unwind an acquisition.
CFIUS has authority to order mitigation measures when foreign investments raise national security concerns. However, the legislation that created CFIUS does not define “national security,” except to construe the phrase to include issues relating to homeland security and to list factors that CFIUS may consider when conducting reviews. These include, among others, domestic production needed for projected national defense requirements, potential effects on the nation’s capacity to meet the requirements of national security, and long-term projections of domestic requirements for critical resources and materials. From 2009 through 2011, CFIUS reviewed 269 foreign investment transactions. Twenty-six percent of these transactions involved acquisitions by investors from the United Kingdom; investment from Canada and France accounted for an additional 10 percent each, and investment from China accounted for 7 percent of the covered transactions. Of these 269 transactions, CFIUS ordered mitigation measures in 22 cases. These cases where mitigation measures were necessary involved businesses engaged in software development, computer programming, computer and electronic manufacturing, electrical equipment and component manufacturing, aerospace financing, and finance.
Because CFIUS is statutorily prohibited from publicly releasing information about individual reviews, the specific factors that sway its analysis in any given situation are generally unknown. However, the Smithfield review may indicate that CFIUS’ focus is broadening to include industries not traditionally thought of as affecting national security. Foreign investors acquiring interests in the United States should explore the pros and cons of submitting future deals to CFIUS review. Since CFIUS’ recent action suggests that pork production may implicate national security, the scope of national security concerns being reviewed by CFIUS may be broader than conventional wisdom would suggest.