Smithfield-Shuanghui Deal Generates Unexpected Opposition

Posted by on Jul 21, 2013 in Direct Investment from China |

By: Henry T. Chou, Esq.

When first reported, the $4.7 billion acquisition of U.S-based Smithfield Foods by China’s Shuanghui International Holdings seemed like a win-win situation.  American shareholders of Smithfield looked forward to receiving substantial payouts, while Shuanghui seemed to have gained access to meat processing capabilities to help meet the massive demand for pork in China.

Unexpectedly, however, opposition to the deal has surfaced, with U.S. food safety advocates claiming Americans could end up eating pork raised in China, which has looser health and safety rules than the U.S., and U.S. hedge fund managers arguing that Smithfield could have been sold to an American private equity firm for more money.

Opponents of the deal, including a coalition of agricultural and consumer safety groups, have so far as to request the U.S. Committee on Foreign Investment in the United States (CFIUS) to block the deal.  It seems unlikely that CFIUS would block the deal, given that it usually only reviews transactions affecting national security, such as the transfer of sensitive technology that could be used for military purposes.

Nonetheless, the unexpectedly strong opposition to the transaction has gained the attention of politicians, who are exploring other avenues for blocking the deal.  Senator Debbie Stabenow (D-MI) and other lawmakers have asked the U.S. Food and Drug Administration and the Department of Agriculture to review the transaction.  It remains to be seen whether Shuanghui has the resolve to weather the political storm and complete the transaction.

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Update on Ralls Corporation v. CFIUS, et al.

Posted by on Nov 27, 2012 in Direct Investment from China, Dispute Resolution |

By: Kun Zhao, Esq.

On September 12, 2012, Ralls Corporation (“Ralls”) filed a lawsuit in the United States District Court for the District of Columbia against the Committee on Foreign Investment in the United States (“”CFIUS”) and Timothy F. Geithner, in his official capacity as the Chairperson of CFIUS, alleging that CFIUS’ order which prohibited Ralls from accessing the project site and continuing operations and construction work at acquired properties are in violation of the Administrative Procedure Act and unconstitutional deprivation of private property without due process.  In the complaint, Ralls seeks a declaratory judgment enjoining enforcement of the order issued by CFIUS.

The case is significant because it is first direct challenge to the validity of an order issued by CFIUS pursuant to the Defense Production Act.  The following is an account of recent developments in the case.

On September 13, 2012, Ralls filed a motion for a temporary restraining order and preliminary injunction to enjoin the enforcement of CFIUS’ order.  On September 19, 2012, Ralls and CFIUS reached an agreement which allows Ralls to conduct limited preliminary activities at the acquired properties.  On the same day, Ralls withdrew its motion for a temporary restraining order and preliminary injunction.

On September 28, 2012, President Obama issued an order which prohibited Ralls’ acquisition and ordered Ralls to divest all interests acquired in the transaction.  The order further directed Ralls to cease all operations at the acquired properties and remove all items, structures or physical objects from the acquired properties.

On October 1, 2012, Ralls amended its complaint to add President Obama as a defendant.  It continued to pursue its lawsuit on the ground that the actions of CFIUS and President Obama are in violation of Administrative Procedure Act, beyond authority conferred under the Defense Production Act, and unconstitutional deprivation of private property without due process.  Defendants’ answer to Ralls’ amended complaint is due by December 8, 2012.

On October 29, 2012, defendants filed a motion to dismiss for lack of subject matter jurisdiction, alleging that the Defense Production Act precludes judicial review of President’s order.  A motion hearing will be held on November 28, 2012.

Discovery in the matter is stayed pending the Court’s ruling on the motion to dismiss, which is scheduled to be heard on November 28, 2012.

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Chinese Investment in the U.S. Is Set to Hit A Record High in 2012

Posted by on Nov 14, 2012 in Direct Investment from China |

By: Kun Zhao, Esq.

The second China Overseas Investment Summit was held from August 22nd to 23rd 2012 in Hong Kong. More than 1,200 government officials, investors, and experts from over 40 countries and regions attended the two-day conference under the theme of “Global Economic Transformation and New Approaches to China’s Overseas Investment,” echoing the country’s “going global” strategy.

According to Rhodium Group, which closely tracks Chinese foreign direct investment in the U.S., the U.S. has attracted$20.9 billion in investments from China since 2000. Investment from China is set to hit record levels in 2012. China has become the second fastest growing source of foreign direct investment (FDI) in the United States with an average annual growth rate of 72 percent from 2006 to 2011.  During that time, Chinese FDI has diversified substantially, reaching into many sectors of the U.S. economy.  Chinese companies are investing more than ever in the US and their investments have funded the creation of many American jobs. Recent mega-deals include Dalian Wanda Group’s acquisition of cinema chain AMC Entertainment Holdings for $2.6 billion, Superior Aviation’s $1.8 billion bid for Hawker Beechcraft, and China Petrochemical Corporation (Sinopec)’s acquisition of Ohio-based Devon Energy for $2.5 billion.

Pin Ni, president of the American arm of the private Wanxiang Group, which employs about 6,000 employees in the U.S., said that “negative views of China and political tensions between the two governments deter some companies.” However, that view has not impeded substantial FDI in the U.S.  Ni stated that “[o]ur labor costs are higher (in the U.S) but our overall costs are lower because it’s more efficient here.” Ni set up Wanxiang America from a home office in Mt. Prospect, Illinois, in 1994, essentially as a sales outlet for a parent company in China. It now has 27 manufacturing facilities across 14 states with annual revenues of more than $2 billion, and supplies most of the major American auto manufacturers.

The US government has launched a new effort through the SelectUSA program (www.selectusa.commerce.gov) in 2011 to attract business investment and increase employment. The program offers information assistance for global investors concerning federal programs and incentives for investing in the U.S. It also provides information concerning business incentives offered by different states and territories. It aims to help resolve issues involving federal regulations, programs, or activities during the investment process.

Other than Chinese state-owned enterprises, an increasing number of Chinese private companies, such as Haier and Lenovo, seek to set up shop in the U.S. and establish their own brand presence.  Their main challenge is learning to comply with complex regulations and customizing products to suit American consumers.

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FAQs for Documenting Corporate Decisions and Maintaining Records

Posted by on Oct 3, 2012 in Direct Investment from China |

By: Kun Zhao, Esq.

Registering a limited liability company or corporation in New Jersey is an easy task. However, after establishing a legal entity, many business owners focus on running the day-to-day operations of their businesses and forget about the tasks necessary to maintain the corporate status of their legal entities.

Most business owners understand the benefits of incorporating their business. However, few really understand the importance of documenting corporate key decisions and keeping full corporate records for purposes of maintaining the corporate status of their businesses. When disputes arise among the shareholders and directors, and with the IRS and creditors, many businesses are surprised to discover that their corporate status has lapsed due to their failure to (1) hold annual shareholders and directors meetings and (2) properly maintain corporate records. Additionally, many businesses fail to issue stocks to their shareholders, creating ambiguities as to ownership interest and percentages amongst the principals.

The consequences of failing to address such issues are significant. Failure to properly document important tax decisions and elections can result in loss of crucial tax benefits. When issues arise with the IRS, it is difficult to prove anything without proper corporate documentation. When a corporation has only a few principals, it will often be involved in transactions with those principals in their personal capacities. Without documentation concerning such matters, legal issues associated with claims of self-dealing by shareholders may come back to haunt the principals. Businesses may also lose their status as limited liability entities and their principals may be held personally liable for corporate debt due to poor documentation.

On the other hand, properly documenting corporate decisions and keeping detailed records will help businesses: (1) enjoy the protection and benefits of corporate status, such as limited liability and tax flexibility; (2) prevent shareholder disputes; and (3) protect principals from liabilities.

A corporate entity does not need to record mundane business decisions, such as daily transactions and the marketing of new products and services, etc. However, corporate entities should document major matters, such as the annual meetings of directors and shareholders, the issuance of stocks, transactions involving substantial assets or property, significant loans, self-dealing transactions, and important tax elections. Although formal in-person meetings are ideal, meetings can be held and decisions can also be made through e-mail, fax, video teleconference, etc. When decisions are made at corporate meetings, written minutes for those meetings should be prepared and approved by the directors or shareholders. Most states also allow directors and shareholders to approve a transaction or decision without a meeting by just executing a form that documents their approval.

Maintaining detailed documentation about major decisions will insulate corporate entities from liability when their decisions are challenged by the IRS, creditors, directors or shareholders. In most instances, investing a small amount of time to document decisions will go a long way towards avoid legal disputes.

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FAQs on Corporate Liability for Employee’s Unauthorized Actions

Posted by on Aug 22, 2012 in Direct Investment from China, Employment and Labor |

By: Kun Zhao, Esq.

In the course of conducting business, companies rely on their employees to carry out their duties.  The relationship between company and employee is a principal-agent relationship. When employee is acting on behalf of the company within the scope of his authority, the company is bound to the employee’s decisions and activities dealing with third parties on behalf of the company. Disputes arise when employees act outside their scope of authority and third parties have no knowledge or notice that the employees were acting in such a manner.

Situations involving employees acting outside their scope of authority generally fall into three categories. Under the first scenario, an employee has no authority to perform certain actions on behalf of the company. For example, a salesman cannot dispose of his company’s real property. Where one deals with an agent who is apparently without authority to act, he must inquire into the agent’s authority to represent the company. If a third party fails to make such an inquiry, the company has no liability and the third party can only seek remedy against the employee agent.

Under the second scenario, an employee’s act is within the scope of his authority but his conduct is in fact unauthorized by the company and there is no surrounding circumstance that alerts the third person. For example, a salesman may have the authority to collect non-cash payments for transactions, but he has no authority to receive cash payments. In this situation, the company is accountable for the conduct of its agent acting within the scope of his authority even though the conduct is unauthorized and the company receives no benefit from it. The rationale underlying this doctrine is that even though the employee agent may have deceived the principal company, as well as the third person victim, it is more equitable to hold the company accountable rather than the innocent third party because the company placed its employee in a position to perpetuate the act.

The third scenario is identical to the second scenario except that there are circumstances that cause the third party to suspect something is amiss. For example, past payments may have been made by wire transfer, but the salesman suddenly demands substantial cash payment. Such circumstances serve to put the third party on notice and to charge him with the duty of making an inquiry. If the third party fails to make an inquiry and confirm the employee’s authority with the company, the risk shifts to him.

Multi-party relationships in the business world are normally inevitable. Thus, companies should be careful about giving authority to employees to properly notify employees about the scope of their authority. Companies should also firmly enforce their policies and procedures in dealing with third parties. Third parties should adhere to their customary dealings with company employees and make alert inquires if there are any deviations from past practices.

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