Decades-old laws barring foreign ownership of farmland in Iowa, Missouri and at least three other Midwest states may complicate Shuanghui International's $4.7 billion planned purchase of U.S. pork powerhouse Smithfield Foods.
The deal, which would be the biggest purchase in the United States by a Chinese company, will face scrutiny from a federal government panel that assesses national security risks, but that is not expected to block the sale.
A few politicians have raised concerns about food safety, and farmers groups have expressed worries about consolidation and potential damage to small farmers. The land laws could be invoked by those opposed to the deal, and at the very least may require some complex legal maneuvering by the companies.
The statutes in question, some first adopted during the 1970s in response to fast-paced Japanese investment in U.S. real estate, restrict foreign businesses or governments from owning or controlling U.S. land used for livestock or crop production. The laws could provide Midwestern states legal recourse against the Smithfield deal.
At least eight states - Iowa, Nebraska, Minnesota, Missouri, North Dakota, Oklahoma, South Dakota and Wisconsin - have laws that prohibit foreign ownership of agricultural land. If the Shuanghui acquisition goes through, any hog farms, crop fields, manure lagoons or other land used for agricultural production and now owned by Smithfield in these states could invite legal challenges.
Smithfield's 11 slaughterhouses and meat factories in the eight states likely are exempt, legal experts said. However, some of those operations may rely on farm, feed or waste facilities that could be subject to legal challenge.
Smithfield does not disclose specifics of its property holdings, and the company declined to comment for this story. But a source close to the deal told Reuters that dealmakers and lawyers were aware of the issues, and the foreign ownership laws in different U.S. states had been discussed leading up to the May 29 deal announcement.
They believe the laws will not jeopardize Shuanghui's ability to close its purchase as planned in the second half of this year. However, the restrictions could affect how Smithfield and its subsidiaries operate post-merger, the source added.
The morning the deal was announced, Smithfield's attorneys sent a letter to Iowa Attorney General Tom Miller's office, alerting the agency to the takeover. Since then, in Iowa and elsewhere, state officials, legal experts and industry critics are raising questions about whether Smithfield under Shuanghui ownership will comply with these little-known and rarely tested laws, Reuters has learned.
In Iowa, Miller's office is seeking more information from Smithfield about the deal, a spokesman said.
The nation's largest hog producing state and its Democrat Attorney General have a history of opposing Smithfield's corporate transactions. The company currently operates in Iowa under a consent decree with Miller, who had charged that a 2000 acquisition by Virginia-based Smithfield violated a state law barring livestock production by meat packers.
The letter Smithfield sent declared that the merger will not change its current agreements or commitments with the state - a possible reference to the consent decree.
FIGHTS AND WORKAROUNDS
Any state that does seek to challenge the Smithfield deal could find itself attempting to unravel a snarl of property ownership records.
"It's hard to police because you start getting layers of entities and you've got to figure out who owns what and where they are exactly," said Anthony Schutz, an associate professor at the University of Nebraska College of Law in Lincoln.
Smithfield's publicly available corporate records do not disclose how much farmland Smithfield and its subsidiaries own in states with laws barring foreign ownership.
Smithfield's Murphy-Brown of Missouri owns farmland in that state, according to court filings and tax records. Its Murphy-Brown West division operates 150 company-owned farms in eight states: Illinois, Iowa, Missouri, Oklahoma, South Dakota, Texas, Utah and Colorado.
Three of those states have laws against foreign ownership, though a pending change to Missouri law could ease the way for foreign owners. But even in the states with such laws, companies have succeeded in finding ways to elude such restrictions, say legal experts.
In Iowa, for example, entities can create a U.S. subsidiary that is more than 50 percent controlled by people who meet the residency requirements, said Roger McEowen, director of the Iowa State University's Center for Agricultural Law and Taxation.
Smithfield has proven determined in its effort to avoid restrictions on ownership in Iowa, the state generally regarded to have among the most restrictive farmland-ownership laws.
A battle between Miller and Smithfield grew heated over Smithfield's 2000 acquisition of Murphy Farms Inc, then one of the nation's largest hog producers.
Miller challenged the deal, citing a state law prohibiting livestock processors from having control over hog suppliers. But Smithfield found a work-around when Randall Stoecker, then a Murphy Farms executive, left the firm and formed a company to buy his former employer's Iowa assets.
According to court records, Stoecker financed the deal in part using loans provided by Smithfield.
Less than a month after the transaction, Stoecker returned to Murphy Farms to again manage the Murphy Farms' Midwest division, though it no longer included the Iowa operations.
Stoecker could not be reached for comment.
The Iowa legislature twice amended the law in failed efforts to thwart Smithfield. When Attorney General Miller sued, Smithfield prevailed. At one point, a federal court ruled that Iowa's law discriminated against interstate commerce and engaged in economic protectionism that harmed out-of-state companies.
Miller launched an unsuccessful appeal of that federal decision. Ultimately, Miller signed a 2005 consent decree with Smithfield that prevented the state from enforcing the law for 10 years. In exchange, Smithfield agreed to provisions designed to protect Iowa hog farmers.
The decree ends in 2015 - or about a year after Smithfield expects the Shuanghui merger to be completed.
A Chinese market hungry for grains and meats has generally been embraced by the Midwest farm economy, but subtle rifts are beginning to show between farmers who stand to benefit from a boost in pork production after the takeover and those who won't.
Farmers like Chris Petersen of Clear Lake, Iowa, are concerned. A hog producer whose family has farmed in the Midwest for generations, Petersen said he was taken aback by comments made by Chinese investors and Smithfield officials last year at a closed-door symposium he attended. "All they could talk about was how much pork they were going to sell and how much money they were going to make," Petersen said.