First published in V&E Antitrust News and Notes, April 2009.
By Li Ge
Background Information | Despite Development, Ambiguities Remain | Implications for Future Transactions
On March 18, 2009, the Ministry of Commerce of the People’s Republic of China (MOFCOM) released MOFCOM Announcement No. 22 [2009] denying approval to the acquisition by The Coca-Cola Company of Huiyuan Fruit Juice Company (Huiyuan) (the Proposed Concentration) in accordance with the Anti-monopoly Law of the People’s Republic of China (the AML) (the Announcement).1 MOFCOM is the governing authority that presides over the anti-monopoly review of mergers and acquisitions (the AML refers to such transactions as “concentrations”). The decision not to approve the Proposed Concentration marks the first time MOFCOM has blocked a transaction since the enforcement of the AML. This is also the second landmark decision since MOFCOM’s conditional approval of InBev's acquisition of Anheuser-Busch in November 2008 (InBev case). While it may be too early to draw many conclusions, this early decision begins providing some insight into MOFCOM’s application of the AML (both substantively and procedurally) to the review of concentrations affecting the Chinese domestic market.
Background Information
The Coca-Cola-Huiyuan Case
Huiyuan is China’s largest fruit juice manufacturer. It was set up as a privately-owned company in 2002, and was subsequently incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange.
On September 3, 2008, Atlantic Industries, a whollyowned, indirect subsidiary of The Coca-Cola Company, announced that Atlantic Industries would acquire all of Huiyuan’s
issued shares and outstanding convertible bonds. The bid provoked an outcry from nationalists opposed to foreign investor control over the well-known domestic brand. As both companies had operations in the People’s Republic of China, the Proposed Concentration was subject to the AML merger control regulation and the parties had to observe the applicable waiting period.
Substantive Anti-monopoly Analysis
The Announcement outlines the notification, review, and investigative process of the Proposed Concentration. Without giving a detailed analysis, MOFCOM concluded the following adverse impacts could result from the Proposed Concentration:
First, MOFCOM concluded that the Proposed Concentration would permit The Coca-Cola Company to extend its market dominance over the carbonated soft drinks market into the fruit juice beverage market. MOFCOM was concerned that the acquirer could eliminate or restrict competition in the fruit juice beverage industry by entering into unlawful tying and bundling agreements or other exclusive agreements, and infringing upon consumer interests.
Second, MOFCOM considered brand recognition to be the key factor affecting effective competition in the beverage market. Allegedly, the concentration would enable The Coca-Cola Company to increase its market control in the fruit juice beverage market by controlling two prominent fruit juice brands: Huiyuan and Minute Maid (called Meizhiyuan in China), a brand already belonging to The Coca-Cola Company. Additionally, MOFCOM was concerned that the transaction would increase the obstacles for any potential competitor to enter the juice beverage market.
Third, MOFCOM believed that the concentration would marginalize small and medium-sized domestic fruit juice enterprises, curb their competition capacity, and diminish their innovation capability, which would thus hinder effective competition in the Chinese fruit juice beverage market and undermine its sustained and healthy development.
The Announcement reveals that MOFCOM considered conditioning the clearance of the Proposed Concentration, as in the InBev case. However, Coca-Cola’s remedial proposal did not convince MOFCOM that such proposal would lessen the adverse competitive impacts of the Proposed Concentration.
Developments in Anti-monopoly Review
Although neither the underlying data nor detailed analysis of the review have been published, MOFCOM’s Announcement, together with the Q&A between MOFCOM’s News Spokeman and reporters regarding the Anti-monopoly Review of Coca-Cola’s Acquisition of Huiyuan published by MOFCOM on March 24, 2009 (the 2009 Q&A), provides some insight into the anti-monopoly review procedures invoked by MOFCOM.
First, the Announcement signals a positive step in measuring the length of the review process. The Announcement suggests that the “days” in the pre-concentration review timeline are calendar days rather than business days. According to the Announcement, the 30-day initial review of the Proposed Concentration commenced on November 20, 2008. On December 20, 2008, MOFCOM decided to conduct a subsequent 90-day further review. The Announcement provides that the deadline for MOFCOM to complete this review was March 20, 2009, 90 calendar days from December 20, 2008. This observation is significant because, as explained below, MOFCOM has not consistently used calendar days.
Second, according to the dates outlined in the Announcement, the time spent on the investigative measures such as meetings and hearings were counted towards the deadline for the review process. This is a positive signal to future notifying parties who may be concerned about the unpredictable delay in the review process due to investigative measures such as meetings and hearings.
Third, the Announcement emphasizes that brand recognition is an additional consideration for MOFCOM in the review process. Article 27 of the AML enumerates the key factors to be considered in the pre-concentration review with a catch-all item that allows the Anti-monopoly Enforcement Authority under the State Council (the AMEA, i.e., MOFCOM is in charge of concentration cases) to consider any other factors the AMEA deems necessary. The use of brand recognition demonstrates that MOFCOM is willing to construe broadly the factors that the AML allows it to consider.
Fourth, concern has been expressed that this case demonstrates that MOFCOM decided the matter, at least in part, on nationalism, protectionism, and political considerations. In response to such speculation, the 2009 Q&A asserted that MOFCOM’s consideration was limited to whether the Proposed Concentration threatened effective competition.
Fifth, the Announcement suggests that the Chinese government may be willing to use the AML to protect domestic enterprises and small and medium-sized competitors. MOFCOM asserted in the 2009 Q&A that it is common practice to consider the impact of the concentration of business operators on national economic development in the anti-monopoly review process in order to safeguard effective competition.
Despite Development, Ambiguities Remain
Despite the clarification reflected in the Announcement and 2009 Q&A, there remain ambiguities with respect to certain aspects of the anti-monopoly review and its process.
When the Submission is Considered Complete
It is still difficult to define at which point MOFCOM is satisfied that the submitted documentation for antimonopoly review is complete. According to Articles 24 and 25 of the AML, an anti-monopoly review may commence once the notifying parties have submitted a complete set of required documents and materials. MOFCOM reserves sole discretion in determining whether the submitted documentation is complete.
In this matter, The Coca-Cola Company submitted the notification materials to MOFCOM on September 18, 2008. MOFCOM required the company to submit supplementary materials on September 25, October 16, and November 19, 2008, respectively. On November 20, 2008, more than two months after Coca-Cola’s initial filing, MOFCOM declared the submission complete, and officially commenced the anti-monopoly review. However, MOFCOM did not clarify in the Announcement why the earlier submissions were incomplete. Therefore, MOFCOM’s discretion may allow the agency to prolong the review process.
How to Measure the Length of the Review Process
Despite the positive sign contained in the Announcement regarding the measurement of the length of the review process, it is our experience in non-public cases under the new AML that MOFCOM often uses business, not calendar, days. We believe that MOFCOM is seeking support and confirmation from the Chinese People’s Congress to interpret the “days” as business days. Before any formal response from the Chinese People’s Congress, the answer to this question will remain unclear.
Definition of Relevant Market
Although the Announcement alludes to separate “carbonated soft drink” and “fruit juice beverage” markets, it does not clearly define the relevant market on which MOFCOM based its analysis. The 2009 Q&A does not provide any guidance because it only repeats the factors included in Draft Guidelines on the Definition of Relevant Market, published on January 7, 2009, without explaining how those principles were applied (for more details regarding the draft guidance, please refer to our previous Antitrust News & Notes).
Implications for Future Transactions
Multinational companies seeking to engage in cross-border transactions (both offshore and onshore) that may affect the Chinese domestic market should consider carefully the implications of MOFCOM’s recent enforcement actions on the likely approach to future transactions and the interpretation of the AML. While a more comprehensive view will evolve from MOFCOM’s enforcement efforts, MOFCOM has provided some signal as to how it will treat merging parties.
First, MOFCOM is going to take antitrust enforcement very seriously and given the size of the economy and global presence, China likely will take the antitrust stage alongside of the United States and the European Union.
Second, MOFCOM may condition the clearance of a proposed transaction on the parties offering adequate remedies. If MOFCOM is satisfied with the remedial proposal, the transaction likely will be approved.
Third, as MOFCOM presently possesses sole discretion in the determination of whether a submission is complete and how to measure the length of the review process, it is advisable that notifying parties plan their notification carefully, arrange for pre-notification consultation with MOFCOM regarding documentation submission, and allow additional time for the review process.
Fourth, despite MOFCOM’s defense, the Coca-Cola case implies that MOFCOM may be particularly concerned about the acquisition of well-known Chinese brands by foreign investors, making high-profile transactions risky in China.1 It also may signal some level of concern for both small- and medium-sized businesses and the development of the Chinese economy.
For more information about this and similar topics, please contact V&E lawyer William Vigdor or Li Ge. Visit our website to learn more about V&E's Antitrust practice. (Follow this link to access the Chinese-language version of this article.)
This article is not intended to be legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information only. Results described herein may be subject to reconsideration or appeal. Application of the information reported herein to particular facts or circumstances should be analyzed by legal counsel.
Footnotes1The Announcement being referred to hereunder includes the news report released by MOFCOM on its website on March 18, 2009. MOFCOM Announcement No. 22 [2009] is available in Chinese at www.mofcom.gov.cn/aarticle/b/c/200903/20090306108617.html. The news report is available in Chinese at www.mofcom.gov.cn/aarticle/ae/ai/200903/20090306108388.html.
2Nationalism helped sink a 2005 China deal where a U.S. private-equity firm, Carlyle Group, signed an agreement to acquire an 85 percent stake in Chinese construction equipment maker Xugong Group for US$375 million. As such, foreign investors should be cautious to avoid raising nationalist sentiment.