On March 18, 2009, the Ministry of Commerce of the PRC (MOFCOM) announced its decision to bar the Coca Cola Company’s proposed acquisition of China Huiyuan Fruit Juice Group Limited (Huiyuan) (the Announcement) based on concerns that the transaction would adversely impact competition in China’s fruit juice market and harm the sound development of the fruit juice industry. This is the first transaction that MOFCOM has barred after conducting a pre-concentration anti-monopoly review. In this edition of the Antitrust Update, we will brief you on the highlights of the Announcement and the developments and uncertainties reflected in the Announcement. An English translation of the full text of the Announcement is attached to this article for your reference.
Background of the Coca Cola-Huiyuan Transaction and the Decision
The Coca Cola-Huiyuan case has been closely followed by businesses, industry experts, observers, and the general public. Both Coca Cola and Huiyuan are prominent in the Chinese beverage market, and the proposed transaction was one of the first pre-concentration cases MOFCOM took under its review following the enactment of China’s Anti-Monopoly Law (AML). Further, Huiyuan has significant symbolic value as one of the most recognized and respected national brands in China.
The transaction began last fall when, on September 3, 2008, Coca Cola, Atlantic Industries (a wholly-owned subsidiary of Coca Cola), and Huiyuan jointly announced that ABN AMRO, a Dutch bank, would act on behalf of Atlantic Industries to make a conditional cash offer to acquire all of Huiyuan’s issued shares and outstanding convertible bonds. Huiyuan is incorporated in the Cayman Islands and listed on the Hong Kong Stock Exchange. The total consideration for the proposed acquisition would be nearly HKD18 billion. To proceed with the transaction, Coca Cola filed with MOFCOM to seek an anti-monopoly clearance.
MOFCOM announced its decision to block the transaction on anti-monopoly grounds yesterday. According to the Announcement, MOFCOM determined that post-transaction the combined company would have a dominant position in the fruit juice market, effectively reducing and/or eliminating competition between existing fruit juice enterprises. MOFCOM also expressed concern that the post-transaction company’s position in the fruit juice market, when added to the parties’ pre-existing dominant position in the market for carbonated soft drinks, would inhibit potential competitors from entering the fruit juice beverage market and reduce innovation. The parties were unable to demonstrate that the transaction generated sufficient procompetitive benefits to outweigh these potential harms.
Procedural Highlights of MOFCOM’s Review
The Announcement outlines the notification and review process used in the transaction. On November 20, 2008, MOFCOM officially started the first-stage review of the transaction and notified Coca Cola accordingly. On December 20, 2008, MOFCOM decided to conduct a further review, and on March 18, 2009, MOFCOM finished that review before the initial secondstage 90 day deadline of March 20, 2009.
According to the Announcement, during the initial and further review stages, MOFCOM verified the notification materials and analyzed all the relevant important issues. Additionally, MOFCOM solicited opinions from various stakeholders, including relevant government agencies, industry associations, fruit juice enterprises, suppliers, distributors, and experts in areas of law, economics and agriculture. Opinions were solicited by means of written requests, forums, hearings, on-site investigation and discussions with interested parties.
The Announcement stated that MOFCOM considered imposing restrictive conditions on the transaction and accordingly required Coca Cola to provide remedial plans to reduce the potential adverse competitive effects of the proposed transaction. However, MOFCOM was not satisfied with Coca Cola’s remedial plans because it did not believe the proposed remedies could effectively reduce the potential negative competitive impact of the transaction.
Developments Reflected in the Announcement
Basis of Pre-Concentration Anti-Monopoly Review Timeline is Clarified
For the first time, the Announcement clarifies that calendar days will be used for the timeline of MOFCOM’s pre-concentration anti-monopoly reviews. Under the AML, MOFCOM’s preconcentration anti-monopoly review consists of a 30-day initial review plus a 90-day further review, with the possibility of a 60-day extended review under extreme circumstances. However, the AML ambiguously refers to “days” without stating if they are calendar days or work days. Before the Announcement, neither MOFCOM officials nor the previous MOFCOM cases clarified on this technical issue.
The Announcement, however, clearly indicates that the “days” in the pre-concentration antimonopoly review timeline are calendar days rather than work days. According to the Announcement, the 30-day initial review started on November 20, 2008 after MOFCOM had received all required filing materials. Given the complexity of this acquisition, MOFCOM decided to start the 90-day further review on December 20, 2008.The Announcement also states that the deadline for MOFCOM to complete this review is March 20, 2009, which is 90 calendar days from November 20, 2008.
The Announcement establishes a precedent for MOFCOM’s future pre-concentration antimonopoly reviews in terms of the timeline. Calendar-day based deadlines mean more expedient reviews than work-day based deadlines, which may benefit the participating business operators.
An Example of the Important Factors is Provided
Article 27 of the AML enumerates several typical factors for MOFCOM to take into consideration in assessing the potential effects of a transaction under review. These factors include the market shares of the business operators, the degree of market concentration of the relevant markets, the impact of the concentration on market access and technological advancement and on consumers and other relevant business operators. In addition to these garden variety factors, a catch-all item of Article 27 allows MOFCOM to consider any other important factors it deems necessary. However, MOFCOM has never specified what other factors may be taken into consideration in its review of concentrations and therefore notifying parties may be concerned that an unexpected factor would make the review unpredictable.
As stated in the Announcement, like in the review of any other concentration, MOFCOM considered the factors enumerated in the AML. Additionally, MOFCOM especially assessed the impact that Coca Cola’s acquisition of the Huiyuan brand would have on the Chinese fruit juice market. Specifically, MOFCOM asserted that if the Coca Cola-Huiyuan transaction moves forward, Coca Cola’s control over the fruit juice market will be significantly strengthened because it will control the two well-known fruit juice brands on the Chinese market: “Minute Maid” and “Huiyuan.” Coupled with its existing dominant position in the market of carbonated soft drinks, the concentration will significantly raise the barrier for potential competitors to enter the fruit juice market. MOFCOM decided that this is one of the major adverse effects the transaction will cause.
This additional brand consideration seems to direct MOFCOM to a final decision to bar the transaction to a considerable degree. In other words, MOFCOM is using its discretion to single out a case-specific factor that is not enumerated in the AML, which may prove to be a crucial or even decisive factor of MOFCOM’s final decision. MOFCOM’s decision may help the business community to better evaluate MOFCOM’s pre-concentration reviews under the AML from the Coca Cola experience, when well-known brands are involved in future transactions.
Hearings Will Not Prolong the Review Timetable
Under the AML, MOFCOM normally conducts its pre-concentration reviews based on the filed materials, but it also may hold hearings to seek opinions from interested parties in reviewing a high-profile transaction. Before the Coca Cola-Huiyuan case, it was unclear whether the time spent on these hearings would be counted toward the time limit of each stage of the review.
As stated above, the Announcement reveals that MOFCOM held hearings during its review of the Coca Cola-Huiyuan case, without prolonging the timetable for the review. This is good news to future filing parties who may be concerned that hearings may delay the review process.
Satisfaction of Information Requirements are Not Addressed
Under the AML, an anti-monopoly review commences only after the notifying parties have submitted all required materials. However, because no detailed rules on the documentation requirements exist, MOFCOM enjoys sole discretion in deciding whether the filing parties have met the information requirements. In practice, MOFCOM may require additional materials several times after the notifying parties officially submit the first round of documents, a practice which is unpredictable and has potential to unexpectedly prolong the review process.
In the Coca Cola-Huiyuan case, Coca Cola submitted the notification materials to MOFCOM on September 18, 2008. MOFCOM required Coca Cola to submit supplementary materials on September 25, October 9, October 16, and November 19 of 2008, respectively. On November 20, over two months later than Coca Cola’s initial submission of materials, MOFCOM deemed Coca Cola to have submitted all required materials and thus officially started the review process. MOFCOM did not explain in the Announcement why the earlier information submissions by Coca Cola were not satisfactory, so future notifying parties receive little guidance from the Announcement with regard to the information requirements.
Rules for National Security Reviews Remain Unclear
The Announcement shows that in reviewing the Coca Cola-Huiyuan transaction, MOFCOM did not conduct a national security review in parallel with the pre-concentration anti-monopoly review.
The national security review mechanism was first established in the Rules on Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors (the M&A Rules) issued on August 8, 2006. According to the M&A Rules, in certain cases a national security review may be conducted in combination with a pre-concentration anti-monopoly review. Of particular relevance to the Coca-Cola-Huiyuan transaction, the M&A Rules state that such review may be necessary when, as a result of a foreign investor’s acquisition of a domestic enterprise, that foreign investor will obtain actual control of the domestic enterprise and the acquisition involves any major industry, has or may have an impact on the economy security, or may result in transferring the domestic enterprise’s actual control over the ownership of any famous trademarks or traditional Chinese brands.
The AML further spells out that while a national security review may run in parallel with a preconcentration review, it is a separate process. As set out by the Provisions on Major Responsibilities, Internal Organizations and Personnel for NDRC (the NDRC Job Responsibilities), MOFCOM shares responsibility for designating transactions for national security review with NDRC. If MOFCOM believes that a specific transaction has national security implications, it will submit the transaction to an ad hoc committee jointly established by MOFCOM, NDRC and other government authorities (the Committee) for a national security review, and the Committee will decide when the specific transaction passes the review.
The NDRC Job Responsibilities outline the national security review mechanism to a certain degree; however, this mechanism remains to be murky in several key aspects, such as the triggering conditions and the specific procedures for the review. Noticeably, the proposed Coca Cola-Huiyuan transaction involves the transfer of a famous brand “Huiyuan,” and MOFCOM also indicates in the Announcement that it paid particular attention to this branding issue, but MOFCOM did not initiate a national security review in this case. Therefore, Coca Cola-Huiyuan offers no clear indicators regarding what would trigger a national security review, leaving potential investors with little comfort in this regard.
In addition, a national security review is applicable when foreign investors intend to acquire domestic enterprises. However, neither the M&A Rules nor the AML defines “domestic enterprise.” MOFCOM’s review of this transaction offers no further guidance. Huiyuan is generally regarded as a Chinese company, but it is legally registered in the Cayman Islands and is listed in Hong Kong. Consequently, it may be deemed to be a foreign enterprise. It remains unclear how to distinguish a “domestic enterprise” from a “foreign enterprise” in the context of national security review.
In sum, MOFCOM’s rejection of the Coca Cola-Huiyuan transaction marks a milestone in the history of China’s anti-monopoly enforcement. By clarifying several rules, the Announcement may help market players better evaluate MOFCOM’s pre-concentration reviews under the AML. However, the Announcement neither provides much analysis of the transaction, nor does it explain the reasoning behind the decision, which may not provide market players with muchneeded guidance. For other unresolved issues, market players need to continue to keep close relations and coordinate with relevant authorities, and especially to take advantage of the informal consultation mechanism during the notification process.
Announcement of the Ministry of Commerce of the PRC
(No. 22 of 2009)
The Ministry of Commerce of the PRC (MOFCOM) has received an anti-monopoly notification of a business operator concentration submitted by the Coca Cola Company of the U.S. (Coca Cola Company) and China Huiyuan Juice Group Limited (China Huiyuan Company), and makes the following announcement in accordance with Article 30 of the Anti-Monopoly Law (AML):
- Case Filing and Investigation.
On September 18, 2008, the Coca Cola Company submitted notification materials to MOFCOM. On September 25, October 9, October 16, and November 19, the Coca Cola Company submitted supplementary materials in accordance with MOFCOM’s requirements. On November 20, MOFCOM determined that the notification materials submitted by the Coca Cola Company met the notification criteria under Article 23 of the AML, thus, MOFCOM set up a case for review and notified the Coca Cola Company. Since this concentration is of a relatively massive scale and has profound implications, on December 20, 2008, MOFCOM decided to further investigate the case upon the completion of the preliminary review and so notified the Coca Cola Company in writing. During the course of further review, MOFCOM assessed the various effects that this concentration may cause and completed the review before March 20, 2009.
- Content of the Review.
In accordance with Article 27 of the AML, MOFCOM comprehensively reviewed this business operator concentration from the following aspects:
- Market shares in the relevant markets and the power of control over the markets of the business operators participating in the concentration;
- The degree of market concentration of the relevant markets;
- The impact of the business operator concentration on market access and technological advancement;
- The impact of the business operator concentration on consumers and other relevant business operators;
- The impact of the business operator concentration on the development of the national economy; and
- The effect of the Huiyuan brand on competition in the fruit juice market.
After having set up the case, MOFCOM reviewed the notification in accordance with the law, carefully verified the notification materials, and analyzed in depth the important issues concerned in this notification. In addition, MOFCOM solicited opinions from relevant government authorities, industry associations, fruit juice enterprises, upper-stream juice concentrate suppliers, down-stream fruit juice distributors, both parties to the concentration, the Chinese partners of the Coca Cola Company, and relevant experts on law, economics, and agriculture by means of writing, discussion panels, forums, hearings, on-site investigations, authorized investigations, and conversations with interested parties.
- The Competition Issue.
Upon completion of the review, MOFCOM comprehensively assessed this concentration according to the law and confirmed that this concentration will have the following adverse effects:
- Upon completing the concentration, the Coca Cola Company will be able to pass on its dominant position in the market of carbonated soft drinks to the fruit juice market, which will have an effect of eliminating or restricting competition between existing fruit juice enterprises, which will in turn harm the lawful rights and interests of beverage consumers.
- Branding is a key factor that affects the effective competition in the beverage market. Upon completion of the concentration, the Coca Cola Company’s control over the juice market will evidently strengthen by controlling the two well-known fruit juice brands: “Minute Maid” and “Huiyuan.” Along with its existing dominant position in the market of carbonated soft drinks and the corresponding transmission effect, the concentration will significantly raise the bar for potential competitors to enter the fruit juice beverage market.
- The concentration will reduce the chances of domestic mid- and small-sized fruit juice enterprises to survive, and limit domestic enterprises’ abilities to participate in the competition of the fruit juice beverage market and to innovate independently, which will adversely affect the effective competition in the Chinese fruit juice beverage market, and will harm the sustainable and sound development of the Chinese fruit juice industry.
- Discussions on the Imposition of Restrictive Conditions.
MOFCOM discussed with the Coca Cola Company the imposition of restrictive conditions in order to reduce the adverse effects detected during the review process. During the discussions, MOFCOM requested that the Coca Cola Company propose feasible solutions on the issues that MOFCOM had detected during its review. The Coca Cola Company expressed its opinions in response to the issues raised by MOFCOM, and came up with a preliminary solution and a revised solution. After conducting an assessment, MOFCOM determined that the remedies proposed by the Coca Cola Company to the effect on competition failed to effectively reduce the adverse effects that this concentration may have.
- Decision of the Review.
Based on the reasons mentioned above, in accordance with Article 28 and Article 29 of the AML, MOFCOM decides that this concentration has the effect of eliminating or restricting competition, and will adversely affect the effective competition in the Chinese fruit juice beverage market, and harm the sound development of the Chinese fruit juice industry. Since the participating business operators failed to provide sufficient evidence to prove that the positive effects of the concentration on competition significantly outweigh its adverse effects, or that the concentration is consistent with public interests, and the Coca Cola Company failed to propose a feasible solution to reduce the adverse effects within the required time period, MOFCOM decides to prohibit this business operator concentration.
This decision takes effect on the date of its publication.
The Ministry of Commerce of the People’s Republic of China
March 18, 2009