Introduction

On March 18, 2009, China’s the Ministry of Commerce (“MOFCOM”) disapproved Coca-Cola’s US$2.4 billion acquisition of Huiyuan Juice Company Ltd. (“Huiyuan”), China’s largest fruit juice manufacturer. This decision is significant because it is MOFCOM’s first rejection of an acquisition of a Chinese company by a foreign investor reviewed under China’s new Anti-Monopoly Law (“AML”) that came into effect on August 1, 2008. [1]

Request for Approval

In September 2008, Coca-Cola submitted its initial acquisition filing to MOFCOM under the AML. After requesting Coca-Cola to submit several supplemental filings during the initial 30-day review period, MOFCOM opened a “second-stage review” in December 2008. MOFCOM made its decision after extensive consultation and investigation, involving not only materials submitted by both parties to the transaction but also information provided by other governmental authorities, trade associations, the juice-beverage industry, suppliers, resellers, as well as, economists, and agricultural and legal experts.

Following its announcement, MOFCOM held a special press conference in Beijing on March 25, 2009 to clarify its reasons for disapproving Coca-Cola’s proposed acquisition. Knowing that the Huiyuan acquisition has generated tremendous public attention within China and abroad, MOFCOM made an effort to emphasize that its decision was based on a detailed assessment of the acquisition’s impact on China’s juice-beverage market rather than attempting to protect a well-known Chinese national brand.

The Approval Process

Under the AML, any concentration of business operators reaching one of the two following turnover thresholds must report such concentration of business to the relevant authority, failing which, they may not proceed with the concentration:

  1. the total of the global business turnover of all of the business operators who are to be part of the concentration exceeds RMB10 billion during the previous financial year and the business turnover in China of each of at least two of those business operators exceeds RMB 400 million during the previous financial year; or
  2. the total of the business turnover in China of all of the business operators who are to be part of the concentration exceeds RMB 2 billion during the previous financial year and the business turnover in China of each of at least two of those business operators exceeds RMB 400 million during the previous financial year.

According to the information released at MOFCOM’s press conference, both Coca-Cola and Huiyuan’s turnover in China’s mainland market clearly satisfied the second of the above threshold turnover tests; therefore, jurisdiction for MOFCOM’s anti-monopoly review was established.

The AML also set forth the following factors of consideration when conducting an examination of concentration of business operators:

  1. the market share of the business operators involved in the concentration in the relevant market and their degree of control of such market;
  2. the degree of concentration in the relevant market;
  3. the effect of the concentration of business operators on entry into the market and technological progress;
  4. the effect of the concentration of business operators on consumers and other relevant business operators;
  5. the effect of the concentration of business operators on the development of China’s national economy; and
  6. other factors that affect market competition that the State Council's anti-monopoly law enforcement authorities believe should be taken into consideration.

While items (iv) and (v) above could be viewed as giving MOFCOM a fairly wide discretion to disapprove any business concentration, it is international common practice to consider the effect of the business concentration of operators on the development of the national economy, and “other factors” are restricted to those factors limiting competition.

According to the information released at the press conference and other publicly available information, Coca-Cola is considered the dominant participant in the carbonated-beverage market because of its sixty percent market share in China. And according to certain publicly available data, Huiyuan is considered a significant market participant since it controls about ten percent of the juice-beverage market in China.[2]

When reviewing Coca-Cola’s acquisition filing, MOFCOM considered the juice-beverage market as the “relevant market” for assessing the impact on competition under the AML. MOFCOM concluded that a merger of these two major market participants would enhance Coca-Cola’s ability to control and effectively restrict competition in China’s juice-beverage market. From MOFCOM’s perspective, given Coca-Cola’s dominant position in the carbonated-beverage market, Coca-Cola could easily leverage the combined marketing power of a merged company to dominate China’s juice-beverage market by bundling products or offering special incentives and exclusive arrangements, all of which could result in fewer choices and lead to higher prices for consumers, and thereby harm the interests of the public.

Conclusion

Because of MOFCOM’s unwillingness to provide detailed reasoning and analysis (other than brief statements), it is difficult for foreign investors to draw any clear conclusion as to the driving force behind MOFCOM’s decision to reject Coca-Cola’s bid for Huiyuan, and this lack of information continues to leave room for speculation and criticism. Nevertheless, what seems to be clear is that MOFCOM did have jurisdiction to review the proposed acquisition, it did engage in a detailed and lengthy consultation and investigation process, and it was able to provide some reasoning for its decision. MOFCOM also suggested that it was willing to negotiate certain restrictions on the proposed acquisition that would have addressed MOFCOM’s concerns, but Coca-Cola and MOFCOM could not agree on those restrictions.

What can be learned from MOFCOM’s decision in this case is that for transactions that trigger the turnover thresholds under the AML, parties to the transaction need to be prepared for a lengthy approval process when laying out the acquisition timetable and assigning resources required to complete the transaction. Finally, parties involved in the transaction need to be willing to renegotiate certain already agreed upon terms to satisfy MOFCOM’s concerns in order to gain the necessary approval for the acquisition.