- First major test of China’s new antimonopoly law
- Demonstrates that competition authorities will block transactions they deem anticompetitive
On March 18, 2009 MOFCOM rejected the Coca-Cola Company’s proposed US$2.4 billion takeover of the country’s leading juice maker, China Huiyuan Juice Group Ltd., saying that the deal could have an adverse impact on competition and lead to higher prices for consumers.
Article 27 of China’s Antimonopoly Law (the “AML”), which took effect on August 1, 2008, directs MOFCOM, in reviewing mergers and acquisitions, to consider the parties’ market shares and market power, market concentration, the impact on market entry and technological advances, the effect on consumers and other relevant business operators, and the effect on the development of the national economy. The term “other relevant business operators” can be interpreted to include competitors, customers and suppliers. The proposed Coca-Cola/Huiyuan acquisition was the first transaction blocked by MOFCOM under the new law.
Coca-Cola has a strong presence in China's carbonated drinks market, with some estimates putting its market share at 54%, while Huiyuan is the dominant player in the pure fruit juice market in China, with an estimated 42% market share. Coca-Cola already owns the well-known Minute Maid juice brand. According to some industry reports, Coca-Cola and Huiyuan, if combined, would control about 20% of the juice market in China.
In the statement announcing its decision, MOFCOM said that it blocked the deal after determining that a combined entity could use its market dominance in carbonated soft drinks to limit competition in the juice market through tying, bundling or other exclusive transactions, resulting in consumers being forced to accept higher prices and reduced variety. MOFCOM also determined that the combined entity would reduce competition opportunities for small and medium-sized juice manufacturers. MOFCOM’s statement made it clear that Coca-Cola’s bid was not being turned down for any technical reasons.
Some analysts opined that the decision of China’s government was made partly under public pressure, as Huiyuan is perceived by many in China as a beloved national brand. Before the decision, Coca-Cola’s proposal to buy Huiyuan had stirred protests by China’s drink industry, and many Chinese consumers had also expressed concerns about the potential loss of a leading homegrown brand to the international soft drink giant.
One immediate assumption among some observers in the United States and Europe was that MOFCOM’s decision was based on nationalistic concerns, as opposed to a genuine concern that this transaction could adversely affect competition. They suggested that support for the belief that MOFCOM was seeking to promote nationalism could be found in Article 27 of the AML itself, which directs MOFCOM to consider, among other things, the impact of a potential transaction on the development of the national economy.
However, it should be noted that in its statement, MOFCOM did not cite the national security provision in the AML that can be applied to protect China-based companies from acquisition if the takeover is perceived to pose risks to China’s national economic security, such as reducing employment or eliminating a famous China brand.
Both before and after the AML took effect, there was speculation as to how MOFCOM’s Anti-Monopoly Bureau (the “Bureau”) would apply the new law. Among other issues, commentators debated whether the Bureau would be protectionist in its application of the law. The Coca-Cola decision was the first significant application of the new law, and it was expected to provide some insight into the answers to these questions. However, it seems that the decision has not really helped clarify matters.
Prior to the Coca-Cola/Huiyuan decision, MOFCOM had completed 24 reviews under the AML and approved 23 earlier transactions (the “23 Transactions”) without conditions. The 24th transaction, regarding Inbev’s acquisition of Anheuser-Busch, was approved after the acquirer agreed not to acquire shares in competing companies in China without MOFCOM’s prior approval.
Under Article 30 of the AML, the Bureau is required to publicly announce decisions that deny merger or acquisition approvals as well as decisions granting conditional approvals, but not decisions granting unconditional approvals. Because all of the 23 Transactions were approved by the Bureau without conditions, they were not publicized. The only publicly announced decisions were those in the Coca-Cola/Huiyuan case and the Inbev/Anheuser-Busch case. Unfortunately, such data are insufficient for drawing clear inferences. It is to be hoped that the outstanding question as to how MOFCOM will apply the AML can be answered when more decisions are publicized in the near future.
Meanwhile, although MOFCOM’s decision on Coca-Cola/Huiyuan is only a single data point, the decision demonstrates that China’s competition authorities will not hesitate to block transactions they deem to be anticompetitive under the new law. MOFCOM’s decision also suggests that the objective of China’s merger analysis process is not only to protect consumers, but also to protect the competitive process by ensuring a large number of competitors in the market. In addition, it appears likely that MOFCOM will also make protection of medium- and small-sized competitors a priority. Companies pursuing mergers and acquisitions involving corporations operating in China should, therefore, be prepared to face tough scrutiny from China’s competition authorities.