Chinese Ministry of Commerce Blocks Coca-Cola's Acquisition of Huiyuan

January 1, 0001


On March 18, 2009, the Antimonopoly Bureau of the Chinese Ministry of Commerce (MOFCOM) released Ministry of Commerce of the People’s Republic of China Notice [2009] No. 22, prohibiting the proposed acquisition of the Huiyuan Fruit Juice Company Ltd. (“Huiyuan”) by the Coca-Cola Company (“Coca-Cola”) pursuant to the Antimonopoly Law (“AML”).

The AML, China’s first comprehensive competition statute, introduced more rigorous procedures for reviewing mergers, acquisitions, and other “concentrations” on competition grounds. The onset of the global financial crisis largely overshadowed the launch of the new merger review regime; MOFCOM has reportedly received just 40 notifications since the AML took effect on August 1, 2008. Several of these transactions have, however, proven controversial. On November 18, 2008, MOFCOM published its first decision enforcing the AML, conditionally approving the acquisition of Anheuser-Busch Companies Inc. by InBev NV/SA. Although MOFCOM’s ruling on the Coca-Cola Company’s bid for Huiyuan is the second published enforcement decision, it represents the first time that MOFCOM has outright prohibited a reported transaction pursuant to the AML.

Huiyuan is China’s largest fruit juice manufacturer. It was established as a privately owned company in 1992, and was subsequently listed in Hong Kong through a Cayman Islands listing vehicle in 2007. On September 3, 2008, Coca-Cola publicly announced plans to acquire Huiyuan through a wholly-owned subsidiary for HK$17.9 billion. Huiyuan’s founder and other shareholders accounting for 66% of the outstanding shares agreed to sell their stakes. The proposed transaction provoked tremendous controversy within China. The public outcry, however, focused more on objections to foreign control over one of China’s premier domestic consumer brands than on the potential competitive effects of the transaction.

While “onshore” acquisitions of Chinese companies are subject to a battery of review and approval procedures by multiple government bodies at the local, provincial, and national level, Coca-Cola’s proposed acquisition of Huiyuan involved the “offshore” acquisition of shares in Huiyuan’s overseas listing vehicle. Consequently, the Chinese government’s principal channel for evaluating (and ultimately blocking the transaction) was through antitrust review of the transaction based on its competitive effects within China. This transaction proved to be the most controversial and complex concentration yet reviewed by MOFCOM pursuant to the AML.

Review Schedule

The notice suggests that MOFCOM has adopted the practice of calculating deadlines for the merger review process under the AML in terms of calendar days rather than business days. The AML authorizes a 30 day initial review period, which may be followed by a 90 day further review period (extendable by an additional 60 days in certain cases). MOFCOM had not previously clarified whether these periods should be calculated based on calendar days or on business days. Under the previous Regulations on the Mergers & Acquisitions of Domestic Enterprises by Foreign Investors (the "M&A Rules"), deadlines for the review of certain transactions involving foreign investors were based on business days. The notice explains that Coca-Cola initially submitted the transaction for review on September 18, 2008, and made four supplemental submissions between September 25 and November 19. MOFCOM determined that the notification was complete as of November 20, 2008, and only at that point commenced the thirty day initial review period. At the conclusion of the period, MOFCOM notified Coca-Cola of the initiation of a 90 day further review. MOFCOM “evaluated the various impacts resulting from the concentration and completed the examination before March 20, 2009.” The timing of the review conforms to deadlines calculated based on calendar days. If this represents MOFCOM policy, then reviews under the new AML may proceed faster than reviews under the previous M&A Rules.

Investigation Process

The notice describes MOFCOM’s investigative steps. After analyzing the notification materials, MOFCOM “solicited the views from such communities as the relevant government entities, the relevant industry associations, fruit juice beverage enterprises, upstream providers of condensed fruit juice, downstream fruit juice beverage distributors, the parties of the concentration, the Chinese partners of Coca Cola, and the relevant legal, economic and agricultural experts.” MOFCOM described the investigative means as “written enquiry, verification workshops, seminars, hearings, onsite investigation, entrusted investigation, and stakeholder interviews.” The notice does not, however, further describe these investigative measures--or of any precautions taken with respect to the handling of confidential information in the course of the investigation. Similarly, the notice does not describe the procedures through which the transaction parties were permitted to advance their positions or respond to arguments advanced by other parties.

Substantive Antitrust Analysis

The notice explains that MOFCOM’s investigation focused on the following six factors:

  • “the relevant business operators’ market shares in the relevant market and their market power;”
  • “the degree of market concentration in the relevant market;”
  • “the impact of the concentration of business operators on market access and technological advancements;”
  • “the impact of the concentration of business operators on consumers and other business operators;” 
  • “the impact of the concentration of business operators on the national economic development;” and
  • “the impact of the Huiyuan brand on the competition of fruit juice beverage market.”

The notice identifies three potential negative impacts on competition.

First, MOFCOM found that the acquisition would enable Coca-Cola “to carry over its dominance over the carbonated soft drink market to the fruit juice beverage market, triggering the effect of eliminating or restricting competition over the existing fruit juice beverage enterprises and, in turn, compromising the legitimate interest of consumers.”

Second, MOFCOM emphasized that brand recognition is “a key factor affecting the effective competition in the beverage market.” After the transaction, Coca-Cola would have “considerably stronger market power in the fruit juice beverage market by controlling two well-known fruit juice brands,” specifically Huiyuan and Coca-Cola’s existing “meizhiyuan” brand. MOFCOM found that “given its current dominance over the carbonated beverage market and the carry-over effect, the concentration will considerably raise the barriers for potential competitors to enter the fruit juice beverage market.”

Third, MOFCOM concluded that the acquisition would squeeze out small and medium-sized domestic fruit juice enterprises and “curtail the ability of domestic enterprises to compete and independently innovate in the fruit juice beverage market.” This, in turn, would negatively affect “the pattern of effective competition in the Chinese fruit juice beverage market” and impede “the sustained and sound development of the Chinese fruit juice industry.”

Rejection of Proposed Restrictive Conditions

The notice explains that MOFCOM requested Coca-Cola to propose restrictive conditions to cure the negative effects perceived by MOFCOM. Coca-Cola presented an initial proposal for corrective measures, and later introduced a supplemental proposal. Nevertheless, MOFCOM concluded that “the relief plans proposed by Coca-Cola in response to the questions regarding the impact on competition still fail to effectively reduce the negative impact caused by the concentration.” The notice does not explain whether MOFCOM developed alternate restrictive conditions, or whether such alternatives were relayed to (or rejected by) the parties.

Final Decision

MOFCOM’s final decision to prohibit the transaction follows the decision-making structure outlined in Articles 28 and 29 of the AML. Initially, MOFCOM determined that the concentration would have the effect of “eliminating or restricting competition.” Echoing foreign antitrust principles, MOFCOM specifically found that the transaction would adversely impact “effective competition in the Chinese fruit juice beverage market.” In the same sentence, however, MOFCOM also emphasized the transaction’s adverse impact on “the sound development of the fruit juice industry.” MOFCOM concluded that the parties had “failed to provide sufficient evidence” to prove either “that the positive impact of the concentration over the competition considerably outweighs its negative impact” or “that the concentration serves the public interest of society.” MOFCOM then reiterated that Coca-Cola had “failed to propose, within the prescribed time limit, a feasible solution to reduce the negative impact.” Accordingly, MOFCOM prohibited the concentration.

Implications for Future Transactions

Although the notice sheds some light on MOFCOM’s evolving merger review procedures, daunting questions about the substance and mechanics of Chinese competition policy persist.

The notice itself provides only limited grounds for evaluating MOFCOM’s substantive antitrust analysis. It contains just 1,481 Chinese characters, most of which summarize the procedural history of the review. This is not unusual; most Chinese administrative notices are relatively brief and conclusory. In the antitrust context, however, this lack of detail limits the usefulness of the decision.

For example, MOFCOM adopted the language of foreign competition authorities in finding that the transaction would result in a “dominant position” in the fruit juice beverage market, strengthen Coke’s “market power,” and impede “effective competition.” However, the notice does not clearly explain the underlying factual findings and analysis that led to these conclusions. Although the notice alludes to separate “carbonated soft drink” and “fruit juice beverage” markets, it does not clearly define the relevant markets on which MOFCOM based its analysis, describe alternate market definitions rejected by MOFCOM, or describe MOFCOM’s assessment of available market share data. Significantly, commentators had advanced several alternative approaches to segmenting the juice and beverage markets, each of which pointed towards different outcomes. Similarly, the notice does not explain MOFCOM’s methodology in gauging the economic effects of the transaction or weighing any contradictory views.

The notice does, however, highlight the Chinese government’s willingness to consider industrial policy in merger review. MOFCOM emphasized the threat to the domestic enterprises, to “small and medium sized” competitors, and to “the sound development of the fruit juice industry” irrespective of the needs of consumers.

MOFCOM avoided explicitly condemning the transaction on grounds of “economic nationalism.” Apart from “pure” antitrust concerns, the proposed acquisition had also provoked public opposition to the acquisition of control over a famous homegrown brand by a foreign conglomerate. The M&A Rules actually include special procedures for approving onshore acquisitions by foreign investors of control over “domestic enterprises which own any well-known trademarks or Chinese historical brands.” It was unclear, however, whether this rule technically applied to an offshore stock deal. Although the public furor focused on this issue, the notice formally addressed the value of the Huiyuan brand in terms of its competitive effects rather than in terms of economic nationalism.

Finally, the timing and circumstances of the ruling raise questions about the allocation of real decision-making authority on high-profile cases. As the March 20 deadline approached, Chinese media suggested that personnel from the MOFCOM Antimonopoly Bureau had presented recommendations on the handling of the transaction to more senior levels, perhaps even the State Council. Escalation of specific enforcement decisions above the Antimonopoly Bureau may invite other goals and political considerations into antitrust policymaking. The precise circumstances in which sensitive cases might move beyond MOFCOM remain unclear. Likewise, potential gaps between the views of frontline MOFCOM personnel and higher decision-makers may limit the value of high-profile decisions in predicting MOFCOM’s treatment of more mundane transactions. Even as foreign competition authorities pursue technical assistance programs and policy dialogues with their Chinese counterparts, the possibility remains that the final decision on significant competition policy issues may not always rest with the competition authorities.

Additional details on the roles played by other government bodies, domestic constituencies, and general policy goals in the final decision will likely surface in coming weeks. Foreign investors, in turn, will have to consider carefully both likely effects of proposed transactions on Chinese consumers and the likely impacts on other Chinese government policies. One fact remains clear: after over a decade of academic debate and speculation, Chinese merger review is now a serious consideration in a firm’s international merger and acquisition strategy.