In a test case for China’s new anti-monopoly law, Mallesons Stephen Jaques partner Martyn Huckerby looks at the ramifications of Coca-Cola’s failed bid to acquire famous Chinese juice brand Huiyuan.

The decision by the Chinese Ministry of Commerce to block Coca-Cola’s proposed acquisition of the leading Chinese juice company, Huiyuan, in March has provided additional insight into the operation of the new Anti-Monopoly Law, which took effect in August last year. While the decision has attracted much negative commentary, there are many positive signs for firms looking to invest in China, particularly where they allow sufficient time for the merger review process and adopt a flexible approach in dealing with MOFCOM.

Both at the time of the original decision and in subsequent public statements, MOFCOM has justified its decision to block Coca-Cola’s proposed acquisition of Huiyuan on antitrust/competition law grounds. In particular, MOFCOM considered that the acquisition would have the effect of eliminating or restricting competition in China.

MOFCOM was concerned that Coca-Cola would leverage its dominant position in the carbonated soft drinks market to restrict competition in the juice beverage market.

Coca-Cola’s control of two key beverage brands in China, one being a famous Chinese brand (Huiyuan), may also raise barriers to entry and leave little, if any, room for smaller players to manoeuvre.

While many commentators have been surprised by MOFCOM’s decision, it is not without international precedent. In 2003, the Australia Competition and Consumer Commission determined that Australian listed Coca-Cola Amatil Limited’s proposed acquisition of Berri Limited, a manufacturer and marketer of fruit juice and fruit drinks, would have the effect of substantially lessening competition in Australia.

One of the key differences between the approach taken by the ACCC and that of MOFCOM is that the ACCC’s decision-making approach was significantly more transparent, which helped address potential counterarguments. In the Coca-Cola Amatil-Berri deal, the ACCC reasoned that because the two companies had common trade channels, complementary products and significant markets shares in their respective markets, anti-competitive effects would result. The ACCC considered that Coca-Cola Amatil’s unrivalled network of in-store refrigeration equipment in non-grocery distribution channels would encourage tying or bundling and retailers would have an incentive to acquire carbonated soft drinks and fruit juice and fruit drinks from the same supplier to minimise logistics costs. The ACCC also outlined potential conditions imposed on Coca-Cola Amatil and why they would not counteract resulting anticompetitive effects. Coca-Cola had offered to undertake not to tie or bundle the merged entity’s products. However, the ACCC concluded that it was unlikely that undertakings could be framed to capture all existing and potential anti-competitive behaviour.

Even if undertakings were possible, they would be so complex and prohibitive so as to be unworkable, unduly interfere in the competitive process or be inflexible to market changes. Without a detailed explanation of MOFCOM’s decision it is difficult for commentators to test the veracity of MOFCOM’s reasoning. MOFCOM also did not disclose why it was unable to reach an agreement on possible remedial conditions or why Coca-Cola’s proposals did not address its concerns.

However, it is clear from MOFCOM’s decision that parties that are more willing to adopt a flexible approach in negotiating with MOFCOM are much more likely to achieve a successful outcome. In the case of MOFCOM’s clearance of InBev’s acquisition of Anheuser- Busch last year, InBev was able to address MOFCOM’s concerns regarding the acquisition of
Anheuser-Busch’s minority stake in Tsingtao (another famous Chinese national brand). MOFCOM’s decision does not necessarily mean that other proposed foreign investments will be blocked by MOFCOM, although any decision to acquire a business with a famous Chinese national brand will need to be carefully considered. In its published decision, MOFCOM has highlighted its track record in clearing transactions and sent a series of positive messages to firms looking to invest in China.

To successfully navigate the merger control process in China, firms should undertake the following steps:

• consider at an early stage whether the turnover thresholds requiring a mandatory merger filing have been met and whether the transaction may give rise to antitrust/competition concerns;

• commence early pre-notification consultation with MOFCOM’s Anti-Monopoly Bureau;

• be prepared to adopt a flexible approach in negotiating conditions with MOFCOM; and

• have a strategy in place to deal with the concerns of third parties likely to be consulted by MOFCOM as part of its merger review process.

In relation to dealing with third party concerns, the impact of a proposed transaction on smaller competitors and the potential for job losses will generally be of concern to MOFCOM.

In the case circumstances, the arguments around competitors being harmed by the acquisition have probably gained greater traction as a result of the global financial crisis. Commentators will now be watching MOFCOM’s next decisions with interest to see if there are any emerging trends and if MOFCOM responds to criticism of its decision to block Coca Cola’s proposed acquisition of Huiyuan juice through the provision of more detailed reasoning in future cases. ■

* Martyn Huckerby is a partner in the Shanghai office of Mallesons Stephen Jaques where he specialises in M&A, competition/ antitrust and telecommunications law.

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