April 01, 2009

Notice of Decision on Prohibition of Coca-Cola's Acquisition of Huiyuan Company

Issuing Body: Ministry of Commerce
Issuing Date: March 18, 2009
Effective Date:         March 18, 2009

In a decision that has garnered attention—and some expressions of concern—around the world, China's Ministry of Commerce (MOFCOM) has denied approval of a corporate acquisition because of antitrust concerns. It is the first time MOFCOM has done so since passage of the PRC Anti-Monopoly Law in August 2007. Coca-Cola Co., which already makes "Minute Maid" brand juices, had sought to acquire one of China's largest and best-known juice manufacturers, China Huiyuan Juice Group Ltd. (Huiyuan). MOFCOM concluded, after lengthy review, that the combination would adversely affect competition in China's juice market.

Background

The Standing Committee of China's National People's Congress adopted the PRC Anti-Monopoly Law in August 2007, after years of internal and external debate. More than a decade in the making, that law attempted for the first time to systematically define and regulate antitrust law and antitrust law enforcement throughout China. It became effective on August 1, 2008.

China Law Update summarized that landmark legislation, first in draft form (August 2007) and ultimately, as enacted, in our October 2007 issue. We have likewise summarized various rules and regulations enacted in order to implement the Anti-Monopoly Law (the Regulations on Notification of a Concentration of Undertakings, September 2008; the Guiding Opinions on Merger Control Notification, February 2009; the Guiding Opinions on Application Materials for Merger Control Notification, February 2009).

MOFCOM's rejection of the Coca-Cola/Huiyuan acquisition is its second major decision under the new Anti-Monopoly Law. The first approved (albeit with conditions) InBev's acquisition of Anheuser-Busch in November 2008.

MOFCOM's Decision

Coca-Cola initially filed with MOFCOM to acquire Huiyuan in September 2008, a little more than a month after the Anti-Monopoly law took effect. The U.S.-based soft drink giant subsequently submitted several supplemental filings.

In rejecting Coke's acquisition of Huiyuan, MOFCOM gave three reasons:

1) Upon completion of the sale (Concentration), Coca-Cola would leverage its dominance of China's soft drink market to control the juice market, eliminate or restrict competition among existing juice enterprises, and therefore damage the interests of consumers;

2) The Concentration would significantly strengthen Coca-Cola's control over the juice market by enabling the company to control two famous juice brands, i.e. "Meizhiyuan" and "Huiyuan," creating obstacles for potential competitors to enter the juice market; and

3) The Concentration would squeeze small- and medium-sized juice enterprises and restrict competition.

The proposed takeover received both a 30-day initial review and the 90-day secondary review, as provided in the Guiding Opinions on Merger Control Notification. According to MOFCOM, it conducted an extensive investigation of the proposed merger and relevant markets, including, among other things, public hearings, discussions, on-site investigations and interviews. It also consulted with relevant industry associations, juice enterprises, juice suppliers and retailers, as well as legal, economic and agricultural experts. MOFCOM did not release its underlying data and evidence.

In order to lessen what it considered to be the potential adverse effects of the Concentration, MOFCOM had engaged in extensive negotiations with Coca-Cola about imposing possible restrictive conditions on the merger (as MOFCOM had with InBev). Most notably, MOFCOM had reportedly proposed that Coca-Cola could acquire Huiyuan's plants and physical assets, but would have to divest itself of the Huiyuan brand. Coke reportedly rejected that proposal, saying that such a restriction would have rendered its $2.4 billion purchase price unacceptable.

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