Coke, antitrust and the future
5/05/09 Source: Legalbusinessonline.com
Few transactions have been as widely debated and talked about in the legal sector as the failed acquisition of China Huiyuan Juice Group by the Coca-Cola Company. If it had been approved, the proposed US$2.4bn acquisition would have been the largest takeover of a domestic company by a foreign entity. However, it in fact became the first transaction blocked under the new Anti-Monopoly Law (AML).
“This is the first time MOFCOM has denied antitrust approval of an acquisition, so naturally it has raised a lot of attention from the public and business community,” says Zhan Hao, managing partner of Grandall’s Beijing office. “There are grave concerns about this decision, mainly because the reasonings in it were very general, and the transaction involved a well-known multinational company and a famous national brand.”
Despite these concerns, the majority of AML and competition lawyers believe the decision marks the coming of age of the AML practice in China.
Defending the decision
Regardless of the final outcome, lawyers have noted the beneficial results of the procedure and the process of MOFCOM’s review.
“In reviewing this transaction, MOFCOM has followed the rules they set up, in terms of the procedure. The process is more transparent and involved more communication. To me, that’s one good sign,” says David Blumental, a partner with Vinson & Elkins in Shanghai. “Antitrust is a very complicated area of the law, involving detailed economic analysis, so a high level of communication is required in order to ensure that the regulators can review a transaction properly.”
Some media reports said the decision indicated the country was closing the door to foreign investment, but DLA Piper’s Asia head of competition practice, David Cox, says it is difficult to be absolutely sure because the decision was very brief and certain things are still not clear.
“Many of the comments made in the press are either being misconceived or unfair. To be able to make fair comments, one has to be very reserved,” Cox says, pointing out that the rulings adopted by MOFCOM on Coca-Cola’s acquisition of Huiyuan look very similar to a decision made previously by Australia’s competition authority. In 2003, the Australian Competition and Consumer Commission (ACCC) opposed the acquisition of Berri Limited by Coca-Cola Amatil, the Australian Coca-Cola bottler and partly-owned affiliate of The Coca-Cola Company.
In both cases, a major concern of the regulators was that Coca-Cola would have gained the ability to leverage a dominant position in the carbonated soft drinks market into the juice market.
“Whether the ruling is valid or not is impossible to see at the moment, due to the short nature of the decision,” Cox says. “However, this type of merger… is the type of situation that has raised difficult competition issues in other jurisdictions, such as in Australia and the EU. This will always be a difficult case and the reasonings adopted by MOFCOM are classic reasonings of competition authorities with similar cases around the world.
“It clearly shows that AML and competition law in China has come of age. MOFCOM is acting very much in a way the ACCC would act in Australia, the European Commission in the EU and the FTC in the US. They all have extensive powers and they are using them,” he adds.
In addition, the decision indicates that solutions or remedies were discussed between Coca-Cola and MOFCOM. Although the remedies proposed by Coca-Cola were considered by MOFCOM as insufficient, some industry observers have suggested it was pragmatic to try to find solutions – an encouraging sign for foreign investors.
Not a bad thing
While lawyers are confident that the Coca-Cola/Huiyuan ruling will not directly affect future M&A, in terms of foreign investors’ interest in making acquisitions in China, the unpredictability of the AML enforcement may make it difficult for legal advisors to provide precise advice and consel to clients.
“As MOFCOM only needs to publish decisions of rejection and conditioned approval, we don’t know much about the approved deals. So we can’t study them and understand the implementation of the new law better, in order to help clients accordingly,” says Peter Wang, a partner at Jones Day in Shanghai.
Nevertheless, many said the lessons that can be drawn from both the Coca-Cola/Huiyuan and InBev/Anheuser-Busch decisions would help to stimulate more legal work.
“Foreign investors won’t give up their plans to acquire companies in China due to this ruling or [the] increasingly sophisticated legal environment. But they will think twice before starting a deal, particularly for multinationals, who have large market share in certain markets or have important brand names that are well-known in China and worldwide,” Wang says.
“Potential acquirors will seriously consider if it is worth trying to do M&A deals in China in related product areas. From now on, multinationals and other investors will have to look more seriously into the AML and competition issues before they start a deal, and need to be prepared for different possibilities – such as no antitrust approval or delays in approvin – in the planning a transaction.”
With the emergence of AML and competition legal practices in China, international firms have geared up to make a mark in the new market. They are increasing their capabilities by relocating experienced lawyers from UK or US offices and promoting local talent to partner.
“Antitrust is a brand new practice area for all PRC firms. It is a complicated area and sets a high threshold for lawyers to enter, but it offers local firms great prospects for growth,” Zhan says. Although international firms have natural advantages in this area at the moment, he believes PRC firms will play an increasingly important role in advising on merger control matters in China. Zhan also noted that PRC firms can provide a wider range of antitrust and competition legal services in China than their international counterparts.
“Advising on matters related to merger control will be only one part of the antitrust practices at PRC firms. We are also developing expertise and resources in private antitrust litigation, dominance and abusive conduct inquiries and IP-related unfair competition cases,” Zhan says.
