China's Ministry of Commerce ("MOFCOM") has concluded its review of Coca-Cola's bid to acquire beverage maker Huiyuan Juice Group Ltd (a Hong Kong listed company), and has ruled that the deal is prohibited by China's Anti-Monopoly Law ("AML").  This is the first prohibition decision that MOFCOM's Anti-Monopoly Bureau has issued under the AML.
The proposed US$2.4b acquisition would have been the largest buyout of a Chinese company by a foreign firm.  MOFCOM's rejection of the deal on competition grounds, the first such decision since the commencement of merger control in China in 2003, demonstrates the significance of ensuring AML-compliance for transactions. 
MOFCOM's decision announcement on 18 March 2009 comes 118 days after commencement of its formal review process on 20 November 2008, although it is known that the parties to the deal were informally consulting with MOFCOM for some months prior to this.  In addition to the implications of the rejection decision, the lengthy review process puts the business sector on notice about the delays deals may potentially face when subject to merger filing scrutiny in China. 
China's merger review process and the prohibited deal
Under Article 28 of the AML, MOFCOM is required to prohibit relevant proposed M&A deals if they are likely to have the effect of eliminating or restricting competition in a relevant market in China.  The AML also provides MOFCOM with the power to approve deals if the parties can prove that the positive impact on market competition clearly outweighs the negative elements, or if the deal satisfies public interests. 
To facilitate review, parties are required to submit to MOFCOM extensive reports on relevant deals (which can include deals wholly outside China, if the parties have affiliates with sufficient China turnover)  and to suspend closure pending an approval decision.  A formal review period of up to 180 days may be possible if a deal is seen to raise serious competition issues.
Because Coca-Cola and Huiyuan are seen to operate primarily in different product markets (carbonated soft drinks and juice drinks respectively), it was initially believed by many commentators that the deal was unlikely to raise significant competition concerns.  However, unease about the deal's prospects rose when MOFCOM moved into its 'second phase review' process in mid-December 2008.  Most deals reviewed by MOFCOM are cleared within an initial 30 day review period, with second phase review generally reserved for deals that are seen to raise substantial competition-related issues.
Additionally, there has been speculation the significant degree of public interest in the deal within China, and in particular nationalistic concerns about the potential loss of a famous Chinese brand to foreign control, would hinder approval prospects.  Under the AML, the Chinese authorities may review deals that are seen to raise national security issues, and based on pre-existing regulations this may be interpreted broadly to include where deals raise issues relating to national economic security, or involve key sectors or time-honoured brands.
Coca-Cola appears to have been sensitive to these issues, and made it clear from an early stage that the Huiyuan brand would be retained if the deal was concluded.  Additionally, assurances had been given that key personnel associated with development of the brand would retain senior positions within the company.  
However, MOFCOM's decision is stated to be based purely on an assessment of the deal's impact on competition in China.
MOFCOM's concerns about the competition impacts from the deal
Huiyuan is the largest juice beverage maker in China, with an estimated share of China's pure juice market exceeding 40%.  It is also believed to control more than a tenth of the rapidly growing  fruit and vegetable juice market in China. 
MOFCOM has stated that it believes the merger would have an adverse affect on competition because it would give Coca-Cola (which already has a presence in these markets in China) a dominant position in the growing market for juice beverages in China.   In particular, MOFCOM indicated that it believed Coca-Cola's acquisition of control over the famous 'Huiyuan' juice brand (supplementing the company's existing 'Minute Maid' brand in this sector) would enhance the company's ability to effectively control (and restrict the competitive development of) the market and limit the ability of smaller players in this market to grow and compete.   In turn, MOFCOM stated that this lessening of competition would harm the legitimate rights and interests of Chinese consumers.
In particular, as Coca-Cola is already considered to be dominant in the carbonated beverages market, MOFCOM expressed concern that the merged company would have the ability to leverage this position to dominate the juice market through tying, bundling and exclusive dealing.  This is notwithstanding that the legality of any such future practices may have potentially been able to be scrutinized under the AML's separate prohibition concerning abuse of a dominant market position.
Except for a brief decision statement referencing primary areas of concern in relation to the deal, MOFCOM has not published any substantive reasoning or analysis relating to the decision.  This lack of transparency is a concern, as it limits the ability of parties to gain an insight into MOFCOM's assessment process, and its current thinking on key issues with broader implications such as market definition and the balancing of pro-competitive and anti-competitive effects of deals.
This also leaves room for speculation about the role protectionist policy may play in such decisions.   Although China's leaders have recently called for more action to encourage foreign investment, concerns remain about the openness of key sectors and prospects for proposed investment in 'national champion' brands. 
MOFCOM says that it tried to negotiate restrictions on the deal, but that Coca-Cola's response was insufficient.  There is speculation that Coca-Cola may have been reluctant to engage in any significant compromise in relation to the deal after a recent weakening in Huiyuan's sales and other factors potentially denting the attractiveness of the deal.
Implications for the business sector
This MOFCOM decision demonstrates the importance of:
  • considering AML issues at an early stage in deal development
Where deals may impact a significant sector of the Chinese economy, or may involve a famous Chinese brand, the prospect of lengthy review on competition grounds cannot be discounted.  This will affect deal timetables, and the resources and management time that may need to be made available to addressing competition concerns.  Even in relation to relatively straightforward deals not obviously raising competition concerns, MOFCOM's strict filing and information-production requirements may result in lengthy delays being encountered even before formal review of a notified deal commences.
Businesses whose transactions may be subject to merger filing requirements under the AML should consult with MOFCOM at an early stage, in order to determine precisely what information and analysis may be required to be included in filing documents and what competition or other concerns may need to be addressed.  Additionally, there will be situations in which it is prudent to consider alternative deal structures at an early stage, or even implementing proactive divestments or the giving of undertakings to MOFCOM, to address potential areas of concern.
  • consulting with potentially concerned parties
It is clear that MOFCOM consulted widely with interested parties such as competitors of the transaction parties and their customers  Such broad industry consultation by MOFCOM is becoming a more frequent occurrence as it expands its resources and expertise in this area.  Accordingly, it will be prudent for parties submitting merger  filings in China to conduct advance discussions (where feasible) with relevant competitors, customers and industry associations, to brief them on positive aspects of a deal that is to be notified.  This may increase the prospect of regulatory consultation with these parties proceeding promptly and smoothly.
  • ensuring there is scope for 'last minute' changes to deal structures
MOFCOM attempted to negotiate solutions and remedies to the competition concerns it identified with the notified deal, however it was unable reach agreement with Coca-Cola on these matters.  Going forward, it will be important that parties submitting merger filings in China are attuned to the prospect that MOFCOM may want to negotiate last minute changes to the deal structure, or to impose forward looking conditions restricting the market behaviour of the transaction parties after the deal is implemented.  Parties should give advance consideration to the kinds of negotiated outcomes that may be acceptable, and ensure they are in a position to offer or implement them promptly if this is required to ensure approval of a notified deal.
Overall, the decision highlights the increasingly important role the AML is playing in China's commercial environment.  Businesses operating in China, selling to China, or doing deals with companies whose corporate groups have a nexus to China, need to ensure they are AML compliant and take steps to minimise any adverse impact of AML review processes.