China blocks Coca Cola merger

01 March 2009

Grace Chen, Lei Sun

On March 18 2009, the Ministry of Commerce’s (MOFCOM) Anti-monopoly Bureau (the Bureau) announced its decision on the proposed acquisition of Coca Cola Inc. (Coca Cola) and Huiyuan Juice Corp (Huiyuan). After almost three months of investigation and review, the Bureau concluded that the proposed transaction would result in anti-competitive effects on the juice beverage market in China and that such effects would outweigh the pro-competitive effects; it therefore decided that the transaction should be prohibited.

The Bureau stated that the market concentration which would result from such an acquisition would allow Coca Cola to exploit its dominant position in the carbonated drinks market to control and restrict or eliminate competition in the juice market, for example through product tying and bundling, and thus further injure the interests of consumers. The decision went on to express concern that the proposed concentration would allow Coca Cola to control two well known brands, "Mei Zhi Yuan" and "Hui Yuan", and strengthen its market power in the beverage industry, thus raising barriers to entry for any potential competitors. The Bureau believed that the proposed concentration could inhibit the development of small and medium sized domestic juice producers, which would have a negative impact on the competitive environment within China’s juice market. In the course of the investigation, Coca Cola was given the opportunity to consult with the Bureau on the details of a possible conditional clearance. After careful consideration of the solutions proposed by Coca Cola, the Bureau determined that it would not be possible to reduce the negative impact of such a concentration effectively and therefore decided to issue a decision prohibiting the transaction.

The Coca Cola case is the first instance where the Bureau has issued an absolute prohibition of a proposed concentration. Since the PRC Anti-monopoly Law (AML) took effect on 1 August 2008, the Bureau has received forty merger control filings. Decisions have been reached in twenty-five of those cases; of these, twenty-three were unconditionally approved and one (the acquisition of Anheuser-Busch by Inbev, both of which have significant interests in Chinese breweries and turnover in China) was approved with certain restrictive conditions imposed.

To facilitate AML enforcement, MOFCOM has published a series of regulations and guidelines relating to antitrust notification and AML review since the beginning of 2009. The publication of these documents signals China’s intention to build up a solid antitrust regime, modelled on those of Western jurisdictions.

This decision marks an important milestone in China’s antitrust regime and constitutes a significant departure from China’s foreign investment policy, which had focused primarily on attracting foreign investment to expedite the development of its economy over a short period, without taking into consideration other factors. China’s economy has clearly arrived at the point where it needs to ensure that market competition continues to thrive in a healthy and robust manner, and it is now recognised that the Chinese Government needs to take steps to keep monopolistic forces in check. Companies looking to enter the Chinese market or expand an existing presence in China must now take into account competition law issues more carefully than in the past.