China Law Vision : China Insurance & Anti-Trust Lawyer : Dr. Zhan Hao : Grandall Legal Group : Anti-Monopoly & Competition Law : China Law Vision Blog

As we all know, representation and warranty provision, as well as indemnification provision, are the core content of an M&A contract. Generally speaking, both the acquirer and the acquired promise in the representation and warranty provision that it has provided all truthful information it possesses pertaining to the relevant issues to the other party, otherwise it will be liable for any damages caused by its misrepresentations.

Where one party applies for the Seller/Buyer Warranty and Indemnity Insurance, if there are damages caused by the other party, the insured may make a claim to the insurance company to get the indemnification. This will help the insured to prevent from the damages caused by the intentional failure of disclosure and other incidental damages caused by the uncertain factors.

From a global perspective, the Seller/Buyer Warranty and Indemnity Insurance is never the main product for the insurance companies. However, taken the huge amount of the fund which will be involved in the M&A into consideration, the premium of the insurance is still hard to be ignored. The current average premium rate of the Seller/Buyer Warranty and Indemnity Insurance is 1%-3%. In the last 10 yeas, the highest limitation of indemnification is USD500 million.

Now, the Seller/Buyer Warranty and Indemnity Insurance is emerging on the Chinese insurance market: two foreign-invested insurance companies: Chartis Insurance and Zurich Insurance have filed this product to the CIRC. According to the information provided by Chartis, the first policy in China is underway.

The underlying reason for the two insurance companies to import these two insurance companies is to meet the increasing needs of the Chinese giant companies for this product.

Since the financial crisis exerts less influence on Chinese market, and Chinese corporations developed rapidly in recent years, a lot of Chinese corporations have accelerated their steps towards the global market. According to some unofficial statistics, Chinese corporations are parties in over 50% the important M&A transactions in recent years. However, as new player in the global financial market, one of the biggest concerns of Chinese undertakings is that they may not so familiar with the rules and tricks of the M&A transaction. They need a kind of insurance which will cover them from the overall risks involved in M&A. Then, the Seller/Buyer Warranty and Indemnity Insurance is the very choice for these corporations. Many insurance companies, especially those foreign insurance companies, take this need as the new opportunities for their development in Chinese insurance market.

In one word, when more and more Chinese corporation engages in M&A in the global market, the Seller/Buyer Warranty and Indemnity Insurance will have a promising future in china.

In an attempt to provide clarification of the final decision, Ministry of Commerce spokesman, Yao Jian, in an interview in the People’s Daily, tried to flesh out the Ministry's rationale for rejecting the bid.

Mr. Yao stated that MOFCOM took the following factors into consideration; market shares; market strength and the potential influence of the concentration on entry to the relevant market for consumers and other competitors and for competition as a whole. He also emphasized the rejection was based solely on monopoly concerns, not nationalism, as many members of the foreign media had suggested.

In his speech, Mr. Yao acknowledged the most crucial and difficult decision is how to define the relevant market. Theoretically speaking, two ways may be employed. The first is substitutability of demand from a consumers' perspective. In general, if consumers are more likely to buy B as a substitute of A, then competition exists between B and A, both belong to the same relevant market. The other way is substitutability of supply, from suppliers' perspective. If suppliers of B can easily offer a closely related product to A with little extra risk, then B and A belong to the same relevant market.

In the Coca-Cola and Huiyuan decision, as Mr. Yao addressed, two sub-sectors under the non-alcoholic beverage sector are present. These are the sectors of juice beverages and carbonated soft drinks. The relevant market in this case is the juice beverage market.

Mr. Yao further explained that Coca-Cola already had market dominance in the carbonated drinks sector, citing local industry association estimates that it holds 60.6 percent of the market. Huiyuan controls more than a tenth of the Chinese fruit and vegetable juice market and has also gained great market strength in the juice beverage market. Although there is not strong substitutability between the carbonated beverage and juice beverage markets, both are non-alcoholic drinks. On this basis the two sectors are closely intertwined markets. If the deal went through, Coca-cola would have leveraged influence in the juice sector and could use its position to "transfer its dominance of the carbonate beverage market to the juice beverage market".

However, Mr. Yao's speech does not cover how Coca-Cola would transfer its dominance of the carbonate beverage market to the juice beverage market. In theory, this would be impossible to explain in less than two pages, the length of the actual judgment in Chinese characters. The absence is one reason behind the lack of persuasiveness in the judgment, leading to further arguments as to whether this transaction should have been banned.
 

The Coca-Cola business in Chinese drink market has been operating since the reform of Chinese market and is well known for its famous sparkling beverage brands such as Coca-Cola, Sprite and Fanta. In the last few years, the Company has also introduced a number of still beverage brands, including Guo Li Chen (Minute Maid Pulpy) and Yuan Ye (Original Leaf Tea). In line with this, the Company is seeking to further develop its beverage business through this acquisition.
President and CEO of The Coca-Cola Company told press:

"This acquisition will deliver value to our shareholders and provide a unique opportunity to strengthen our business in China, especially since the juice segment is so dynamic and fast growing in China. It is also further evidence of our deep commitment to China and to providing Chinese consumers with the beverage choices that meet their needs."

This decision is astonishing news to the parties of concentration and Chinese profession circle as well. Just on 16th, March 2009, China Daily reported that Mr. Yao, the spokesman of MOFCOM , said Monday that Coca-Cola's bid to acquire China Huiyuan Juice Group was still being reviewed, with reference to an anti-monopoly law that took effect last year.Yao told reporters that the ministry's investigation and review of the proposed transaction, which started November 20, would finish on March 20.Coca-Cola applied for an anti-trust exemption at the end of 2008. The acquisition would be the first major deal concluded under China's new anti-monopoly law.That law was passed in 2007 and took effect on August 1, 2008.Yao said the MOC would consider whether the acquisition would disturb market competition or harm rival enterprises or consumers.

I thought the prohibition decision should be related to high concentration degree in the relevant market, high market share of two parties and the final decision on the relevant market.
 

In the past, forms of concentration such as mergers, acquisitions, combinations, consolidations, and takeovers were regulated by the General Principles of Civil Law, The Company Law, The Bankruptcy Law, Explanations by the Supreme Court of China regarding Enterprise Reconstruction, and additional regulations of the Ministry of Commerce (MOFCOM). There was no official statutory definition of concentration and the applicable rules created by different regulatory bodies were unclear and not properly coordinated leaving a large gap for differing interpretations of the law.  

The most important statutory rule for concentration before the adoption of the Anti-monopoly Law was in Article 2 of the Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors. However, many legal commentators criticized the above provision as they believed its regulatory scope was too narrow and the definition of share right and asset takeover did not adequately provide for the many new emerging forms of concentration in the market.

The Chinese legal definition for merger as used in The Company Law and in other rules and regulations refers to the act of purchasing part of the equity and assets of another company; excluding many other forms of concentration such as acquisition, joint venture, strategic alliance, contractual arrangements for shared rights and obligations, and an interlocking director. Similarly, not all forms of concentration are fully encompassed within the American legal definition of Merger and Acquisition (M & A)

The word "concentration"as it is defined under European competition law may be the best model for the Anti-monopoly Law. This is because it focuses on the essential outcome of concentration activity, instead of just describing specific behavior. It also gives consistency to the law by providing a general term covering many different types of consolidations. Thus, if there are other forms of concentration in future practice, such as certain strategic alliances, joint ventures, or other agreements/undertakings between parties that cannot be categorized as a merger, acquisition, interlocking director, franchise or contractual control; it will still fit within the definition of concentration in the Anti-monopoly Law. 

Article 20(3) of the Anti-monopoly Law states that concentration occurs where "a business operator acquires control over a business(s) or is able to exert a decisive influence on a business(s) by contract or any other means." This provision establishes that control may be obtained through contract or any other activity in which a business operator could exert influence on other business operators. Article 217 of the Company Law defines an "actual controller" as "anyone who is not a shareholder but is able to hold actual control over the acts of a company by means of investment relations, agreements or any other method."

It is important for the Anti-monopoly Law to properly take into account the increasingly more complex and diverse forms of concentration that are now emerging, and which will continue to be utilized in the market. By focusing on the "outcome" of concentration activities, the European model best achieves this goal.