Authored by Dr. Zhan Hao (

Walmart surprisingly merged with Niuhai Holdings Ltd before the concentration received approval from MOFCOM.

The concentrated entity Store No.1, controlled by Niuhai, was established in 2008, after which it experienced ups and downs in China’s e-commerce market. The founders, Mr. Yu Gang and Liu Junling, made large capital investment to rapidly increase market share. However, the money-consuming feature of e-operators seemed to trap Store No.1 permanently into capital shortage. On May 2010, Ping An Group, a leading integrated financial services group in Chinese insurance market, purchased 80% equities of Store No.1 at the price of RMB 80 million, enabling Store No. 1 to grow rapidly.

It is revealed that the turnover of Store No.1 was RMB 4.17 million in January, 2008 under the great drive from Ping An Group. The number rose to RMB 46 million in 2009 and RMB 805 million in 2010. The trading volume in 2011 continued to increase rapidly throughout the four quarters. Public statistics show that its Q2, Q3 and Q4 increased by 336%, 609% and 268% compared with those in last quarter. Before the concentration, over 180,000 kinds of commodities were on sales online by Store No.1 and its working staff amounted to 5400. Its warehousing centers scattered around Beijing, Guangzhou, Wuhan, Chengdu and Shanghai, covering a total area of 220,000 square meters.

The merger was conducted by Walmart, a tycoon in retail market. However, the retail tycoon whose physical stores are booming in China did not go smoothly in e-commerce. Sam’s Club online stores were opened in China, but it did not expand with its services limited to Shenzhen and Beijing.

In 2011, Walmart had negotiations with 360buy. According to Mr Liu Qiangdong, the CEO of 360buy, Walmart proposed to acquire absolute control of 360buy, which was subsequently turned down by Liu.

In order to recover from the embarrassing situation, Walmart contacted Niuhai with the intention to purchase equities of Store No.1. Since 2011, Walmart’s ratio of shareholding Store No.1 has been on the rise.

During the interim of 2011, Walmart purchased 20% equities of Ping An Group at the price of USD 65 million. In early 2012, there were rumors that Walmart would purchase 50% equities of Store No.1 held by Ping An Group, which arouse a lot of discussions. Before the concentration notification filing, Mr. Yu Gang, CEO of Store No.1, clarified that the above said purchase was simply a rumor. However, Walmart declared on February 20th it would increase its investment on Store No.1 and its shareholding ratio from 20% to 51%.

Subsequently, in accordance with MOFCOM anti-monopoly promulgation, the relevant transaction process is as follows: On December 16th, 2011, MOFCOM received Walmart’s concentration notification filing in regards to the purchase of 33.6% equities of Niuhai Holdings Ltd. After reviewing the transaction, MOFCOM concluded that the filling documents were incomplete and required further supplements. On February 16th, 2011, MOFCOM considered that the supplemented documents sufficiently met Article 23 of Anti-monopoly Law and accepted the filing for preliminary review.

The specific framework for the concentration is as follows: On November 24th, Walmart and its wholly-owned subsidiary GEC 2 PTE. LTD (hereafter referred to as GEC2) signed the Equity Purchase Agreement (hereafter referred to as the Agreement) with Niuhai Holdings Ltd, Ping An Overseas (Holding) Co., LTD – selling shareholder of Niuhai Holdings Ltd, Mr. Yu Gang – American natural person, Mr. Liu Junling – Australian natural person, Xingangling Co., Ltd (hereafter referred to as Xingangling) wholly owned by Niuhai Holdings Ltd, Niuhai Information Technology (Shanghai) Co., Ltd (hereafter referred to as Niuhai Shanghai) wholly owned by Xingangling (HongKong), Shanghai Yishiduo E-commerce Co., Ltd (Yishiduo) and Ping An Ventures Co., Ltd – selling shareholder of Yishiduo.

According to the agreement, Walmart’s shareholding in Niuhai Holdings Ltd will increase from 17.7% to 51.3% through its wholly-owned subsidiary GEC2. Niuhai Holdings Ltd shall take hold of direct sales of Store No.1, an online shopping platform controlled by Yishiduo (hereafter referred to as Yishiduo Store No.1). Upon completion of the transaction, Walmart shall be the controlling shareholder of Niuhai Holdings Ltd and take control of direct sales of Yishiduo Store No.1 through Niuhai Holdings Ltd.

In accordance with AML, the transaction constitutes equity-purchase concentration behavior. As the applicant meets the turnover requirement, concentration can be implemented post approval by MOFCOM.

During the preliminary review, MOFCOM considers the concentration might restrict and exclude competitions on B2C retail market. The case was listed for further review. On March 16th, 2012, MOFCOM decided to make further review, and upon the consent of the notifying parties, MOFCOM decided to extend time limits for further review.

During the review process, MOFCOM consulted relevant government departments, industry association and enterprises, as well as collected information regarding market definition, industry characteristics and future trend in order to assess the truthfulness, completeness and accuracy of the submitted documents.

MOFCOM also questioned the applicant on competition issues. On July 3rd, 2012, Walmart made a final commitment to MOFCOM in respect of solutions to competition issues. After the assessment, MOFCOM concluded the commitment may reduce the adverse effect on market competition.

Upon review, MOFCOM concluded that Walmart’s purchase of 33.6% equities of Niuhai Holdings Ltd and taking control of direct sales of Yishiduo Store No.1 are exclusive and restrictive. Based on the commitment by Walmart, MOFCOM decided to impose conditional approval of the concentration.

Walmart shall abide by the following conditions: (1) the purchase by Niuhai Shanghai is only limited to direct sales by its own online platform (2) Niuhai Shanghai shall not, post the concentration, provide network services to other dealers with its own network platform without getting permit for value-added telecom business (3) After the transaction, Walmart shall not, by a VIE model, run value-added telecom business operated by Shanghai Yishiduo E-commerce Co., Ltd.

MOFCOM approved the concentration subject to the abovementioned conditions, and MOFCOM shall supervise Walmart on its performance of the above obligations by itself or by a trustee. In the event that Walmart fails to perform these obligations, MOFCOM shall impose penalties in accordance with AML.

In terms of the case details, the conditional approval by MOFCOM involves many legal  issues worthy of further analysis.

1.       Transmitting-effect Hypothesis of Market Dominant Position

According to MOFCOM, Walmart is the main competitor in the global and Chinese chain supermarkets and maintains a dominant position in supply, storage, production line, store network, service, logistics and brand. Its main business lies in physical stores. Yishiduo Store No.1 is the largest online shop at present, and has thousands of suppliers and hundreds of cooperators. The selling products include foods, drinks, beauty care products, kitchen cleaning and electrical appliances, totaling over a hundred thousand commodities.

Business of Yishiduo Store No.1 includes direct sales and value-added telecom business. According to the business scope, model and features as well as substitute factors such as supply and demand, MOFCOM concludes that B2C online selling markets are affiliated markets. Meanwhile, considering the consuming preferences, transportation and customs, the relevant regional markets are Chinese markets.

Survey shows that online retails involve payment, storage, distribution, marketing and network platform, among which logistics and services are key factors restricting online retailers. Walmart has established warehousing distribution systems, wide range of supply channels and sound brand awareness. Upon the completion of the transaction, Walmart shall be capable of transmitting its competitive advantage in physical stores to online sales of Yishiduo Store No.1. The synthetic effect would increase the competitiveness of the merged entity in retail industry. Therefore, MOFCOM extended its investigation on the possible value-added services. The result showed that the merged entity, if enters telecom market through Yishiduo Store No.1, will be able to expand its business rapidly by its current physical retail market and online market to gain advantageous position in value-added telecom market, strengthen its bargaining power against online users and thus restrict or exclude competition in Chinese value-added telecom services market.

The above promulgation reveals that one of the reasons for MOFCOM’s additional approval lies in its concern that Walmart might transmit its competitive advantage to online retail sales of Yishiduo Store No.1. The synthetic effect would increase the competitiveness of the merged entity in retail industry.

Namely, MOFCOM believes that the merger Walmart has gained certain competitive advantage in the relevant market (entity market for commodity retails) and the concentration took place in the online B2C retailing market. If the concentration is conducted in accordance with the agreed terms among the relevant parties, it is likely that Walmart will transmit its advantageous position in retail markets to B2C online sales, giving rise to restriction or exclusion of competitions.

The so-called conducting-effect of dominant market position is a controversial issue in antitrust field. The “bundle sales” or “mixed M&A” adopted by European Antitrust Authorities in concentration review have been under criticism in recent years. This theory is rarely used by the United States in AML implementation. Specific provisions regarding dominant market transfer have been introduced by Australian AML. There are no definite provisions in Chinese legislative system but many are involved in antitrust practices.

Case 1: 360 Vs QQ (Antitrust Private litigation )

In the high-profile APL case of 360 Vs QQ, the plaintiff alleged that the defendant Tencent Shenzhen Science And Technology Co., LTD is the copyright holder of the instant messaging software and the defendant Shenzhen Tencent Computer Company is the real operator of the instant messaging software. The two defendants made supply of QQ instant messaging software and actual operation services, commonly bearing responsibilities for legal consequences in running the software. The defendant, after years of operation, has gained dominant market position in instant messaging software and service market. Instead of safeguarding the market, the defendant abused its dominant market position by excluding competitions on relevant markets and even illegally abusing the market dominant position in internet security software market, preventing other operators from developing or even co-existing with the defendant. The behaviors of the defendant are categorized into disobey of antitrust private litigations.

The court held that the defendant has gained dominant market position in instant messaging software market and relevant market. The product market is internet security software market. The tort liabilities that the defendant incurred in his dominant market position in instant messaging software transmitted to relevant market were under debate, and therefore should be negated.

Case 2: CocaCola Vs. Huiyuan (Undertakings concentration)

The concentration case between Coca Cola and Huiyuan is the only concentration case which did not receive approval from MOFCOM since the implementation of AML.

When interviewed by journalists after the issuance of the above decision, the spokesman of MOFCOM outlined its review principles. One of the important theories is the conducting-effect of the dominant market position, that is, upon the completion of the purchase, Coca Cola will conduct its dominance in carbonated drinks to fruit drinks.

The spokesman of MOFCOM explained that, according to data provided by the China Beverage Industry Association, the Coca-Cola Company accounted for 60.60% share of the carbonated drinks market. Moreover, considering the competitive advantage that has been made in the capital, brand management, marketing and other aspects, upon careful verification and assessment, MOFCOM concluded that the Coca-Cola Company holds a dominant position in the carbonated soft drinks market.

Therefore, MOFCOM held that in seeking profit maximization, Coca Cola may utilize its dominance in carbonated drinks after M&A and introduce sales of carbonated drinks with fruit drinks, bundle sales or conditional sales, and conduct its dominance in carbonated drinks market to fruit drinks market. Such conduct will greatly reduce or deprive other drink producers’ capability in competition, thus harming the competitive market and forcing consumers to accept higher prices and fewer commodities.

The author shall not make a conclusion to the transmitting effect of dominant market position, but two questions with respect to the AML implementation are worth discussing.

First, a concentration implementer has a dominant market position if it has gained dominant market position in the relevant market and shall conduct such dominance to other markets (where the concentration took place); the question/issue is, the regulator is responsible for proving that the concentration implementers have gained dominant positions on other relevant markets.

Article 18 of AML rules stipulates that an operator’s dominant market position shall be determined based on the following factors (1) the market share of the operator in relevant market and the competitive situation of the market (2) the operator’s capability of controlling selling market and raw material market (3) the financial and technical conditions of the operator (4) other operators’ reliance on this operator (5) the coefficient of difficulty for other operators to enter into the market (6) other factors for determining the operator’s dominant market position.

Article 19 of AML stipulates that any of the following behaviors is indicative of the operator having a dominant market position: (1) market share of an operator amounts to 20%; (2) two operators have 2/3 market share in total; or (3) three operators have 3/4 market share in total. With respect to articles 19(1) and 19(2), an operator with less than 10% of market share cannot be said to have market dominance. The operator should not be held to have dominant market position if there is evidence to that effect.

Determination of market dominance requires facts and data in terms of determination or presumption, as analysis of abuse of market dominance requires the application of reasoning rather than applying the rule per se. Market dominance is a neutral concept and requires the related party to provide rebuttal evidence for defense prior to determining its existence.

It is unfortunate that MOFCOM concluded that Walmart has established warehousing distribution systems, wide range of supply channels and sound brand awareness. Upon the completion of the deal, Walmart shall utilize its competitive advantage to retail sales of Yishiduo Store No.1.

It is the author’s point of view that after determination and presumption, Walmart may well have dominant market position in Chinese physical retail markets, but the relevant conclusion would not be convincing if it is not supported by specific inference and analysis of data and facts.

2.       The Effect of Its Dominant Position in the Relevant Market to Other Relevant Markets Is Questionable

Third, the regulators finally decided to negate or conditionally approve the concentration due to concern of market dominance position, rendering the anti-competitive effect of the transmission a hypothesis. Without being scientifically proven, the transmitting-effect can only be a hypothesis and would require further evidence. 

3.       Negative Analysis of VIE Model

MOFCOM eventually approved the concentration with the following conditions: (1) the purchase by Niuhai Shanghai is only limited to direct sales by its own online platform (2) Niuhai Shanghai shall not, post the concentration, provide network services to other dealers with its own network platform without getting permit for value-added telecom business (3) After the transaction, Walmart shall not, by VIE model, run value-added telecom business operated by Shanghai Yishiduo E-commerce Co., Ltd.

The promulgation arouses a lot of debates. After all, this is the first time Chinese regulators made clarifications to the VIE model.

VIE (Variable Interest Entities), commonly known as protocol control, refers to the separation of overseas registered and listed entity from domestic operating entity. The overseas entity takes control of the domestic entity in the way of scheme arrangement, such as franchise, IP permit, business consulting and management services. In a VIE model, operating entity is VIE for listed entity. is the first to use a VIE structure. Telecom regulations in 1993 stipulate that foreign investors are not allowed to invest in telecom business and telecom value-added services. The policy guideline of the Ministry of Information Industry at that time was that foreign investors were not entitled to ICP but technical services only.

Sina created a VIE model in order to be listed in the United States. Foreign investors, by buying shares of offshore companies, take control of technical services in China. Domestic companies of technical services transfer telecom value-added services to overseas companies through cooperative agreements so that offshore companies can consolidate financial statements of domestic telecom value-added service companies.

After the success of Sina VIE, other Chinese internet companies such as Sohu, Baidu and Alibaba managed to enter overseas capital market in the way of VIE.

There is no official declaration with respect to VIE compliance and doubts remain about this matter.

Strictly speaking, review of undertakings’ operation is a reflection of national policy and regulators’ assessment of AML value on market transactions rather than a true assessment on industry policies and foreign capital policies. The regulation of VIE should be directed by regulators from telecom industry and security market. While industry policy of a country is closely related to its competitive policy, there are great differences between them.

The decision made by MOFCOM, an AML regulator, indirectly involves VIE model and bears some relation to MOFCOM’s multifunction, e.g. subordinated antitrust authorities of MOFCOM regulate mainly market competition and other authorities of bureau level also regulate overseas investments.

Next, how to combine industry policies and foreign capital policies with competitive policies is a topic for antitrust review. Currently, concentration review by MOFCOM is performed for the purpose of national security review, time cohesion of security market, coherence of foreign capital policies, industry policies and environmental protection policies. Due to the comprehensive characteristics of antitrust enforcement, the above issues needed to be tackled.

With regards to antitrust review, it is the author’s point of view that China is the world’s second largest economy and it is unquestionable that China’s M&A antitrust review jurisdiction ranks as the third largest worldwide. The Anti-monopoly Bureau of MOFCOM has not been established for long but the introduction of talents and practices gradually matures its review process. By observing prohibiting and conditional promulgations, one can see that Chinese antitrust regulators have not blindly followed the practices of American and European antitrust authorities, but are gradually formulating independent judgments. Although the conclusion of MOFCOM’s review of Walmart’s purchase of Store No.1 has several issues worth discussing, the author thinks highly of MOFCOM in its antitrust regulations.