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Negative influences on the market due to Coke’s existing dominant position in the carbonated drink market

MOFCOM believed that after the completion of the Transaction, Coca-Cola would have had the ability to leverage its dominant position in the carbonated drink market in the juice drink market.

The ability to leverage is where an operator has a dominant position in a certain market and by taking advantages of its current dominant position, it is also able to obtain a new dominant position in a similar product market through tie-ins or bundle sales, imposing exclusive trading conditions, or other methods.

As Coca-Cola may have a dominant position in the carbonated drink market, MOFCOM believed that after the Transaction, Coca-Cola may (i) tie or bundle in Coca Cola’s juice drinks by utilizing its customers’ preferences in its carbonated drink, or tie its carbonated drink in as a means of promotion when selling juice drink; (ii) by offering discounts or refunds, encourage carbonated drink retailers to purchase a large number of its juice drinks, or limit their purchase and distribution of juice drinks manufactured by other competitors; (iii) increase sales volumes of its juice drink and supplant other juice drink products by taking advantage of its current sales channels, for example, its in-store refrigeration units installed at down-stream retailers.

Dominant market position in a certain market may be leveraged in adjacent or other closely related markets, which has already raised competition concerns by authorities in other jurisdictions. For instance, according to the decision made by the Australia Competition and Consumer Commission (ACCC) of the acquisition of Berri Limited (Berri) by Coco-Cola Amatil Limited’s (CCA) on October 8, 2003, ACCC believed that CCA would have the ability and incentive to leverage its market power in CSD (carbonated soft drinks) to increase distribution of Berri’s FB (chilled and ambient fruit juice and fruit drinks) product to the exclusion of rivals in the non-grocery trade channels.

Coke’s ability to impede market entry by controlling brands

Through review, MOFCOM believed that the brand is a key factor that influences effective competition in the drink market, that is, among other factors which may influence competition, such as capital and technology, the brand is considered one of the most important as opposed to other industries where technology may be more important. New entrants may not successfully gain market share in that it is difficult for them to obtain consumers’ recognition of their brands, even though they own certain technologies, facilities and capital. Coca-Cola may also restrain new market entrants by using its dominant position in the carbonated drink market as well as the leverage effect.

Accordingly, MOFCOM believed that after completion of the Transaction, Coca-Cola would have significantly stronger power to control the juice market by controlling two famous juice brands: “Meizhiyuan” and “Huiyuan”, as well as using its dominant position in the carbonated drink market. Therefore, the Transaction would significantly increase obstacles for potential competitors to enter the juice drink market from the prospective of branding.

The negative influences of the proposed concentration over small and medium operators and for the competition within the industry

MOFCOM believed that the Transaction would reduce survivability of domestic small and medium juice manufacturing enterprises, inhibit the ability of domestic enterprises to compete in the juice drink market, and harm the effective competition structure in the China juice drink market.

MOFCOM may have also believed that in the juice drink market, Coca-Cola and Huiyuan are direct competitors and therefore after the completion of the Transaction, Huiyuan, as an important and competent competitor, will no longer exist, which may lead to an increase of concentration. In addition, after the Transaction, Coca-Cola may soon gain a new dominant position by better utilizing Huiyuan’s current purchasing channels for raw materials, distribution channels of products, manufacturing equipment, market share, brand effects, and other advantages, as well as the leverage effects resulting from its dominant position in the carbonated drink market. Therefore, it could be concluded that the Transaction may negatively impact small and medium operators and may have a bad influence on the competition structure of juice drink industry and its further development.
 

A. Ease of Approving Holding Companies

On March 6th 2009, MOFCOM issued the Notice on Delegating the Approval Authority for Foreign Invested Holding Companies to streamline the establishment of foreign investment holding companies.

 This notice provides:

 1. Proposed holding companies with a registered capital of USD 100,000,000 or less will be examined and approved by the competent MOFCOM counterparts at the provincial or vice-provincial city level. Previously, the establishment of a holding company required MOFCOM level approval regardless of scale.

 2. Any amendments to established holding companies (i.e. such as name change, revisions to business scope) can be approved by MOFCOM provincial level counterparts except for cases where a single capital injection increases its value by over USD 100,000,000 or where shareholders of holding companies change.

 3. Despite the positive developments, MOFCOM also reinforces in the Notice that holding companies cannot invest in areas that are restricted or forbidden to foreign investment, or in industries that are subject to macro-control by the government. Further, if required by relevant industry rules, investments by holding companies will still need approval from the industry authorities even if approved at the local MOFCOM level.

B. Delegation of Approval Authority for FIVCEs and FIVCE Management Firms

MOFCOM further issued, on March 5 the Notice on Approving Foreign Invested Venture Capital Enterprises and Foreign Invested Venture Capital Management Enterprises (the “No. 9 Notice”) which simplifies the approval process for FIVCEs and FIVCE Management Firms.

The legal basis for setting up FIVCEs and FIVCE Management Firms are the Management Rules on Foreign Invested Venture Capital Emperies (the “FIVCE Rules”) promulgated by MOFCOM, the Ministry of Science and Technology, the State Administration for Commerce and Industry, the State Tax Administration, and the State Administration on Foreign Exchange on January 30, 2003. According to the FIVCE Rules, foreign investors are permitted to set up a FIVCE to invest in unlisted high-tech enterprises, provide management services to such enterprises and are also able to enjoy capital gains from such investments.

Pursuant to the FIVCE Rules, the establishment of a FIVCE adopts a multi tier approval process regardless of scale. A FIVCE requires preliminary examination at the MOFCOM provincial level with final approval from the central MOFCOM with the consent of the Ministry of Science and Technology. On the other hand the establishment of a FIVCE Management Firm only requires MOFCOM provincial level counterpart approval.

The No. 9 Notice simplifies the approval process in the following regards:

1. Proposed FIVCEs and FIVCE Management Firms with registered capital of no more than 100 million USD can be approved by MOFCOM counterparts at the provincial level (1), vice-provincial city level, or national economic development zone level. It is important to note that FIVCE Management Firms which were previously approved at the provincial level should now obtain approval from central MOFCOM in cases where its registered capital exceeds USD 100,000,000. Accordingly, the new policy is that establishment of a FIVCE can be approved locally except if the registered capital exceeds USD 100,000,000.

2. The provincial MOFCOM counterpart is required to complete the approval process and decide upon approval within 30 days after receiving the complete application documents. It is noteworthy that under FIVCE Rules, due to the two tier approval level regime, the mandatory approval timeframe is 60 days (15 days for preliminary review at the provincial level and 45 days for final approval by MOFCOM). Furthermore, following the delegation of approval authority in respect of FIVCEs, the No. 9 Notice requires that when establishing a FIVCE, the provincial approval authority shall request the opinion from the science and technology administration of the same level (i.e. the Ministry of Science and Technology provincial counterpart).

3. The basic rule has always been for amendments to the corporate structure for a FIVCE or FIVCE Management Firm to be approved by the original approval authority. The No.9 Notice changes this by allowing FIVCE or FIVCE Management Firms originally approved by MOFCOM to have subsequent commercial changes approved by MOFCOM's provincial counterparts except for capital increases where the increase exceeds USD 100,000,000 or the change of “requisite investors (2)” in the FIVCE.

It should be borne in mind that although the No. 9 Notice simplifies the approval process and shortens the approval timeframe considerably the substantial requirements provided in the FIVCE Rules will still need to be strictly followed in many cases. These requirements include the restrictions on the business scope of a FIVCE, notably a FIVCE being prohibited from (i) obtaining loans to finance venture capital investments, (ii) investing in areas prohibited to foreign investment, (iii) directly or indirectly investing in the real estate market, (iv) directly or indirectly investing in publicly traded stocks or bonds, except for shares of the invested enterprises held by the FIVCE which are publicly traded after listing.)

Summary

The devolution of approval competency for holding companies, FIVCEs and FIVCE Management Firms will simplify and speed up the approval process for foreign investors as well as lower the work burden on MOFCOM. In addition, the new policy will simplify the operations of existing holding companies, FIVCEs and FIVCE Management Firms in that many will be able to bypass central MOFCOM approval for operational actions such as capital increases less than USD 100,000,000.
Although, there is no apparent negative impact upon foreign investors in these notices, it should be also noted that MOFCOM and other approvals still remain in place under specific circumstances. Foreign investors will need to carefully check which approvals at which level will be required in order to have a valid establishment and which restrictions remain in place.
 

(1) Vice-provincial cities, as an administrative division in China, are not treated as a province from an administrative perspective, but are distinct from a financial perspective.

(2) According to the FIVCE Rules, one shareholder of the proposed FIVCE must be a requisite investor i.e. a investor that meets the following requirements or thresholds: (i) the business of the requisite investor is venture investment; (ii) the capital under its management is not less than USD 100 million in the last three years prior to the application and at least USD 50 million of which has been used for venture investment; (iii) the investor shall have at least three professional management personnel with not less than three years experience in venture investment business; (iv) the requisite investors shall not have been prohibited by the judicial authorities or other relevant regulatory authorities from engaging in venture investment or investment and consultancy business or punished due to any fraud; (v) the amount of capital contribution subscribed to and paid in by the requisite investors shall not be less than 30% of the total subscribed capital and 30% of the total paid in capital of the FIVCE respectively.
 

2. Pursuant to the Notice, MOFCOM will adopt a filing system for the establishment of new branches by FIEs. The Notice clarifies that establishment of a branch by a FIE does not require MOFCOM or local counterpart approval unless specific regulations state otherwise. This clarifies a previously unresolved issue in that MOFCOM local counterparts had varying practices in such regard from region to region (some local MOFCOM counterparts required approval for FIEs to set up a branch engaged trading). The Notice implies that if the FIE’s business scope relevant to a restricted area has been approved, then no additional approval from MOFCOM is required to set up a branch for the approved business. Furthermore, the Notice regulates that if a FIE intends to set up a branch abroad, then this should be approved by the provincial MOFCOM with the consent of the Chinese embassy’s commercial department in the country where such branch is to be located.

B. Ease of Approving Holding Companies

On March 6th 2009, MOFCOM also issued the Notice on Delegating the Approval Authority for Foreign Invested Holding Companies to streamline the establishment of foreign investment holding companies.

This notice provides:

1. Proposed holding companies with a registered capital of USD 100,000,000 or less will be examined and approved by the competent MOFCOM counterparts at the provincial or vice-provincial city level. Previously, the establishment of a holding company required MOFCOM level approval regardless of scale.

2. Any amendments to established holding companies (i.e. such as name change, revisions to business scope, normal changes to capital structure) can be approved by lower level MOFCOM counterparts except for cases where a single capital injection increases its value by over USD 100,000,000.

3. Despite the positive developments, MOFCOM also reinforces in the Notice that holding companies cannot invest in areas that are restricted or forbidden to foreign investment. Further, if required by relevant industry rules, investments by holding companies will still need approval from the industry authorities even if approved at the local MOFCOM level.

Summary
The devolution of approval competency for most projects will simplify and speed up the approval process for foreign investors as well as lower the work burden of MOFCOM. In addition, the new policy will make the operations of existing FIEs easier in that many will be able to now bypass central MOFCOM approval for operational actions such as capital increases.
Although, there is no apparent negative impact upon foreign investors in such notices it should be also noted that MOFCOM and other approvals still remain in place under specific circumstances. Foreign investors will need to carefully check which approvals at which level will be required in order to have a valid establishment.

[1] Vice-provincial cities, as an administrative division in China, are not treated as a province from an administrative perspective, but are distinct from a financial perspective.
[2] According to a notice issued by National Planning Commission (the predecessor of National Development and Reform Commission), central government reliant projects include the FIEs using state subsidies, FIEs investing in infrastructure, etc. But this notice was issued in 1999 based on the old Industry Category for Foreign Investment in 1997 which has been revised largely afterwards, thus may be out of date.
 

Before the issuance of such a Circular, the above-mentioned question has for a very long time confused not only foreign investors, its lawyers, and other consultants, but also some local officials of SAFE partly due to the reason that SAFE did not clarify this question by issuing an official and universally-applicable rule. As a result the answer to this question has to depend, to large extent, on the local regulatory practice. Not surprisingly, in practice, some local offices of SAFE held a view that a FIE should not be allowed to exchange the foreign currency from its capital account into RMB for purposes of re-investing in China on the grounds that the foreign currency deposited in such account had been specially approved to satisfy the defined project as described in the business scope. In the meantime, some others officials held different views and allowed the FIE to settle the foreign exchange into RMB to satisfy the needs of re-investing in China. This is particularly the case where a local government is thirsty for foreign investment and it may be driven to take a more flexible policy.

Now, with the promulgation of the Circular, the door to direct re-investment by FIE(s) using the RMB settled from its foreign exchange capital account in China is closed. If a FIE happens to come upon a good investment opportunity, it will have to use its accumulated RMB profits or income or borrow RMB from domestic banks.

As is known in recent years, international “hot” money has unnerved the Chinese government which has thus taken a series of measures to cope with the issue. Without doubt the new rule is intended to strengthen the administration of foreign exchange flow and curb the inflow of hot money. However while it may contribute to the strengthening of its foreign exchange administration and the stability of its economic growth, it may also add the cost of making re-investment by foreign investors through their FIE(s) in some cases more difficult from a commercial perspective.
 

Conditions to be Considered - the regulations introduce factors for the authorities considerations such as whether an import will unfavorably influence the PRC domestic industry’s development, adverse affect upon public morality or environment.

Validity Period - the amended Article 9 states that the validity period for the Proposal for Technology Import License will be set within the range of one to three years. As the previous law did not set limits it is not clear what this restriction will mean in practice.

Procedural Changes – the new regulations require on-line registration with a MOFCOM website before an applicant can collect a Technology Import License. More importantly, contracts which include royalty payments require the technology importer/exporter to make a recordal within 30 days after the base figure for the royalty has been determined. This requirement appears to be an on-going requirement for subsequent years.

Requirements in respect of free technology transfers have been relaxed. Under current law the technology importer or exporter should re-register any amendment to a free technology import or export contract. The June 2008 amendments simplify this by requiring the technology importer or exporter to comply with an amendment recordal procedure rather than re-registering. However, the current practice of the vast majority of companies in China – i.e. doing nothing – is simpler still. However, a failure to follow up properly will make taking legal action against a breaching importer more difficult still.

By Mark Schaub, Partner