I don’t know whether it’s the blogging or the law school teaching that causes this, but every once in a while, I come across an incident, dispute or business deal that announces itself, quite loudly, “If there were a textbook written about Subject X, this would make a great case study.” Anyone else? Just me? Well, it helps when you’re hopped up on cold medicine, I suppose.
Subject X, for this post, is e-commerce/Internet law in China. The deal in question is Wal-Mart’s recent purchase of a majority equity stake in Yihaodian, one of the more prominent e-commerce platforms in China.
Let’s start with some background from AFP:
China said Tuesday it has approved a plan by Wal-Mart Stores Inc. to gain control of a local online supermarket, but imposed conditions on the deal over concerns it could hinder competition.
The approval comes after the US-based global retail giant announced in February that it reached a deal to increase its investment in the holding company of Chinese e-commerce website Yihaodian to about 51 percent. China’s Ministry of Commerce said in a statement Tuesday it had approved an increase in Wal-Mart’s stake in the holding company to 51.3 percent from the previous 17.7 percent.
Citing concerns over possible exclusion or restriction of competition on China’s value-added telecommunications service market, the ministry imposed several conditions, state-run Xinhua news agency said.
For example, the acquired business cannot use its online platform to provide Internet services for other parties in the deal, Xinhua said, and will be limited to online retailing. Xinhua said that Yihaodian also offers value-added services.
I like to use simple deals to illustrate points of law. No reason to let a convoluted corporate structure get in the way. And this one is nice and straightforward, at least at first glance:
1. Foreign company retailer.
2. Chinese domestic e-commerce company that holds all the requisite licenses.
3. Current position of foreign firm: minority shareholding.
4. Desired position: majority shareholding.
This would actually make a great exam question. Hmm . . . If this were an exam, I’d probably ask at this point what the big picture legal/regulatory concerns are for Wal-Mart. Several possibilities, but I’d really be fishing for two major areas: AML M&A review and foreign investment restrictions in the telecom/Internet sector, which overlap here.
When a foreign company acquires a majority stake in a domestic enterprise in China, notwithstanding its prior shareholding position, that triggers the M&A law. The regulatory authority in charge of M&A review is the Ministry of Commerce, whose name I’m sure you caught in that above quote.
When MOFCOM reviews a deal like this, there are several issues it looks at, including possible problems under the Anti-monopoly Law, which it turns out is the reason why this deal sat on MOFCOM’s desk for so many months. And indeed, MOFCOM had “concerns over possible exclusion or restriction of competition on China’s value-added telecommunications service market.”
So what is MOFCOM’s solution? Conditional approval! (Hint to my students: when answering any question about China Anti-monopoly Law and the MOFCOM review process, the answer “conditional approval” is a great guess.)
In case you’ve forgotten, numerous recent approvals of M&A deals by MOFCOM have been of the “conditional” variety. So no big surprise there.
However, the details of the conditions are interesting. What did MOFCOM do here?
The restrictions include limiting Yihaodian to using its e-commerce platform strictly to sales, and Yihaodian’s parent company may not host third-party transactions on its platform.
Additionally, Wal-Mart cannot use variable interest entity (VIE) arrangements to conduct value-added telecommunication services now operated by Yihaodian. (ZDNet)
At the moment, I’m only looking at media reports of this. If I want to take this deal into the classroom, I’ll probably need to go peruse the MOFCOM website and see what they issued publicly. That mention of VIEs certainly is intriguing, isn’t it?
I don’t know enough to say whether MOFCOM’s fears about competition in this sector were justified. I do find it interesting, however, seeing as how e-commerce is not only thriving in China, but there are certainly a lot of big players out there providing serious competition (perhaps too much, at least in the electronics sub-sector).
This would be a little easier for me to understand if both Wal-Mart and Yihaodian were e-commerce giants. But this deal just involves a retailer and an e-commerce platform, and therefore MOFCOM is saying that even this horizontal deal could have serious anti-competitive results without the conditions. I have questions, but without seeing the analysis, I will remain puzzled.
Finally, although these conditions are ostensibly about competition, they remind me a great deal of foreign investment restrictions. Think about it. Wal-Mart may not use the platform for third-party transactions or otherwise sell Internet services. Internet guys, does this sound familiar to you?
E-commerce, as an “Internet service,” used to be off limits to foreign investors, but as more and more enterprises began to incorporate a web presence into their overall sales, the law had to change to reflect reality. These days, e-commerce is just another sales platform and not really seen as an Internet service like online advertising or web site hosting. For foreign companies, as long as you are conducting your own sales, you can sell online in China.
But when it comes to third-party sales or provision of other kinds of services relating to the Internet, then the foreign investment restrictions regarding value-added telecom services kick in. Minority stakes in Joint Ventures are allowed, although there are of course many problems with that sort of model. The answer for a lot of foreign investors is (you see where this is heading) the VIE structure, where a domestic company holds the licenses and the foreign company controls the operations.
So when MOFCOM added in those conditions to prevent anti-competitive behavior, it was speaking in the language of foreign investment law, wasn’t it? And since we’re fluent in that language, we can translate what it said to Wal-Mart:
Go ahead and control Yihaodian. No problem with selling your own stuff. However, just like with any other Sino-foreign Joint Venture in the e-commerce sector, you better not be thinking of using this platform for transactions that are restricted. And oh yeah, don’t bother trying to thwart these restrictions by using a VIE. We’ve got our eye on you.
A loose translation.
To sum up: this deal looks like the usual competition law review, with MOFCOM granting a conditional approval. But look closer, and you’ll see that those conditions look awfully familiar.