China M&A, with Linguistics Attached Please

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By Chris Devonshire-Ellis

Budweiser packaging plant in St. Louis, MODec. 3 – The recent approval of InBev’s acquisition of Anheuser-Busch by China’s Ministry of Commerce (MOC) has caused some consternation amongst M&A lawyers in China. Being the first major deal to be subjected to China’s enhanced anti-monopoly laws which require MOC approval for deals that affect China-based businesses, the decision by the ministry comes with some linguistics attached.

The ministry imposed a variety of further restrictions on InBev that will prevent it from acquiring additional interests in four other specific Chinese brewers. That has raised alarm bells amongst the legal community in China, who believe that Beijing has broken new ground in international antitrust decision making as they have effectively imposed additional future conditions on a deal that did not harm competition.

It’s a difficult call to make. The MOC ruling states that while allowing the US$52 billion takeover, the merger alters the competitive status of the players in China’s own beer markets – which is where the anti-monopoly law kicks in. Accordingly, conditions were imposed which state that Inbev cannot increase Anheuser-Busch’s current 27 percent stake in Tsingtao Brewery, or its own 28.5 percent stake in Zhujiang Brewery, and also prevent Inbev specifically from taking shareholdings in two other major Chinese breweries, namely China Resources Snow Brewery and Beijing Yanjing Brewery. InBev must also inform the MOC of any changes in its controlling shareholders. That seems fair enough, InBev already have a sizable chunk of market share in China, Beijing wishes to see competition. But M&A firms such Freshfields and Linklaters operating in China view the position taken by the MOC as “imposing a degree of oversight in excess of that contemplated by the anti-monopoly law” – by implication engaging in market protectionism.

With recent global events suggesting the mantra of free trade at all costs may have been overly excessive, lawyers are going to have to get used to dealing with government intervention or conditions being attached to global M&A deals that have a significant effect on countries domestic markets. But in China, linguistics also comes into play – and establishing exactly what Beijing means when it passes legislation is always an issue. Shareholdings are not always exactly as they appear to be. Between imaginative stock plays, and appreciating what the Chinese actually mean when they introduce legislation, M&A activity in China just got a new angle to consider. Inbev may not be happy about conditions being imposed, but Beijing’s added requirements should, if one reads the situation correctly, lead to a more competitive market for other brewers to invest in and not just tie up one major domestic industry in the hands of just one globally dominant player.