David Barboza of the New York Times is out with an excellent article that nicely sums up why China rejected Coca Cola’s bid to purchase Huiyuan. The article is entitled China Blocks Coke Bid for Juice Maker, and it does a great job summarizing the rejection because it quotes China Law Blog’s own Steve Dickinson and because it reaffirms what we have been saying all along.
Barboza rightly notes that “very few foreign companies have taken full control of a major Chinese company….[but] “many legal analysts said they had expected the deal to be approved because China itself is moving aggressively this year to acquire foreign assets during the global economic downturn.” It then quotes Steve:

Steve Dickinson, a China-based lawyer at Harris Bricken, said China usually restricts foreign takeovers because of a longstanding belief that state assets should not be controlled by foreign entities.
“China’s very open to green field investments, allowing foreign companies to start up businesses,” Mr. Dickinson said. “But China strongly discourages outright purchases of existing Chinese companies to enter the China market.”

This is exactly what we have been saying all along. In one of our posts from more than a year ago, entitled, “Meet China’s New M&A Policies. Same As The Old Policies,” we set out what we saw as the basic rules for China government approval of a foreign led M&A deal:
China’s basic policies for M&A is as follows:

Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.
Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.
Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.
Foreigners are not permitted to purchase a majority interest in a large and financially successful Chinese company. Even smaller companies are off the table if they are financially sound and work in a core technology field or have created a strong or historically important brand.

China is “remarkably receptive to direct foreign investment that creates new business activity in China,” but opposed to purchases of successful existing businesses and assets. “Such purchases are strongly disfavored, since they are seen as providing no net benefit to China:”

Under this policy regime, venture capital and troubled company buy-out businesses have plenty of room to operate. Strategic alliances in core industries also work well. On the other hand, traditional private equity that focuses on the outright purchase of strong and successful companies simply does not work under this system. Central government regulators will consistently step in and exercise their veto powers to prevent the foreign acquisition of a majority interest in any existing, strong Chinese company. This is not likely to change anytime soon.

For more on what goes into China’s M&A policy for foreign investment, you should also check out “China M&A: Can You Hear Me Now?” “China’s Anti-Monopoly Law. People, We’ve Got The Rules.

Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.