MOFCOM addresses the VIE issues

On 13 August 2012, the Ministry of Commerce ("MOFCOM") granted conditional anti-monopoly approval clearance for Wal-Mart Stores, Inc's acquisition through GEC 2 Pte. Ltd., its wholly owned subsidiary, of a 33.6% interest in Niuhai Holdings Company Limited ("Niuhai Holdings"), which will raise Wal-Mart's total holding in Niuhai Holdings to 51.3% from 17.7%. The initial anti-monopoly filing for the transaction was made on 16 December 2011, and MOFCOM deemed the application complete on 16 February 2012. The review was extended on 16 March 2012. The approval was received approximately six months after the submission was deemed complete.

The transaction is of interest because Niuhai through its subsidiary, Niuhai Information Technology (Shanghai) Co., Ltd. ("Niuhai Shanghai") controls one of China's leading online sales platform, Yihaodian, which is owned by Shanghai Yishidou E-commerce Co Ltd., which operates both a direct online retail sales business and acts as an online intermediary between third party vendors and purchasers pursuant to a value-added telecommunication service licence. The value-added telecommunication sector is restricted for foreign investors whose equity interest in a company holding such licence cannot exceed 50%.

Anti-competitive Impact

In imposing conditions of the transaction, MOFCOM found that the acquisition would have an anti-competitive impact on the retail B2C market in China due to Wal-Mart's extensive distribution, logistics and service network established through its physical stores. The market for this review was defined as the retail B2C market in China, which excludes physical retail shops, creating a smaller market in which to assess impact.

Approval with Conditions

In order to address this concern, Wal-Mart has agreed to a number of conditions to the transaction. These conditions include:

1. with regard to the acquisition, Niuhai Shanghai shall be limited to using its own network platform for its direct sale of merchandise;
2. without obtaining a value-added telecoms business licence, Niuhai Shanghai cannot use its own network platform to provide services to other transaction parties after the completion of the transaction; and
3. after the completion of transaction, Wal-Mart will not be permitted to carry out the value-added telecommunication business operated by Yishidou through the VIE structure.

Conclusion

This is one of the first explicit mentions of the VIE structure by MOFCOM and may suggest that MOFCOM is preparing to more closely regulate those structures. While this is another unfavourable mention of the VIE structure by PRC regulators, the decision interestingly did not state that such structures are illegal.

Key Contacts

Edwarde Webre

Consultant | Corporate Commercial

Email or call +852 2825 9730