Henan Provincial High Court Dismisses Danone’s Appeal

HANGZHOU, China - Wahaha Defeats Danone by 23:0

On 10 April 2009, the Henan Provincial High Court in the second instance decision rejected the claim against Zong Qinghou, Chairman of Hangzhou Wahaha Group Co, Ltd., brought by two subsidiaries of Danone, Myen Pte. Ltd. and Festine Pte. Ltd. So far, Wahaha has defeated Danone 23:0 in their three-year legal dispute.

Danone’s claim rejected in first instance decision in Xinxiang

The two subsidiaries brought an accusation against Zong in September 2007, alleging Zong of violating the board director’s “non-compete” obligation stipulated in the Company Law of China by setting up four non-joint ventures, which resulted in horizontal competition with joint ventures (Xinxiang Wahaha Foods Co., Ltd and Xinxiang Wahaha Instant Foods Co., Ltd) between Wahaha and Danone. The two subsidiaries required Zong to resign from directorial and chairman positions of the non-joint ventures in addition to financial compensation.

On 16 August and 7 November 2008, the Intermediate People’s Court of Xinxiang, Henan province dismissed the claim proposed by Myen Pte. Ltd. and Festine Pte. Ltd. in the first instance ((2007) No. 073, 074). The court concluded that the board of directors of the joint ventures was aware of, and agreed with Zong’s involvement in the operation of the four non-joint ventures, that the non-joint ventures did not constitute competition against the joint ventures, and that Zong did not take advantage of the business opportunities originating from joint ventures to operate the non-joint ventures, and accordingly joint ventures did not suffer losses. For this reason, Zong did not violate the board director’s “non-compete” obligation.

Danone disagreed with the court ruling with a public announcement commenting that, “The fairness and validity upon which the ruling was based was unconvincing, and the court erred in failing to identify key facts of the lawsuit”. The French company appealed to the Henan Provincial High Court in November 2008.

Henan Provincial High Court rejected Danone’s appeals in second instance

The Henan Provincial High Court heard the appeals by Myen Pte. Ltd. and Festine Pte. Ltd. in a public trial on January 16, and February 12, 2009, respectively. On April 10, the court issued the second instance decision, affirming the decision of the first instance that the judgment was made based on “ascertained facts and correct legal standing”, thus rejecting the appeal and sustaining the original judgment.

Results of the two adjudications of (2008) No. 80 and (2008) No. 9 demonstrate the following acknowledgements of the Henan Provincial High Court:

1. On Danone’s accusation that the board of directors of the joint ventures never agreed with Zong’s involvement in the operation of the four non-joint ventures

Court’s decision: the board of directors of the joint venture actually was aware of, and agreed with Zong’s involvement in the operation of the four non-joint ventures

The Court held that, of the four non-joint ventures involved in the accusations by Danone, two non-joint ventures (Zong has been chairman of the two non-joint ventures) had been incorporated before the joint venture. Therefore, the joint venture’s board of directors has no logical basis to approve and permit on Zong’s involvement in the operation of the two non-joint ventures.

Secondly, the audit reports of Hangzhou Wahaha Health Food Co., Ltd. (*) for 2005 and 2006 provided by PricewaterhouseCoopers showed that the four non-joint ventures were major affiliates and were controlled by the same key management personnel (i.e. Zong). But Danone had never raised an objection after receiving these annual audit reports. Therefore, Myen Pte. Ltd. and Festine Pte. Ltd. were aware of, and agreed with the existence of the non-joint ventures and Zong’s positions in these non-joint ventures.

In addition, Myen Pte. Ltd. and Festine Pte. Ltd. “did not provide any evidence to demonstrate that they had raised a clear objection when they were aware of the above mentioned facts in both the first and second instance. This means they accepted and agreed with Zong’s establishment and operation of the four non-joint ventures”.

* The court acknowledged that “Hangzhou Wahaha Health Food Co., Ltd.’s foreign directors’ actions to the non-joint ventures can be considered as the expression of Myen Pte. Ltd. and Festine Pte. Ltd.’s opinions”. Because Jinja Investments Pte. Ltd., the foreign shareholder of Hangzhou Wahaha Health Food Co., Ltd., a joint venture 51 percent owned by Danone, is the same as that of Myen Pte. Ltd. and Festine Pte. Ltd. And the foreign directors are the same as these of the involved joint venture.

2. On Danone’s accusation that the competition between the non-joint ventures and the joint ventures undermined the interests of the joint ventures

Court’s decision: Non-joint ventures did not compete with and in anyway harm the interests of the joint ventures

Independence and competitiveness in terms of raw material supply, product manufacturing and marketing are the most important characteristics of horizontal competition. According to Hangzhou Wahaha Health Food Co., Ltd.’s audit reports for 2005 and 2006, all of the products from joint ventures and the four non-joint ventures were acquired and sold by Hangzhou Wahaha Health Food Co., Ltd., and the profits they made were deemed normal income as competition did not take place. Although the four non-joint ventures’ business core registered with the industrial and commercial department intersects with that of joint ventures, they manufacture different products. For this reason, there is no competitive relationship between the non-joint ventures and joint ventures in terms of raw material supply, product manufacturing and marketing.

In a fax to Zong, Emmanuel Faber, President of Danone Asia Pacific, not only said he is satisfied with the operating results of the joint ventures in 2006, but also spoke highly of Zong’s assumption of the duty of integrity and diligence in joint ventures. In November 2006, Danone’s chairman Franck Riboud said in a fax to Zong that “… I still believe that you’re not intended to damage the interests of our joint ventures by establishing those non-joint ventures …” Therefore, Zong did not cause any damage to joint ventures by running those non-joint ventures.

3. On Danone’s accusation of Zong’s violation of board director’s “non-compete” obligation

Court’s decision: Zong did not violate the “non-compete” obligation

Under the Company Law in China, board directors are only required to abide by the “non-compete” obligation when two companies are engaged in competition with each other and such competitive behavior brings about adverse consequences. The court has decided that competition did not take place between the non-joint ventures and joint ventures. According to Zheng Daoha, general manager of one of the joint ventures, Zong’s involvement in the operation of the non-joint ventures caused no damage to the joint venture.

In addition, Myen Pte. Ltd. and Festine Pte. Ltd. failed to provide the necessary evidence to confirm that the joint ventures had been damaged.

As a result, the Henan Provincial High Court believes that “there is no factual and legal basis” to support the allegations of Myen Pte. Ltd. and Festine Pte. Ltd. Consequently, the court dismissed the lawsuit and affirmed the decision of the lower court.

Since the dispute between Danone and Wahaha broke out, Danone has pursued a “one case, multiple lawsuits” strategy. In addition to the arbitration request filed with the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) in Sweden, as required under the contract, the French company has filed numerous lawsuits against Zong and his family members, as well as overseas shareholders of non-joint ventures that are not related to Danone in China, the United States and the British Virgin Islands. According to Ye, a lawyer at Zhejiang province-based T&C Law Firm who represented Wahaha, the decision by the Chinese court sustained these facts. The decision may possibly serve as a valuable reference for and, to a certain extent, influence the decision of the SCC.

Ye said: “As one of the largest, most influential cases since the implementation of the Chinese government’s reform and opening-up policy, the Danone-Wahaha feud is far more than a legal case.”

A number of courts and arbitration organizations have decided in favor of Wahaha. However, the SCC, the key arbitration organization mediating the dispute, has not yet come to its decision. Wahaha is confident of ultimately winning the case, saying: “We fully believe that as a commercial arbitration organization highly respected worldwide, the SCC will make a fair decision.”

About Hangzhou Wahaha Group

Founded in 1987, Hangzhou Wahaha Group Co, Ltd, China’s largest food and beverage producer and the fifth largest beverage producer in the world, has been taking the lead in the Chinese beverage sector for ten consecutive years in terms of asset size, production, sales and profits, among others. With assets totaling RMB12.1 billion, the company has over 100 subsidiaries and produces nearly 100 varieties of products in eight major categories, including milk, bottled water, carbonated drinks, tea drinks, juice drinks, canning food, healthcare products and leisure food, with bottled water, milk and Babao Congee ranked first in China for years in terms of both production and sales.

Wahaha achieved revenues and pre-tax profits of RMB10.3 billion and RMB2.9 billion respectively in the first quarter of 2009, a 22-year record growth of 37.22 percent and 95.68 percent from the same period last year.

Source: Hangzhou Wahaha Group

Baoxiu Ye, +86-10-8886-5353 x8832, bx.ye at insightpr.com.cn