Wahaha Reviews 21:0 Whitewash Against Danone

HANGZHOU, China - The 3-year dispute which resulted in a series of worldwide lawsuits between two beverage giants, China’s Wahaha and Danone, the biggest international war in scale since China’s reform and opening up, is expected to come to a close with the final verdict from the arbitration court in Sweden, of which both parties are quietly awaiting. Among numerous court cases worldwide, Wahaha had so far taken the upper hand by winning 21-0 of the Wahaha VS Danone cases.

The Danone-Wahaha feud

In April 2006, Wahaha was informed by its ten-year joint-venture partner Danone that it had breached the contract by establishing non-joint ventures, which has infringed upon the interests of Danone. In reaching a settlement, Danone proposed to purchase 51% of shares of Wahaha’s non-joint ventures at a cost of RMB4 billion, the value of their net assets. However, total assets of the non-joint ventures at was RMB5.6 billion in 2006, with annual profits of RMB1.04 billion.

The move was opposed by Wahaha, and the two parties were then locked in a standoff over the acquisition issue. In May 2007, Danone formally initiated a proceeding, claiming that Wahaha’s establishment of non-joint ventures as well as the illegal use of “Wahaha” trademark had seriously violated the non-compete clause. The two parties carried on some 10 lawsuits in and out of China, and to date, all the ruled cases between Wahaha and Danone have ended in Wahaha’s favor.

On 30 December 2008, the High Court of British Virgin Islands issued a formal verdict, which revoked the freezing and receiving orders filed by Danone. The judge stated in the adjudication order that the lawyer of Danone had misled and concealed from the court, and that Danone’s freezing and receiving orders were received at such a condition when the defendant was absent and no pleadings were made. Previously in November 2008, the Suqian Intermediate People’s Court in Jiangsu province ruled that it is illegal for KPMG, appointed by Danone, to send take-over letters in China, which had infringed upon the right of Wahaha.

On 3 February 2009, a California court in the United States dismissed Danone’s accusation against the wife and daughter of Zong Qinghou, Chairman of the Wahaha Group, and the accusation of two ventures that were in no relation with Danone, and ruled that dispute between Danone and Wahaha should be settled in China.

In addition, Danone’s lawsuits against Wahaha were rejected by courts in Italy and France; and a series of lawsuits brought by Danone in China against Zong Qinghou and Wahaha’s non-joint ventures all ended with failure.

Reasonable existence for Wahaha’s non-joint ventures

The rationality of the existence of the non-joint ventures, the ownership of the “Wahaha” trademark and the non-compete clause issue are the key points of the Danone-Wahaha dispute.

In 1996, Wahaha offered a list of ten subsidiaries to Danone, who after evaluation selected four. On the basis, Jinja Investments Pte Ltd. (a Singapore-based joint venture between Danone Asia Pte Ltd. and Hong Kong Peregrine Investment, of which Danone is the controlling shareholder), Hangzhou Wahaha Group Co., Ltd. and Zhejiang Wahaha Industrial Holdings Ltd. jointly invested to form five joint venture enterprises, with shareholdings of 51%, 39% and 10%, respectively. In 1998, Hong Kong Peregrine sold its stake in Jinja Investments to Danone, which makes Danone the sole shareholder of Jinja Investments, giving it the control of over 51% of the joint ventures. Wahaha and Danone cooperated on the basis of joint venture enterprises, rather than the complete acquisition of Wahaha by Danone. As a result, Wahaha is always independent, and its non-joint ventures have existed and developed since 1996. Relevant transactions of Wahaha’s non-joint ventures and joint ventures were disclosed fully and frankly by the auditing reports of PricewaterhouseCoopers, an accounting firm appointed by Danone. Meanwhile, during the 11-year cooperation, Danone assigned a Finance Director to locate in the headquarters of Wahaha Group to audit the latter’s financial information.

Wahaha has ownership of the trademark according to applicable laws

Danone and Wahaha have signed in succession three relevant agreements concerning the ownership of the “Wahaha” brand name.

In 1997, the two parties signed a trademark transfer agreement, with an intention to transfer the “Wahaha” trademark to the joint ventures. The move, however, was not approved by the State Trademark Office.

For this reason, the two parties signed in 1999 the trademark licensing contract. According to law, the same subject cannot be synchronously transferred and licensed the use to others by the same host. Therefore, the signing and fulfillment of the trademark licensing contract showed that the two parties had connived the invalidation of the transfer agreement. The “Wahaha” brand should belong to the Wahaha Group, while the joint ventures only have right of use.

In October 2005, the two parties inked the No. 1 amendment agreement to the trademark licensing contract, in which it confirmed Party A (Hangzhou Wahaha Group Co., Ltd.) as owner of the trademark. In addition, the second provision of the amendment agreement clearly stated that the several Wahaha subsidiaries listed in the fifth annex of the licensing contract as well as other Wahaha subsidiaries (referred to as “licensed Wahaha enterprises”) established by Party A or its affiliates following the signing of the licensing contract also have right granted by one party to use the trademark. The “licensed Wahaha enterprises” involved in the amendment agreement refer to the non-joint ventures.

According to related files, Wahaha owns the ownership of the “Wahaha” trademark, while its non-joint ventures have the right to use the trademark.

New ventures and acquisitions

Here comes the non-compete clause issue. With market expansion, the joint ventures suffered insufficient capacity at that time. In view of this, Wahaha suggested adding online new production lines by increasing investment, while Danone requested Wahaha to outsource to product processing suppliers for the joint ventures. Wahaha saw the shortcomings in using product processing suppliers, on the one hand they are not able to address the demands for production, on the other hand, it would be difficult to realize optimized monitoring for quality. As a result, Wahaha had to set up non-joint ventures to meet with the production needs as suggested by Danone. As the non-joint ventures develop, all the joint ventures still operate the full year, with production capacity surpassing 100%. Wahaha believes that the existence and operation of the non-joint ventures did not affect any interest of Danone, but beneficially complemented the joint ventures.

During the 11 years that followed 1996, Danone invested less than RMB1.4 billion to the Wahaha’s joint ventures, but received a profit of RMB3.554 billion as of 2007. Basically, each joint-venture program boasts a return on investment of some 40% per year.

On the opposite, Danone acquired several strong competitors of Wahaha including Robust, Huiyuan and Shanghai Maling Aquarius, and appointed its director Qin Peng as chairman of Robust. From this, Wahaha expressed its disappointment that Danone failed to fulfill the ordinance of ‘jointly exploring markets in and out of China’ listed in the joint-venture contract, while only expect dividends from their cooperation. Based on the marketing strategy of Robust, Wahaha sees it as the biggest rival, which totally aimed at Wahaha.

Under the coordination of the Chinese and French governments, Danone and Wahaha once reached a peaceful settlement between December 2007 and April 2008. Danone’s proposition to sell its shares in the joint ventures to Wahaha for RMB50 billion (finally reduced to approximately RMB20 billion) was rejected by Wahaha. The RMB4 billion offered by Danone to buy stakes in the non-joint ventures was calculated on net assets, while the shareholdings of the selling party was calculated on the overall profits and cash flow of the joint ventures and non-joint ventures in 2006 as well as the P/E ratio provided by finance experts.

After the breach of negotiations, the two parties again turned to legal procedures. So far, all the ruled cases both in China and abroad have ruled against Danone. Zong Qinghou, Chairman of the Wahaha Group, wrote at the early stage of the Danone-Wahaha feud in a public letter to Danone, “We say goodbye to Danone today, but I hope Danone will not say goodbye to China tomorrow.”

News link: Who violated the spirit of contract? en.china.cn/content/d526857,ecbff1,1910_13957,0.html For more information, please contact: Baoxiu Ye Tel: +86-10-8886-5353 x8832 Email: bx.ye@insightpr.com.cn

Source: Wahaha Group

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