Danone Group and its partner, Wahaha Group Company, are shareholders in a joint venture company that is the largest beverage company in China. A recent dispute between the partners now threatens to wreck the joint venture. What lessons can be learned from this dispute for investors considering new joint ventures in China? Disputes such as this are not inevitable in China. They can be avoided by following certain basic rules. Many of the most important rules were violated in this case. As a result, the problems that have arisen were almost certain to occur.
The Facts A. Formation of the Joint Venture Company
The Wahaha Joint Venture (“JV”) was formed in February, 1996. At the start, there were three participants in the JV. (1) Hangzhou Wahaha Food Group Co. Ltd. (“Wahaha Group”), led by its chairman Mr. Zong Qinghou. (2) Danone Group, a French corporation (“Danone”). (3) Bai Fu Qin Ltd., a Hong Kong corporation (“Baifu”). Danone and Baifu did not invest directly in the JV. Instead, Danone and Baifu formed Jin Jia Investment Co. Ltd., a Singapore corporation (“Jinjia”). Upon the formation of the JV, Wahaha Group owned 49% of the shares of the JV and Jinjia owned 51% of the shares of the JV. This structure led to immediate misunderstandings between the participants. From the Wahaha Group’s point of view, the division of ownership was 49% Wahaha Group, 25.5% Danone and 25.5 % Baifu. From this point of view, Wahaha Group was the majority shareholder in the JV. Since Wahaha Group felt it controlled the JV, it was relatively unconcerned when it transferred its trademark to the JV. Wahaha was further comforted that the other party to the JV was a Hong Kong company, feeling that the Chinese participants in the JV thoroughly outnumbered the foreign side. In 1998, Danone bought out the interest of Baifu in Jinjia. Through this buyout, Danone became the 100% owner of Jinjia and effectively the 51% owner of the JV. As 51% owner, Danone exercised legal control over the JV because of its right to elect the board of directors. This change came as shock to Wahaha Group. For the first time, the Wahaha Group and Mr. Zong realized two things: 1. They had given complete control over their trademark to the JV because 51% ownership in the hands of Jinjia meant 100% control by Jinjia/Danone.
2. As a result of the above, a foreign company was now in control of the JV. From a legal standpoint, this result was implied by the structure of the JV from the very beginning. However, it is clear from public statements that the Wahaha Group (and Mr. Zong) did not understand the implications when they entered into the venture. The Danone “takeover” in 1998 therefore produced significant resentment on the part of Wahaha Group and Mr. Zong. Rightly or not, they feel Danone had misled them from the very beginning.
B. Transformation of Wahaha Group into a private company. At the time of the formation of the JV, Wahaha Group was a state owned enterprise owned by the Hangzhou city government. After formation of the JV, Wahaha was converted into a private corporation. Approximately 40% of the shares were retained by the Hangzhou government with the remainder distributed to Mr. Zong, other senior managers and to a workers committee. The conversion of the Wahaha Group into a private company effectively controlled by Mr. Zong set the stage for he Wahaha Group’s decision to act to take back control of the trademark they felt had been unfairly transferred to Danone. It was no longer a question of the loss of an asset of a company for which they merely worked; they now viewed the transferred trademark as their personal property. The feeling of injustice at the terms of the transfer became personal.
C. Failed transfer of the Wahaha trademark to the JV. At the time of formation of the JV, the Wahaha Group obtained an appraisal of...