China: MOFCOM Approved Wal-Mart's Acquisition of Controlling Stake in Yihaodian but Said NO to VIE Structure

Last Updated: 25 August 2012
Article by Susan Ning, Han Wu and Hazel Yin

MOFCOM Approved Wal-Mart's Acquisition of Controlling Stake in Yihaodian but Said NO to VIE Structure

On 13 August 2012, the Ministry of Commerce ("MOFCOM") approved Wal-Mart Stores Inc("Wal-Mart")'s proposed acquisition of 33.6% share of Niu Hai Holdings ("Niu Hai"),which enables Wal-Mart to have a controllin stake in the online direct sales business of Yihaodian, the largest e-supermarket in China.1 The approval is not without conditions,though.It is the fifth conditional merger clearance decision ("Decision")MOFCOM issued in 2012 and the first conditional clearance relating to the online retail sector.

Review Process

MOFCOM received notification of the transaction on 16 December 2011 and officially accepted it on 16 February 2012.The case entered into Phase II on 16 March 2012 and the parties submitted the proposed remedies in the extended Phase II period on 3 July 2012.The Decision was issued at the end of the extended Phase II period.2

Relevant Market

MOFCOM found that Wal-Mart is a major competitor in the market of supermarket chains both in China and worldwide;Yihaodian,on the other hand,is the largest e-supermarket in China.MOFCOM defined the relevant product market as the B2C online retail market.Wal-Mart currently is also running e-supermarket business in China, but only for its Samsclub members.The Decision did not explain how the market was defined:whether MOFCOM saw it as a horizontal overlap between Wal-Mart and Yihaodian,or whether it was focused on the business of Yihaodian as the target.The relevant geographic market is defined as China.

Competitive Assessment

MOFCOM held that Wal-Mart may leverage its competitive advantages (such as procurement,warehousing and logistics) in the market for brick-and-mortar supermarket chains to the online retail market, and that the synergies of the transaction would substantially increase the competitiveness of the post-transaction entity in the online retail market. However, MOFCOM did not address in details the competition status of the domestic online retail market. Its concerns have apparently extended beyond this.

As a background, Yihaodian not only is engaged in B2C direct sales but also provides an online sales platform for other businesses. To operate the latter business in China, a company has to obtain the approval for operation of value-added telecommunications service ("VATS")from the Ministry of Industry and Information Technology.3The VATS sector is also subject to foreign investment restrictions:foreign investors'equity interest in such a company cannot exceed 50%.MOFCOM is concerned that with the combined capabilities in both brick-and-mortar and online retail businesses,the post-transaction entity will be able to obtain market power in the VATS market. Its bargaining power vis-ŕ-vis users of online sales platforms will be materially strengthened and this is likely to cause anti-competitive effects in the VATS market.


To eliminate its concerns, MOFCOM imposed the following conditions on Wal-Mart:

  1. the acquisition should be confined to the direct sales segment of Yihaodian;
  2. without acquiring approval for engaging in VATS, Niu Hai Shanghai should not use it own network platform to provide internet services to any other parties;
  3. after the transaction, Wal-Mart is not allowed to use Variable Interest Entity (VIE) structure to engage in VATS currently operated by Yihaodian.


In China,online direct sales belong to the restricted industry for foreign investors.With the approval of the transaction,Wal-Mart will be able to substantially improve its presence in the e-retail sector in China,a market that has experienced surge in sales.

The Decision is somewhat confusing due to the lack of details in relation to market definition,market analysis and competition assessment.Market shares of the parties and their competitors,which used to be relied on by MOFCOM as a major indicator of the dynamics of the relevant market, was not even mentioned in the Decision.

The Decision made it clear though that the transaction is only confined to online direct sales.In other words,this transaction will not allow Wal-Mart to get a stake in Yihaodian's VATS segment, operate as an intermediary between vendors and consumers,a business model T-Mall is taking.

The Decision has also explicitly requested Wal-Mart not to get involved in Yihaodian's VATS business through the VIE structure. This is by far the most direct reference to"VIE"by Chinese regulators.The use of VIE structure to dodge Chinese legal restrictions of foreign investment in specific industries has been very controversial in China. A most recent attack of VIE is the national security review mechanism enacted in 2011,which banned the adoption of"other structures"to evade the national security review.4This condition suggests that the Anti-monopoly Bureau("AMB")is taking a negative approach towards VIE and companies whose operations involve the use of VIE may encounter trouble at the AMB when they file to the AMB for antitrust approval.

Finally,it is interesting to see that the conditions are essentially mandating compliance with foreign investment policies.How to align the authorities of different government agencies in the antitrust review process,both from the procedural and substantive perspectives,is an issue that deserves attention.


1 A copy of MOFCOM's Announcement [2012] No.49 can be found here (in Chinese):
2 The last day of the extended Phase II period should have been August 12,a Sunday.MOFCOM extended the 60-day statutory time limit for extended Phase II and issued the Decision on August 13 instead.While it is still controversial as to whether MOFCOM is legally entitled to extend the statutory time limit, MOFCOM has not yet formed a uniform practice in this regard.In the Google/Motorola case,for example,the decision was issued on a Sunday,when the statutory review period expired.
3 According to the Regulation on Telecommunications of the People's Republic of China, value-added telecommunications business refers to the provision of telecommunications and information services by using the basic facilities of public networks.Value-added telecommunications services includes:(1)electronic mail service;(2)voice mailboxes;(3)on-line database storage and sorting;(4) electronic data interchange;(5) online data processing and trading processing;(6)value-added fax;(7) internet connection service;(8)internet information service and (9)audio-visual telephone conference service.
4 For more details of the national review mechanism and its implication on VIE structure,please see our previous article entitled Updated National Security Review Rules:A Justifiable Cause of Anxiety.[Insert hyperlink]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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