Danone established a joint venture company with the Wahaha Group in 1996, with a 51 percent ownership stake of stock in the company. In addition to this joint venture company, the Wahaha Group also operated several separate non-Wahaha joint ventures. In 2007, Danone attempted to offer four billion Yuan to purchase 51 percent of the shares of all non-Wahaha joint ventures, but this offer was rejected. Subsequently, Danone was involved in a series of complex litigation against the Wahaha group in a number of jurisdictions.
Today we will introduce a hot “KPMG case” regarding the Danone-Wahaha stock dispute. In this case, the takeover practices of KPMG, designated by Danone (Danone SA, BN.FR), against the Wahaha Beverage Co., Ltd, in Suqian, Jiangsu Province, was rejected by the Court. In addition, the court also ordered KPMG to cease its infringement, make an apology and compensate for losses of Suqian Wahaha Beverage Co., Ltd.
Introduction to the Case:
The Suqian Wahaha Beverage Co., Ltd (the “Suqian Wahaha”) is an affiliated non-joint venture company of the Wahaha Group. In December 2007, KPMG, in the name of its Partner Jannie Wong, who works in KPMG China, issued notices to Suqian Wahaha, banks, the administration for industry and commerce, as well as accounting firms, claiming thatJannie Wong was proposed as an asset manager of Ever Maple Trading Ltd., in accordance with the take-over order by the Higher Court of the British Virgin Islands (the “BVI”). Ever Maple Trading Ltd. was an offshore company registered in the BVI with its legal representative being Ms. Zong Fuli. Ms. Zong Fuli is the daughter of President Zong Qinghou of the Wahaha Group. The Wahaha Group is one of the shareholders of Suqian Wahaha.
Enclosed with the notices was a take-over order of the Higher Court of the BVI, requiring the recipient to seriously consider and pay attention to it, stating that anyone who deliberately assisted or allowed the violation of the order shall be in contempt of the court, and that the violator may be sentenced to imprisonment, penalty, or have its property attached. The notice also requested the relevant administrations and banks to freeze Suqian Wahaha’s assets and cease the registration, transferring and changing of pledges of equities. In fact, KPMG issued take-over notices to all non-Wahaha joint ventures in China.
Subsequently, Suqian Wahaha filed a lawsuit with the Intermediate Court of Suqian City, demanding KPMG to stop its infringement and compensate accordingly for losses incurred.
The KPMG, in a defense argued that, first, the issuing of a take-over notice was a personal act of Jannie Wong, not an act done within the scope of her professional duties, and therefore KPMG was not a qualified defendant. Second, the notice issued by Jannie Wong was a merely advice, not a formal take-over order; furthermore, although Jannie Wong acted as the recipient, the acts were not beyond the scope of KPMG’s business operations, and did not violate Chinese laws or constitute infringement. Therefore, KPMG argued, the court ought to reject Suqian Wahaha’s claims.
The court heard the case and decided the key point in this case was the following three questions: first, the nature of the notice of Jannie Wong; second, the subject of these acts and the subject of the liability; third, whether the acts of the KPMG constituted infringement.
In regard to the legal characteristics of the notice issued by Jannie Wong, the court held that a takeover order is a legally binding judicial document, with the contents such involving the taking over assets, restriction of stock transfers, freezing of bank accounts, and the production of evidence, as well as many specific takeover measures and requirements. In addition, a takeover order also contained potential legal consequence. As in this case, the notice tendered by Jannie Wong not only contained clearly written asset takeover and other specific measures, but also pointed out the potential legal consequences of disobeying the order handed down by the High Court of the BVI. After hearing the case, the court decided that Jannie Wong’s notice ought to be considered a takeover order.
As for the subject of these acts and the subject of the liability, the court held that, although the notices were sent in Jannie Wong’s name, from the content, form, methods of communication and other aspects of the letter, the court found the following after a thorough analysis:
The notice was printed on paper containing KPMG’s letterhead, containing an address in Guangzhou, a phone number, and the company name as well as a contact person. Furthermore, considering the Medias and reports’ attitudes and comments towards this affair, it indicated that the acts of takeover were the acts of KPMG, not the personal acts of Jannie Wong. Because these takeover actions were in line with KPMG’s global goals, and because of Jannie Wong, acting in her role as an asset manager in Mainland China, it was reasonable to assume that her acts were based substantially on the performance of her duties in KPMG’s Guangzhou offices. Based on the above reasoning, the court found that KPMG ought to be liable for these acts related to the takeover action, and will assume liability for such.
About the question whether the acts of the KPMG constituted infringement, the court held as follows:
First, as Article 281 of the Civil Procedure Law provides,
“If a legally effective judgment or ruling made by a foreign court requires recognition and execution by a People’s Court of the People’s Republic of China, the party concerned may directly apply for recognition and execution to the competent intermediate people’s court of the People’s Republic of China. Alternatively, the foreign court may, pursuant to the provisions of an international treaty concluded between or acceded to by the foreign state and the People’s Republic of China, or in accordance with the principle of reciprocity, request the people’s court to recognize and execute the judgment or ruling.”
In this case, the Guangzhou KPMG branch was in violation of China’s laws and thus KPMG had no rights to directly carry out a takeover order made by a foreign court.
Next, evidences also proved that, relevant organizations, banks and companies in connection with Suqian Wahaha’s business began questioning its credit worthiness and financial health, and had adjusted their modes of trading and transactions accordingly, causing material adverse effects to Suqian Wahaha’s business. Additionally, Suqian Wahaha’s losses were clear and obvious in light of the negative media reports and intense focus on the issue in dispute.
Then, the losses were due to the takeover notices that were issued to relevant organizations, administrations for industry and commerce, banks as well as accounting firms. Therefore, there is cause and effect relation between the losses and the acts of the KPMG.
At last, the KPMG knew it has no right to implement rulings made by a foreign court in China, but it still sent the takeover orders to Suqian Wahaha and relevant organizations, which the KPMG was in subjective negligence. In conclusion, the court determined the KPMG infringement against the Suqian Wahaha.
For all above reasons, the court of first trial ended in determining that the takeover practice of the KPMG were an act of infringement and the KPMG shall bear legal responsibility for infringement, including stop infringement, restore reputation, eliminate effects of the infringement as well as make an apology, and compensate for losses. Dissatisfied with the decision contained by the first trial court, the KPMG appealed but was rejected by the Higher Court of Jiangsu Province.
Lawyers’ Comments:
1. In all litigation of the Danone-Wahaha cases, we found that Wahaha won nearly all its lawsuits and arbitrations in China, while Danone won most outside of China. The reason arose from the fact that Danone designated KPMG as an asset manager in the taking over of all subsidiary corporations of Ever Maple Trading Ltd, in Mainland China after accepting the takeover orders from the Higher Court of the BVI on Ever Maple Trading Ltd., the holding company of all of the non-Wahaha joint ventures in China. After receiving the takeover order, Suqian Wahaha brought a lawsuit to the local courts against KPMG, instead of handed over control of its company.
According to China’s laws, a company is unlikely to utilize an accounting firm in taking over another company unless the company enters into bankruptcy and insolvency proceedings. However, Danone, familiar with the laws of the BVI, succeeded in taking over the overseas holding company of non-Wahaha joint ventures abroad. On one hand, the two parties undertook mediation for less than three months during the second trial; on the other hand, there have been no results arising out of the arbitration in Stockholm about the dispute. We believe that Danone will win the arbitration but will not acquire control of Wahaha, because the Wahaha knows the relevant Chinese laws and regulations on a deeper level than Danone does.
KPMG, even though it took over the holding company of Suqian Wahaha, ultimately failed in its goal of taking over Suqian Wahaha itself. This may be a good interpretation of the facts. In China, controlling a company requires the following elements: shareholders’ meetings, legal representatives, a company’s official stamp and financial seal, core assets, and control of its bank account. Wahaha holds all of the above elements in the dispute between it and Danone. Where KPMG already controlled Suqian Wahaha’s shareholders, the legal representative of Ever Maple Trading Ltd.was remained the daughter of Wahaha boss Zong Qinghou. Taking this into account, as well as KPMG’s failure to gain the signature of Wahaha’s legal representative, it becomes clear that KPMG faces a number of difficulties to realize total control – this falls in line with our expectations.
2. The Chinese government played an invaluable and undervalued role in other cases arising from the stock disputes between Danone and the Wahaha Group. The Chinese government has always maintained sharp vigilance with regard to foreign funds attempting to control domestic core assets in critical areas, and Danone stepped into a particularly sensitive spot—the sphere of China’s judicial sovereignty. In accordance with the laws of the BVI, Danone could take over Ever Maple Trading Ltd. in its jurisdiction. When attempting to take over its subsidiary corporations, however, such takeover practices were under the jurisdiction of three different places of registration.
KPMG attempted to take one more step in order to directly control all of the subsidiary corporations under Ever Maple Trading Ltd., and actually sent takeover orders to them when the Wahaha Group remained in firm control of them all. Without doubt, their takeover practices failed, and the opposing side took these complaints to court and alleged infringement in accordance with relevant Chinese legislation.
In reality, Danone and KPMG could pursue a different approach with less inherent legal risk and without touching upon the issue of China’s judicial sovereignty. First, KPMG could hold a meeting of the shareholders in the name of the Ever Maple Trading Ltd., in changing its legal representative and other directors. Then, KPMG could remake the company’s official stamp and financial seal, and control the bank accounts after replacing the legal representative. For Wahaha, it would undoubtedly not agree and probably resist such replacement. Therefore, KPMG could file a suit to achieve its aim in the process of replacing the legal representative. Such an approach may take a rather long time, and there would be a risk that KPMG would be unable to prevent Wahaha from transferring its corporate assets. When compared the risks of being determined guilty of infringement, this is a legal and reasonable way to control Suqian Wahaha, as well as other non-Wahaha joint ventures.
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