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Danone suspected of violation of Chinese laws
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13:35, September 22, 2008

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Danone has paid up to 570 million yuan in its one-and-a-half-year-long legal dispute with Wahaha, and its high-profile legal actions worldwide have been questioned by shareholders.

KPMG involved into Danone-Wahaha feud

According to sources close to the case, KPMG, one of "big four" accounting firms, has violated China’s judicial sovereignty by assisting Danone Asia Pte Ltd and its subsidiaries in its forcible takeover of the foreign shareholder of non-joint ventures of Wahaha and sending BVI and Samoa court orders to the non-joint ventures and banks operating in China. Any foreign institution or individual is not allowed to deliver documents and conduct investigations in China without permission from relevant Chinese oversight authorities, in accordance with applicable Chinese laws. For this reason, Suqian, Jiangsu province-based Wahaha Hengfeng Food Co., Ltd, one of the non-joint ventures, brought an accusation against KPMG at Suqian Intermediate People's Court, asking for compensation from KPMG. The court has accepted the case and released a notification on responding to the lawsuit. The court heard the case on August 12.

In November 2007, Danone and KPMG jointly brought the foreign shareholder of non-joint ventures of Wahaha (a BVI company) and relevant directors into court at British Virgin Islands, applying for appointment of KPMG as the receiver. One month later, Danone proceeded against the parent of the BVI company in Samoa, again applying for appointment of KPMG as the receiver. Danone alleged that the non-joint ventures impaired its interests, while Wahaha claimed the ventures have nothing to do with Danone.

Though British Virgin Islands (BVI) is the most popular offshore jurisdiction in the world, it has only one judge. Samoa in Oceania is listed by the UN as one of the most undeveloped countries and does not have a judge of its nationality. Danone cheated the BVI court when applying for arbitration in the event that the BVI company was absent, according to a source at the BVI company.

Wahaha Hengfeng Food sent a petition to the court, accusing KPMG of violating Chinese laws and affecting its normal production and operation, for which the company asked for compensation and a public apology from the accounting firm. A spokesperson for Wahaha Hengfeng Food confirmed the news and said that the company has received a court summons.

Huge sum of legal costs for Danone

According to its first-half results this year announced on July 25 by Danone, the company paid up to 57 million euros (approximately 570 million yuan) in legal disputes. The huge sum of legal costs is related to Danone China’s global legal actions against Wahaha, analyzed industry insiders.

Danone had previously brought accusations against Wahaha at some ten judicial institutions in and out of China, of which all ended in favor of Wahaha. As a result, all the legal costs were assumed by Danone. According to an internal source, as all the lawyer teams and accounting firms serving the company are global leading teams, all of their large sum of attorney fees were paid by Danone in advance. In addition, the tax inspection authority in Shanghai has accepted the case concerning Danone China executives’ tax evasion issue. Should the case be proved, Danone will again suffer a sizeable fine.

Referring to its large sum of legal fares, Riboud, President of Danone, said he had noticed the issue. However, in light of the expensive legal costs arising from its legal actions worldwide, shareholders will naturally come at the question, where should Danone go?

Danone suspected of deceiving the court

“According to BVI and Samoa laws, a company shall not be ordered to be taken over unless its property is facing real threats and it is suspected of non-normal operation and management. However, in fact, Danone still exists as an investment company and the non-joint ventures of Wahaha with investments by Danone also have been operating normally. After describing Wahaha owner Zong Qinghou using the words such as 'conspiracy center' at the court, Danone won the trust of the court deceivably by exaggerating and hiding the facts. Obviously, Danone deceived the judge,” a source familiar with the situation told the reporter.

The reporter then called experts in the legal community for consultation on the matter. They said according to the current situations, KPMG fails to comply with China’s applicable laws for taking on the position of the receiver under the commission of Danone. In addition, KPMG has been suspected of violation of Chinese judicial sovereignty by bypassing Chinese judicial authorities to directly implement BVI and Samoa court orders, and sending the orders to Chinese banks to require them to freeze assets of the non-joint ventures’ foreign shareholder in China. As a result, KPMG is very likely to lose the case.

“In accordance with applicable Chinese laws, KPMG is unqualified for the position of a receiver as an intermediary but the company forcibly took over the foreign shareholder of non-joint ventures of Wahaha without the permission from China’s judicial authorities. One the whole, KPMG has severely infringed upon the judicial sovereignty of China,” a lawyer said when answering the question from the reporter.

Danone is not only suspected of violating China’ judicial sovereignty seriously but also faced with lawsuits again due to its tricks with China’s courts and the compulsive takeover of Wahaha by KPMG at the instigation of Danone. Troubles came one after another to Danone in recent days, including suspicion concerning violations of the Chinese judicial sovereignty, charges of massive tax evasions by its executives and the bad news about its poor operations in the country. In addition, to date, its large-scale “lawsuit show” around the world has suffered successive defeats. After one and a half years of war of words, the company’s goodwill in China has clearly become not so good. According to a poll conducted by a portal website, 90 percent of Chinese netizens opposite Danone’s acquisition of Wahaha with a clear stand, while a large number of Chinese consumers also said they would consider boycotting Danone’s products, marking a critical situation facing Danone.

From another point of view, Danone has also been questioned by shareholders as the company’s abuse of laws worldwide directly led to drops in its earnings and damages in its shareholders’ interests. Since it is faced with more and more troubles, the company is expected to have a difficult future.

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