Zong, who founded Hangzhou-based Wahaha, signed a partnership agreement with Danone in 1996, eventually setting up 39 joint venture units that are 51% held by Danone and 49% controlled by Zong. With capital from Danone, but little direct management input, Wahaha grew to dominate the bottled water market in China. It also is a major producer of milk, yogurt drinks, carbonated soft drinks, juices and canned food. However, their arrangement was strained this year after Danone confronted Zong over side businesses he set up that are allegedly selling Wahaha-branded products identical to those produced by their joint venture, using the same suppliers and distribution network.
Zong's resignation came after Danone filed a lawsuit in Los Angeles against two companies linked to him and two individuals, one a U.S. citizen and one a U.S. green card holder, who are Zong's daughter and her mother respectively. In the suit, Danone claims it has been cheated out of $100 million by businesses set up by Zong that it says are selling Wahaha-branded products identical to those sold by their joint venture, using the same suppliers and distribution network. Hangzhou Wahaha Food & Beverage Sales Ltd, accused by Danone of selling products competing with those produced by the joint ventures, is a wholly owned subsidiary of Hangzhou Hongsheng, which is controlled by the British Virgin Islands-registered Ever Maple Trading.
Does any of that make sense? To begin with, what is Danone mad about? They're mad because the guy that is supposed to be running their joint venture has set up a parallel company that is not only siphoning off profits from the joint venture but it's also using the very same distribution network that the JV uses. Basically, Danone wants its money.
A question us lawyer types are initially curious about is how can Danone bring a law suit in Los Angeles against these companies and Zong's family members if the JV contract has an exclusive arbitration clause? Prior to initiating litigation in Los Angeles, Danone filed for arbitration in Stockholm, and Wahaha subsequently had its request for arbitration in Hangzhou, China approved. Generally, a US court will throw out a case if there is evidence of an exclusive arbitration clause-- So what gives? Either the LA court hasn't had an opportunity yet to throw out the case or the litigation in LA is about a dispute that did not arise from JV contract.
Also, if the Los Angeles lawsuit was not brought against Zong, then why did it compel Zong to resign? The individuals named in the lawsuit were his daughter and his daughter's mother. Perhaps having his family members implicated in this scam shamed him, and he lost face. Perhaps he resigned in an attempt to get Danone to drop the law suit in Los Angeles, taking the burden of the Los Angeles law suit off of his family. Neither of these seem very likely, but they're possible...
Wu Xiaobo of Beijing University, a personal friend of Zong for 16 years and also an author of a book about Wahaha, said that the involvement of Zong's family in the running of the Wahaha JV was unprecedented. If Zong's family members were executives in the JV, then they owe a fiduciary duty to the JV under the new China company law, which is very similar to the company law in the US. Usurping a corporate opportunity is a breach of fiduciary duty, and it is possible that this is the very issue being litigated in LA. Moreover, Zong could have resigned from his position in an attempt to avoid being sued in China for the very same cause of action.
The next question is why didn't Danone, as a shareholder in the JV, bring an action on behalf of the JV against Zong for breach of fiduciary duty in China? Probably because Danone is afraid of the Chinese legal system, which is just another mistake that needs to be added to the long list of mistakes Danone has made doing business in China. Even if the legal system in China is corrupt (and we don't think it is), the chances of Danone getting screwed in the Chinese legal system are miniscule. The last thing the Chinese want right now is (more) bad press, and the world press is currently focused on the outcome of this dispute in China. Danone should utilize this media coverage to their advantage and bring a suit against Zong in China, and it is likely China would use this as an opportunity to demonstrate that their legal system is mature enough and sophisticated enough to handle this kind of international litigation.
UPDATE: Dan Harris of China Law Blog just had an editorial published in the Wall Street Journal on this very subject, and the excellent opening line reads as follows: "The much-publicized legal fight between French beverage maker Groupe Danone and its Chinese partner, Wahaha, calls to mind an ancient Chinese proverb often used to describe a bad marriage: 'Same bed, different dreams.'" For more about joint ventures in China see the following CLB post entitled: China's Joint Venture Jeopardy.