A Chinese court has put the dairy company Sanlu into bankruptcy, after a scandal involving milk contaminated with melamine.
The company was at the centre of a melamine scandal in which milk powder containing the toxic chemical caused the death of several Chinese babies.
Fonterra, which has a 43% stake in Sanlu, confirmed on Wednesday that a court in China has issued the bankruptcy order.
Fonterra's chief executive, Andrew Ferrier, says it is not a surprise, because San Lu was in a very difficult situation and faced mounting debts because of the contamination crisis.
He says Fonterra has already written off its $200 million investment in San Lu. He expects no repercussions for his company from the bankruptcy proceedings.
Fonterra will look for new opportunities in China once Sanlu is sold, which Mr Ferrier expects to take up to six months.
The Chinese company will be managed by a court-appointed receiver, who will take responsibility for the sale of the company's assets and payment of creditors.