Economic Observer reporter Cai Yuekun listed companies requesting the subsidiary to provide financial information, but there is a situation where the subsidiary does not cooperate.
Now this scene is happening in the A-share listed company Shanghai Kehua Biological Engineering Co., Ltd. (002002.SZ, hereinafter referred to as “Kehua Biological”).
On December 27, Kehua Biological announced that its holding subsidiaries, Xi’an Tianlong Technology Co., Ltd. and Suzhou Tianlong Biological Technology Co., Ltd. (hereinafter referred to as “Xi’an Tianlong” and “Suzhou Tianlong” respectively, collectively referred to as “Tianlong Company” ) Director and General Manager Li Ming clearly stated in the “Audit Work Reply Letter” that because the 62% equity of Tianlong Company held by the company was frozen, the People’s Court of Weiyang District of Xi’an City has ruled that Kehua Biotechnology is prohibited from exercising all of the 62% equity of Xi’an Tianlong. Shareholders’ rights, and on the grounds that there is a risk of disclosure of business secrets in opening financial information to Kehua Bio, it is clear that it is currently unable to cooperate with Kehua Bio’s pre-audit accounting statements and subsequent audit work.
In this regard, Kehua Biology stated that Tianlong’s so-called “reasons” completely lack factual and legal basis. The company expressed its strongest indignation and condemnation for the actions of Li Ming and other Tianlong company directors and senior managers who ignored the securities market rules and the company’s standardized operation requirements, and ignored the interests of listed companies and their small and medium shareholders.
In this regard, on December 28, a relevant person from the Kehua Bio-Securities Affairs Department told reporters that he was not the first listed company whose subsidiary was “out of control”. At present, the company is still in communication with Tianlong Company, and will continue to advance the arbitration process, requesting that court hearings be arranged as soon as possible, and will follow up with partners, lawyers and other parties to promote the settlement of matters. Regarding the impact of the company, the person in charge also said that he hopes to discuss with the intermediary agency, including the team, and the specific announcement shall prevail.
On the evening of December 28, Kehua Biological received a letter of concern from the Shenzhen Stock Exchange, requesting an explanation of whether the company has lost control of Tianlong Company and the impact on the scope of the company’s consolidated statement preparation, and fully reminded the relevant risks. If you lose control of Tianlong Company, please combine the existing Tianlong Company’s main financial data and the proportion of the corresponding subjects of the listed company to explain the impact on the company’s production, operation and financial status.
Why did the partners who used to work together turned against each other, and what kind of entanglement is behind them?
Subsidiary “out of control”
In recent years, subsidiaries of listed companies have frequently staged “out-of-control” plots that have aroused the attention of the capital market. Not long ago, on December 21, Zhongjia Bochuang issued an announcement stating that the company had in fact lost “control” of its wholly-owned subsidiary, Beijing Zhongtian Jiahua Information Technology Co., Ltd.
According to a previous document issued by Zhong Lun Law Firm, the “out of control” of listed companies’ subsidiaries is generally reflected in the fact that the subsidiaries refuse to cooperate with the company’s change registration, fail to cooperate with the handover of materials, and do not cooperate with audits. .
From the perspective of Kehua Biology, it stated that in order to ensure that Kehua Biology’s 2021 consolidated financial report and the audit work of its holding subsidiary Tianlong’s 2021 financial report can be completed on time and smoothly, according to the company’s appointed Lixin Certified Public Accountants ( Special general partnership) (hereinafter referred to as “Lixin Accountants”) “Communication Letter on the Audit of “Kehua Bio” 2021 Annual Report” audit requirements:
On December 16 and December 17, 2021, the company sent Kehua Biotech’s “Letter on Requesting Cooperation in the Annual Audit Work of Listed Companies” to Tianlong Company and its directors, supervisors and chief financial officer respectively. Kehua Biotech requested Tianlong All shareholders, directors, and senior management of the company actively perform their duties and obligations, provide financial data and related information on time, and cooperate with Lixin’s accountants to complete the audit of Tianlong’s 2021 financial report on time.
However, in response to the company’s above-mentioned “Letter of Cooperation in Auditing Work”, the company’s director and general manager Li Ming sent an email to the chairman, president and chief financial officer of Kehua Biotechnology on December 25, 2021. Tianlong Company’s “To Kehua Biological <关于集团年报审计预审工作的函> and <关于要求配合上市公司年度审计工作的函> “Response” (hereinafter referred to as “Audit Work Reply Letter”).
Tianlong Company uses the relationship between Kehua Biology and Peng Niancai, Li Ming, Miao Baogang, Xi’an Yujing Tongyi Enterprise Management Partnership (Limited Partnership) (hereinafter collectively referred to as the “arbitration applicant”) No. SDV20210578 “About Xi’an Tianlong Technology Co., Ltd. and Suzhou Tianlong Biotechnology Co., Ltd. “Investment Agreement” (2018.6.8) dispute arbitration case (hereinafter referred to as the “arbitration case”) resulted in the freezing of 62% of the company’s shares in Tianlong. The People’s Court of Weiyang District, Xi’an The ruling prohibits Kehua Bio from exercising all shareholder rights of 62% of Xi’an Tianlong’s equity, and on the grounds that there is a risk of disclosure of trade secrets in opening the financial information to Kehua Bio, it is clearly stated that it is currently unable to cooperate with Kehua Bio’s pre-audit accounting statements and subsequent audit work .
Kehua Biological believes that the so-called “reasons” put forward by Tianlong in the “Audit Work Reply Letter” completely lack factual and legal basis. The company expresses its strongest indignation and condemnation for the actions of Li Ming and other Tianlong company directors and senior managers who ignore the securities market rules and the company’s standardized operation requirements, and ignore the interests of listed companies and their small and medium shareholders!
Kehua Biology stated that the company holds 62% of Tianlong Company’s shares in accordance with the law and is the controlling shareholder of Tianlong Company. Tianlong, as the holding subsidiary of Kehua Biological, is included in Kehua Biological’s consolidated financial statements. According to Kehua Bio’s regulations on the management of controlled subsidiaries, Kehua Bio will prepare consolidated financial statements in accordance with the Accounting Standards for Business Enterprises and other relevant regulations, and the subsidiary’s accounting statements shall be audited by the audit agency entrusted by Kehua Bio.
Ten billion arbitration pending
According to the reporter’s comprehensive knowledge of Kehua Biology’s previous announcement, before Kehua Biology’s subsidiary did not cooperate with the audit work, the arbitration between it and its subsidiary shareholders has not yet reached a conclusion.
Recalling the process of Kehua Bio’s investment in Tianlong, on May 15, 2018, Kehua held the 14th meeting of the seventh board of directors. The meeting reviewed and approved the “Regarding Investment in Xi’an Tianlong and Suzhou Tianlong and signed<合作备忘录>“Proposal”, agreed that the company signed the “Memorandum of Cooperation on Investment in Xi’an Tianlong Technology Co., Ltd. and Suzhou Tianlong Biological Technology Co., Ltd.” with Xi’an Tianlong, Suzhou Tianlong and their existing shareholders.
On June 8, 2018, Kehua Biotechnology and Tianlong Company’s four shareholders Peng Niancai, Li Ming, Miao Baogang and Xi’an Yujing Tongyi Enterprise Management Partnership (Limited Partnership) signed a The Investment Agreement of Tianlong Biological Technology Co., Ltd. (hereinafter referred to as the “Investment Agreement”) stipulates that the capital of Tianlong Company will be increased in cash and the equity of Tianlong Company held by four shareholders will be acquired.
According to disclosures, before the acquisition, Peng Niancai held 55.1% of each of Xi’an Tianlong and Suzhou Tianlong; Li Ming held 24.7% of each of Xi’an Tianlong and Suzhou Tianlong, and Miao Baogang held Xi’an Tianlong respectively. And Suzhou Tianlong each have 15.2% equity; Xi’an Yujing Tongyi Enterprise Management Partnership (Limited Partnership) holds 5% each of Xi’an Tianlong and Suzhou Tianlong.
According to the “Investment Agreement”, Tianlong’s entire equity acquisition was completed in two stages. The first stage was for Kehua Bio to obtain 62% of Tianlong’s equity at a consideration of RMB 553.75 million;
Kehua currently holds 62% of Xi’an Tianlong and Suzhou Tianlong respectively.
The second stage is for Kehua Bio to complete the acquisition of the remaining 38% of the shares held by the four shareholders in 2021 with the value of the equity calculated according to the net profit of Tianlong in 2020, and finally complete the acquisition of 100% of the equity of Tianlong. Whole acquisition.
However, regarding the second phase of the transfer of the 38% equity of Tianlong Company, Article 10.2 of the “Investment Agreement” stipulates that the four shareholders shall have the right to request the company to transfer the 38% equity within 2021. At that time, Tianlong’s overall valuation will be based on the higher of the following two: (1) 900 million yuan; or (2) the target company’s 2020 audited net profit after deducting non-recurring gains and losses × 25 times.
And make an explanation: If Kehua Biotech fails to pay in accordance with the contract, according to the second paragraph of Article 10.3 of the “Investment Agreement”, it shall pay the four shareholders equivalent to the remaining amount within 10 working days from the date of rejection or overdue A penalty of 10% of the investment price, and for each day of delay in payment, the company shall also pay the four applicants a penalty for delayed payment equivalent to three ten thousandths of the penalty.
From May to June 2021, the four shareholders of Tianlong Company issued a letter to Kehua Biology, requesting that Tianlong Company’s 2020 audited net profit after deducting non-recurring gains and losses × 25 times be paid to the applicant The total equity transfer price for the remaining 38% of Long Long’s equity is RMB 10.504 billion.
However, Kehua Bio-Bio responded to four shareholders in June 2021, saying: In 2020, affected by objective factors such as the outbreak of the new crown pneumonia, Tianlong’s revenue and profit have both experienced explosive growth, and this growth has already occurred. It is beyond the normal foreseeable and predictable scope when the parties entered into the “Investment Agreement”; the basis for the parties to further complete the transaction under Article 10 of the “Investment Agreement” under the “further investment” clause has occurred. Significant changes that could not be foreseen at the time of the Investment Agreement and are not considered commercial risks. If they continue to be implemented in accordance with the terms of the transaction, it will be obviously unfair to the company.
On July 5, 2021, the four shareholders of Tianlong Company, Peng Niancai, Li Ming, Miao Baogang, and Xi’an Yujing Tongyi Enterprise Management Partnership (Limited Partnership), applied to the Shanghai International Economic and Trade Arbitration Commission for an application to the Shanghai International Economic and Trade Arbitration Commission. The arbitration application was accepted.
The four shareholders of Tianlong Company proposed that on May 18, 2021, given that Tianlong Company’s 2020 audited net profit after deducting non-recurring gains and losses totaled RMB 1.106 billion, according to the “Investment Agreement”, four Shareholders issued the “Notice Letter on Requesting Your Company to Pay the Price of the Transfer of the Residual Equity and Correct the Default” to Kehua Biology, requesting Kehua Biology to follow Tianlong’s 2020 audited net profit after deducting non-recurring gains and losses × 25 The standard payment of the investment price of the remaining 38% of Tianlong’s equity is RMB 10.504 billion.
The four shareholders of Tianlong Company further proposed that Kehua’s response letter clearly refused to perform the remaining investment payment obligations in accordance with the relevant provisions of Article 10 of the “Investment Agreement”, which constituted a major breach of the “Investment Agreement” and should bear the corresponding Liability for breach of contract. Therefore, this arbitration was initiated.
Kehua Biotech stated in the announcement that after receiving the notice of arbitration, some of the company’s properties were taken by the People’s Court of Weiyang District, Xi’an City to preserve property. The amount of equity involved is RMB 38,452,400.
After the shares were frozen, Kehua Biological also filed a counter-claim for arbitration against the four shareholders of Tianlong Company.
On August 31, 2021, Kehua Bio-Bio issued the “Announcement on Major Arbitration Progress and the Company’s Counter-claim for Arbitration”, and stated that on August 30, 2021, the company will deal with this arbitration case in accordance with the arbitration rules and relevant applicable laws. Submitted an arbitration counter-claim to the Shanghai International Economic and Trade Arbitration Commission and was accepted. Request an award to remove the “further investment” clause of Article 10 of the “Investment Agreement” concluded between the company and the counter-claimed on June 8, 2018, and award the counter-claimed to bear all the costs incurred in this arbitration case .
According to the latest announcement by Kehua Biotechnology, as of December 27, the Shanghai International Economic and Trade Arbitration Commission had arranged two hearings for this arbitration case, and all of them had to be cancelled due to the arbitration applicant. As a result, the arbitration case has not yet Able to go to court.
Will continue to advance arbitration matters
Regarding the follow-up handling of the subsidiary’s “out of control”, on December 28, a relevant person from the Kehua Bio-Securities Affairs Department told reporters, “For the company, it will continue to advance the process of arbitration matters and require that court hearings be arranged as soon as possible. Promote the resolution of matters with partners, lawyers, etc.”
Kehua Biological believes that, on the one hand, the arbitration applicant used its management of Tianlong Company to passively treat, postpone or even refuse to cooperate with the audit agency entrusted by the listed company in the normal annual audit of Tianlong Company. The financial operation data of this arbitration case are important facts that have yet to be formed. The reason is to delay the trial procedures of this arbitration case. . To this end, the company has submitted comments to the arbitration tribunal of this arbitration case, requesting to identify and determine the consistent “delay strategy” adopted by the arbitration applicant in the progress of the arbitration case and to arrange formal hearing procedures as soon as possible. Promote this arbitration case to enter the substantive settlement process in a timely manner. The company has full confidence in the fairness and professionalism of the Shanghai International Economic and Trade Arbitration Commission.
Kehua Biotech also stated in the announcement that in order to ensure the legal rights and interests of listed companies and all shareholders, and to facilitate the proper settlement of Tianlong’s 2021 financial report audit work, the company will continue to take the following main measures:
First, the board of directors of Tianlong Company has reviewed and approved the “Proposal on Requirement to Cooperate with the Annual Audit Work of Listed Companies” on December 27, 2021. The company will require Tianlong’s directors, senior managers, chief financial officer, financial department and related parties to fully implement the content of the board of directors’ resolutions;
Second, the company will continue to actively exercise the management rights of listed companies over its holding subsidiaries, and urge and require Tianlong Company and its directors, senior managers, financial departments and related parties to strictly perform their respective duties and obligations, and cooperate with Lixin accountants to carry out mergers and acquisitions. Complete the audit of Tianlong’s 2021 financial report;
Third, the company will continue to actively communicate with competent authorities at all levels, obtain support and help from relevant authorities, and promote the proper resolution of related issues as soon as possible;
Fourth, for arbitration applicants, directors, senior managers of Tianlong Company, relevant persons responsible for the financial department, and related parties’ violations of the securities market rules and the company’s normative operation requirements, as well as violations of the “Investment Agreement”, the company will Take decisive measures to safeguard the legitimate rights and interests of the company and shareholders, especially small and medium shareholders.
At the same time, Kehua Biology stated that it will continue to actively respond to this arbitration case and firmly defend the interests of the company and shareholders, especially small and medium shareholders. The company will pay close attention to this arbitration case and will disclose the progress of this arbitration case in a timely manner in accordance with the law.
How do listed companies respond to the frequent “out of control” of subsidiaries? On December 28, Fu Yongsheng, a lawyer from Shanghai Guangming Law Firm, told reporters that listed companies can share resources and expand their scale through mergers and acquisitions, but sometimes they lose control of their subsidiaries. The root causes of loss of control are money, people, and things. three sides. For example, when the performance of some subsidiaries has skyrocketed, the original shareholders of the subsidiary regret the merger and will find ways to terminate the agreement; if the performance of the subsidiary deteriorates, the listed company will require the original shareholders of the subsidiary to pay compensation. Therefore, listed companies should strengthen due diligence and stipulate various terms when performance changes in the agreement. The two parties may also have frictions in personnel appointments and business concepts, resulting in disputes, which may lead to loss of control. The agreement should clearly stipulate the proportion of voting rights of the enterprise, the appointment of board members, and strengthen communication and coordination to realize the positive significance of mergers and acquisitions.
Zhong Lun Law Firm has issued a document stating that the equity of a subsidiary company is an important asset of a listed company, whether it is established by investment or acquired by acquisition. The phenomenon of “out of control” is becoming more and more intense, which will inevitably arouse great attention and strict supervision of the supervisory authorities. Therefore, when a listed company discovers a hidden danger of “out of control” in a subsidiary, it needs to carefully consider the response plan, consult a lawyer with relevant experience as soon as possible, and take professional measures to remove mines, and try to avoid or reduce the impact on the normal operation of the listed company, the stock price, the annual audit and The impact of information disclosure. Even if the subsidiary finally needs to be “listed out”, the listed company and its directors, supervisors and senior executives should have been diligent in advance and actively safeguarded the interests of the company and shareholders.
Economic Observer will also continue to pay attention to the progress of Kehua Biology’s arbitration case and the inability of its subsidiaries to cooperate with the 2021 annual report audit.