*Reply to st Mingke’s inquiry letter
Yzzz (2021) No. 310004 Shanghai Stock Exchange:
On December 9, 2021, Baotou Tomorrow Technology Co.Ltd(600091) was forwarded to our inquiry letter on matters related to the signing of equity custody agreement by * ST Mingke (szgh [2021] No. 2967), in which the accountant was required to express clear opinions on articles 2 and 3.
2. According to the provisions of self regulatory guidelines for listed companies of Shanghai Stock Exchange No. 2 – Financial delisting indicators: operating income deduction, the income from subsidiaries or businesses of business merger obtained by significantly unfair consideration or non trading in this fiscal year shall be deducted. The company is requested to disclose whether the listed company will include Shunxin coal washing in the scope of merger in 2021. If it is included in the merger, please explain whether the consideration paid for the entrusted management of Shunxin coal washing equity is obviously unfair and whether the generated operating income meets the relevant standards for deduction of operating income. Please fully remind the company of the risk that the relevant operating income may be deducted and the listing may be terminated. Please comment. [reply]
1、 The listed company incorporated Shunxin coal washing into the scope of merger in 2021
According to the agreement on equity custody agreement of Heshun Shunxin coal washing Co., Ltd. (hereinafter referred to as “custody agreement”) signed by Zhai Hongbo, Jinzhong Hongding Changhe Coal Industry Co., Ltd. (hereinafter referred to as “Hongding Changhe”) and Heshun Shunxin coal washing Co., Ltd. (hereinafter referred to as “Shunxin coal washing” or “target company”) in December 2021, Zhai Hongbo (Party A of the agreement) entrusts Hongding Changhe (Party B of the agreement) to trust Shunxin coal washing (Party C of the agreement), and agrees to authorize Party B to exercise its relevant rights as a shareholder in Party C’s articles of association during the custody period (except for the rights not limited by this Agreement).
Article 7 of the accounting standards for Business Enterprises No. 33 – consolidated financial statements stipulates: “the consolidation scope of the consolidated financial statements shall be determined on the basis of control. Control means that the investor has the right to the investee, enjoys variable returns through participating in relevant activities of the investee, and has the ability to use the right to the investee to affect its return amount.”
Hongding Changhe is entrusted to manage Shunxin coal washing, which meets the definition of control and has the control over Shunxin coal washing. Since the date of custody, Hongding Changhe has included Shunxin coal washing into the scope of consolidated financial statements, which is in line with the provisions of the accounting standards for business enterprises. The reasons are as follows:
(I) Hongding Changhe has the right to wash Shunxin coal
1. The consolidation criteria specify the circumstances in which the investor has power over the investee
(1) The investor holds more than half of the voting rights of the investee, indicating that the investor has power over the investee, unless there is conclusive evidence that it cannot lead the relevant activities of the investee; (2) If the investor holds half or less of the voting rights of the investee, but there is evidence that the voting rights held by the investor are sufficient to enable it to dominate the relevant activities of the investee at present, it shall be deemed that the investor has power over the investee;
(3) In some cases, it may be difficult for the investor to judge whether its rights are sufficient to enable it to have power over the investee. If the requirements of Article 16 of the consolidation standards are met, it can be judged that the investor has power over the investee.
2. In terms of voting rights, Hongding Changhe owns 100% of the voting rights of Shunxin coal washing, so it has the power to wash Shunxin coal.
Escrow agreement:
“2.1 hosted content
The trusteeship content under this Agreement specifically includes all shareholders’ functions and powers related to the underlying equity:
(1) Determine the company’s business policy and investment plan;
(2) Elect and replace directors and supervisors who are not staff representatives, and decide on matters related to the remuneration of directors and supervisors;
(3) Review and approve the report of the board of directors;
(4) Review and approve the report of the supervisor;
(5) Review and approve the company’s annual financial budget plan and final account plan.
(6) Make resolutions on the increase or decrease of the company’s registered capital;
(7) Make resolutions on the issuance of corporate bonds;
(8) Make resolutions on the merger, division, dissolution, liquidation or change of corporate form of the company;
(9) Formulate or amend the articles of association.
However, it does not include the following functions and powers of shareholders related to the underlying equity:
(1) Review and approve the company’s profit distribution plan and loss recovery plan.
2.2 entrusted management of the subject equity under this agreement, that is, Party B enjoys exclusive ownership and other shareholders’ rights over the subject equity.
2.3 during the custody period under this agreement, without the written consent of Party B, Party A has no right to dispose of the subject equity or set any third-party rights on the subject equity, including but not limited to selling, transferring, replacing, pledging and transferring the subject equity to a third party.
2.4 during the custody period under this agreement, Party B shall not delegate the subject equity to a third party without the written consent of Party A.
3.1 The term of equity custody under this Agreement shall be from the effective date of this agreement to December 31, 2023.
3.2 before the expiration of the trusteeship period, unless this agreement is terminated by both parties through negotiation, this agreement will be automatically extended.
6.1 agree to authorize Party B to exercise the relevant rights specified in Party C’s articles of association as a shareholder according to the needs of its trusteeship business matters during the trusteeship period (except for the right not to entrust limited in this Agreement).
6.2 it is agreed that during the trusteeship period or at the expiration of the trusteeship period, if Party C’s overall operation is in good condition, there are no legal obstacles to sustainable operation and there are no major defects in standardized operation, Party C’s equity held by Party C shall be transferred to Party B at a fair price according to the requirements of Party B, and relevant formalities shall be handled in cooperation. A separate agreement shall be signed for details.
6.3 for the purpose of performing this agreement, Party A has the obligation to cooperate with Party B in issuing relevant written documents when the subject company exercises its shareholders’ rights to prove that Party B is the obligee of the subject equity.
Party A confirms that before Party A transfers the equity of the subject company held by Party A to Party B in accordance with Article 6.2 of this agreement, it expressly and irrevocably waives the right to unilaterally terminate this agreement, and does not interfere, obstruct or affect Party B’s exercise of the shareholder’s rights of custody in any way, but Party A may exercise the right of supervision and inquiry over Party B’s performance of the shareholder’s rights.
6.4 during the custody period, Party B has the right to take full responsibility for the production and operation management of Party C within the scope permitted by national laws and regulations, and exercise all production and operation management powers. 6.5 exercise Party C’s shareholder rights as stipulated in Party C’s articles of association according to the scope of authorization of Party A.
6.6 during the trusteeship operation, in order to ensure the funds required for Party C’s production and operation development, Party B can provide financial support, and the interest will be determined by both parties through negotiation according to the bank loan interest rate in the same period.
6.7 during the trusteeship operation period, Party B shall be responsible for the normal maintenance of Party C’s production equipment, and the maintenance expenses shall be borne by Party C. In case of equipment failure or damage, Party B shall be responsible for repairing or updating, and the expenses shall be borne by Party C. according to the market and production conditions, Party B can carry out technical transformation or upgrading to Party C, and the investment shall be borne by Party C. The above matters shall be reported to Party A and Party C.
”
Therefore, according to the articles of association of Shunxin coal washing company, through entrusted operation, Hongding Changhe owns 100% of the voting rights of Shunxin coal washing, so it has the power to wash Shunxin coal.
3. Some terms of the custody agreement shall not affect Party B’s control over Party C
Article 9 of the consolidated financial statements standard stipulates: “the investor has the current right to enable it to lead the relevant activities of the investee, regardless of whether it actually exercises the right or not, it is deemed that the investor has the power over the investee.”
(1) The “right not to entrust” agreed in Article 6.1 of the custody agreement refers to “2.1, but does not include the following shareholder functions and powers related to the subject equity: (1) review and approve the profit distribution plan and loss recovery plan of the subject company.” This does not limit Party B’s voting right to “distribute profits and make up losses”. This is because Zhai Hongbo, as a contributor, has given up his voting right to Party C, but he can still enjoy benefits and still need to make up for losses.
(2) The agreement in the custody agreement that technical transformation or upgrading matters need to be reported to Party A and Party C means that Party A, as the shareholder of Party C and Party C as the target company, has the right to know about major matters occurring in the production and operation of Party C, which does not limit party B’s decision-making power. (3) The trusteeship agreement stipulates that the trusteeship period shall be from the effective date of this agreement to December 31, 2023. Before the expiration of the trusteeship period, unless Party A and Party B jointly terminate this agreement, the trusteeship period can be automatically extended. In addition, the trusteeship agreement also stipulates that Party B may exercise the right to acquire Party C from Party A during or at the expiration of the trusteeship period. In addition, during the trusteeship operation period, in order to ensure the funds required for Party C’s production and operation development, Party B can provide financial support, which is also conducive to Party B’s control over Party C.
4. From other aspects, Article 7.1 of the custody agreement stipulates: “After this Agreement comes into effect, the parties to the agreement promote and realize that the target company establishes a board of directors composed of three directors, of which Party A appoints one director and Party B appoints two directors. Party C sets up finance, procurement and sales, production quality, administration and other departments according to this agreement and business needs, and establishes and improves the internal operation and management organization. Party C’s senior managers include the general manager The manager, financial director, deputy general manager of procurement, sales and production quality shall be appointed by Party B and appointed by Party C. ” Therefore, according to the above agreement, the business activities of Party C’s relevant functional departments are led by Party B’s custody management team.
(II) Hongding Changhe can enjoy variable returns by participating in relevant activities of Shunxin coal washing
1. Hongding Changhe can participate in the business activities of Shunxin coal washing
Article 7 of the accounting standards for Business Enterprises No. 33 – consolidated financial statements stipulates: “The relevant activities mentioned in these standards refer to the activities that have a significant impact on the return of the investee. The relevant activities of the investee shall be judged according to the specific circumstances, usually including the sales and purchase of goods or services, the management of financial assets, the purchase and disposal of assets, research and development activities and financing activities.”
Party B can participate in relevant activities of Party C because it has 100% voting rights over Party C. Therefore, Party B can control and actually participate in the sales, purchase, investment and financing of Party C’s goods or services.
2. Hongding Changhe can enjoy the variable return of Shunxin coal washing
According to the accounting standards, “if the return obtained by the investor from the investee may change with the performance of the investee, it is deemed to enjoy variable return”. The variable return enjoyed by Party B to Party C consists of the following two parts:
(1) Party B shall enjoy the corresponding voting rights and other shareholders’ rights stipulated in Party C’s articles of association and the company law in accordance with the proportion of 100% equity held by Party C. Party B shall enjoy 100% of the shareholder rights of Party C and share and bear the remuneration and risk of the overall value change of Party C according to the actual business situation of Party C.
(2) Under the escrow agreement, you can enjoy an overall variable return.
Escrow agreement:
“4.1 fixed custody fee: within 3 days after the signing of this agreement, Party B shall collect a fixed custody fee of RMB 30000 in December 2021, which shall be paid by Party A to Party B. in 2022 and 2023, Party B shall collect a fixed custody fee of RMB 360000 each year, which shall be paid by Party A to Party B in a lump sum before January 15 each year.
4.2 floating custody fee and its related expenses: the parties agree that the calculation proportion and caliber of floating custody fee (or entrusted operation loss fee) are as follows:
4.2.1 the custody fee in 2021 shall be calculated based on Party C’s estimated net profit (after tax net profit excluding asset disposal profit and loss) of RMB 200000 in December 2021, and the part exceeding or less than the net profit of RMB 200000 shall be enjoyed or borne by Party B;
4.2.2 according to the calculation, Party C’s net profit (after tax net profit excluding asset disposal profit and loss) in 2022 is expected to be 1.8 million yuan to 2.8 million yuan. If Party C’s net profit exceeds the upper limit of 2.8 million yuan, the excess part will be regarded as floating custody fee, of which 60% will be enjoyed by Party B and 40% by Party C. If Party C’s actual net profit is lower than the lower limit of 1.8 million yuan, The insufficient part shall be regarded as the entrusted operation loss, of which 60% shall be borne by Party B and 40% by Party C;
4.2.3 according to the calculation, Party C’s net profit (after tax net profit excluding asset disposal profit and loss) in 2023 is expected to be 2-3 million yuan. If Party C’s net profit exceeds the upper limit of 3 million yuan, the excess part will be regarded as floating custody fee, of which 60% belongs to Party B and 40% belongs to Party C. If Party C’s actual net profit is lower than the lower limit of 2 million yuan, The insufficient part shall be regarded as the entrusted operation loss, of which 60% shall be borne by Party B and 40% by Party C;
4.2.4 within 30 days from the date of issuance of Party C’s corresponding audit report: according to this article, Party A shall pay the fixed custody fee on schedule; Party B shall withdraw the floating custody fee from Party C on schedule: Party B shall pay the operating loss fee on schedule. “
Therefore, if the overall performance of Shunxin coal washing is good, Hongding Changhe will share part of the remuneration for changes in the overall value of the company due to trusteeship of Shunxin coal washing. On the contrary, if the overall performance of Shunxin coal washing is poor, Hongding Changhe will also bear part of the risk of changes in the overall value of the company due to trusteeship of Shunxin coal washing.
It can be seen that Party B enjoys the variable return to Party C and shares and bears the remuneration and risk of the change of Party C’s overall value. The upper and lower limits of escrow variable return agreed in the escrow agreement are the results determined through commercial negotiation by the three parties based on the comprehensive prediction and calculation of external policies, market environmental conditions and internal production and operation resources of Shunxin coal washing. (III) Hongding Changhe has the ability to use its power over Shunxin coal washing to affect its return amount. Article 18 of the consolidation criteria states: “When judging whether to control the investee, the investor shall determine whether it exercises the decision-making power as the main responsible person or agent. If the other party has the decision-making power, it also needs to determine whether the other party exercises the decision-making power as its agent.”
Hongding Changhe’s power over Shunxin coal washing comes from the voting right entrusted by Zhai Hongbo. Party B can exercise the power according to its own wishes without agency relationship. Therefore, Party B exercises the decision-making power as the main responsible person, so that it has the ability to use its power over Shunxin coal washing to affect its return amount.
To sum up, on the basis of signing the custody agreement, Hongding Changhe has control over Shunxin coal washing. The inclusion of Shunxin coal washing in the consolidated statements complies with the relevant provisions of the accounting standards for Business Enterprises No. 33 – consolidated financial statements and the guidelines for the application of regulatory rules – Accounting No. 1 of the CSRC.
