A shares staged the plot of “subsidiaries out of control” again!
Recently, the biochemical diagnosis leader Shanghai Kehua Bio-Engineering Co.Ltd(002022) “storm thunder” said that it lost control of its subsidiary. Subsequently, the company’s share price fell sharply, down more than 20% in the past ten days.
Shanghai Kehua Bio-Engineering Co.Ltd(002022) it is not an isolated case that subsidiaries are out of control. According to incomplete statistics by the reporter of Securities Daily, since December 2021, five listed companies have announced that subsidiaries are out of control.
Insiders believe that, on the one hand, due to the increase in the overall number of listed companies, the number of runaway subsidiaries increases; On the other hand, due to the surge of mergers and acquisitions in previous years, after the performance gambling period, the “sequelae” such as performance commitment appeared, causing some subsidiaries to lose control.
Guo Yaosen, a lawyer at Shanghai jintiancheng law firm, told the Securities Daily, “after a subsidiary loses control, listed companies will generally no longer include the subsidiary in the scope of consolidated statements, and then withdraw the provision for asset impairment, which may lead to litigation and arbitration with the subsidiary and relevant responsible subjects. Those with serious problems may be punished accordingly.”
several listed companies called “subsidiaries out of control”
It is not uncommon for Shanghai Kehua Bio-Engineering Co.Ltd(002022) subsidiaries to lose control in the A-share market. From the perspective of historical cases, “refusing to provide financial statements and refusing accountants to enter the audit” is a main feature of the runaway subsidiaries of listed companies.
Changjiangrunfa Health Industry Co.Ltd(002435) once announced that because Ma Junhua, general manager of Huaxin pharmaceutical, a subsidiary, explicitly refused to cooperate with the audit and refused to implement the audit procedures, the company could not grasp the actual operation of Huaxin pharmaceutical and other information, and in fact had lost control of Huaxin pharmaceutical.
It is worth mentioning that the current accounting rules and laws and regulations have no clear provisions on how to define “out of control”, which is a highly practical issue.
“Generally speaking, if the parent company is unable to implement effective management and control activities over its subsidiaries, including refusing to implement the parent company’s resolutions, refusing to provide the seal of the subsidiary, and not cooperating in the audit, it can be judged as’ out of control ‘.”
Insiders also told reporters, “the measures for the administration of the acquisition of listed companies revised in 2020 has made clear provisions on the control right of listed companies. In practice, we can refer to the identification standard of ‘control’ and judge whether the ‘control’ of listed companies over subsidiaries has been lost by integrating the situation of individual cases.”
the “sequelae” of M & A appears
Industry insiders believe that the runaway subsidiaries of listed companies are mostly the “sequelae” left by early mergers and acquisitions. Take Shanghai Kehua Bio-Engineering Co.Ltd(002022) as an example, the loss of control of the company’s subsidiaries stems from the significant increase in the performance of the acquired subsidiaries and the parent company’s refusal to pay the high remaining investment price.
It is understood that Shanghai Kehua Bio-Engineering Co.Ltd(002022) the acquisition of Tianlong’s equity is divided into two stages. In the first stage, after obtaining 62% equity of Tianlong at a consideration of 554 million yuan, in the second stage, the two sides agreed to deal with the remaining 38% of the shares in 2021 at a price of 1.2 billion yuan or 30 times the net profit after deducting non profits in 2020; It can also be acquired according to RMB 900 million or 25 times of the net profit after deducting non profits in 2020, and finally complete the overall acquisition of 100% equity of Tianlong company. However, Tianlong’s main product is epidemic prevention materials. Its performance increased explosively in 2020, resulting in the price of the remaining 38% equity exceeding 10 billion yuan.
Some of the original shareholders used various means to refuse to cooperate with the audit work because their performance did not meet the standard, resulting in the loss of control of the subsidiary. It is understood that a listed company previously acquired 55% of the equity of another company with 390 million yuan in cash, but the performance changed immediately after the acquisition. The acquiree did not complete the performance commitment in 2017 and 2018. According to the performance gambling agreement, the original shareholders should pay a total cash compensation of more than 200 million yuan to the listed company. But in the end, because the acquiree (i.e. subsidiary) refused to cooperate with the audit of the listed company, it was in a “out of control” state.
Insiders told the reporter of Securities Daily, “Most of the out of control subsidiaries are born from M & A. the common practice of listed companies is’ high premium M & A + performance bet ‘, which is to conclude transactions at a high premium, lock in risks with performance bet and tie down the core team of the M & a object. Under such institutional arrangements, listed companies must and must only fully delegate power to the core team of the M & a object, which paves the way for the out of control of subsidiaries 。”
Kuang Yuqing, the founder of lens research, said frankly in an interview with the reporter of Securities Daily: “Because in the process of M & A, listed companies cannot fully change the management team of their subsidiaries, and many businesses rely on the original management team. When there are disputes over performance gambling and other issues, there will be common situations such as the subsidiaries not cooperating with the audit investigation and the implementation of the company’s management strategy.”
a major “minefield” in the disclosure season of the annual report
Listed companies suffer from “subsidiaries out of control”. As Shanghai Kehua Bio-Engineering Co.Ltd(002022) said, if the control over Tianlong company is lost, the merger will have a significant impact on the performance of the company’s consolidated financial statements; Another listed company announced that it had lost control of its wholly-owned subsidiary, which is expected to reduce the net profit of the listed company by about 1.767 billion yuan in 2021. For another example, Changjiangrunfa Health Industry Co.Ltd(002435) decided not to include Huaxin pharmaceutical in the scope of consolidated statements since January 2020 due to the loss of control over its subsidiaries, Changjiangrunfa Health Industry Co.Ltd(002435) listed Huaxin pharmaceutical and accrued goodwill impairment of 664 million yuan.
“Subsidiaries out of control” is a major “minefield” in the disclosure season of the annual report. After the subsidiaries lost control, there are not a few listed companies involved in embarrassing situations such as performance change, regulatory attention, and even being filed for investigation on suspicion of illegal information disclosure.
“The impact of losing control of subsidiaries on listed companies depends on its importance in the business or asset map of listed companies. If it is a core business, the impact is more serious; if it is only a marginal business, the impact may not be too great.” Kuang Yuqing said that on the whole, whether it is a core business or not, if the subsidiaries do not cooperate with the audit, resulting in the lack of audit, the consolidated financial statements of listed companies will be incomplete.
Guo Yaosen believes that in order to avoid the hidden danger of losing control of subsidiaries, the core of listed companies is to strengthen the control of subsidiaries from the aspects of finance, seal, fund management and production and operation decisions. For example, in terms of fund management, subsidiaries need to formulate approval systems and reporting systems for the use of large amounts of funds, financing and guarantee matters, The management personnel appointed by the listed company or the board of directors controlled by the listed company shall perform the decision-making procedures.
“It is suggested that listed companies should make top-level planning when merging or establishing subsidiaries, and implement the responsibilities of shareholders and operators through legal documents.” Qin Ruohan, general manager of Jinhua fund, told the Securities Daily reporters that the listed companies needed to do research before the merger to advance the “lightning protection”.
