Analysis and case reference of the latest IPO competition rules
Han Peng
Competition in the same industry is a key issue in the review of the initial business. This year, the relevant rules of the main board and the GEM have been revised and introduced respectively, and there have been some changes in the audit situation. This article attempts to provide a brief analysis of the latest rules and typical cases in audit practice.
First, the motherboard
【Rules】Answers to Several Questions On Initial Offering Business (20200610) (1) Scope of Verification. Intermediaries should conduct verifications against enterprises wholly owned or controlled by the controlling shareholder (or actual controller) of the issuer and its close relatives.
(2) The principle of judgment. The "interbank" of inter-industry competition means that the competitor engages in the same or similar business as the issuer's main business. When verifying whether the same or similar business constitutes "competition" with the issuer, it should follow the principle of substance over form, combine the relationship with the issuer in terms of the history of the relevant enterprise, assets, personnel, main business (including but not limited to the specific characteristics of products and services, technology, trademark names, customers, suppliers, etc.), and whether the business is alternative, competitive, whether there is a conflict of interest, whether it sells within the same market, etc., to demonstrate whether it constitutes competition with the issuer It cannot be simply determined that different sales regions of products and different grades of products do not constitute competition in the same industry.
For a company controlled by the controlling shareholder or the actual controller that engages in the same or similar business as the issuer, the issuer should also disclose in the prospectus the future arrangements for relevant assets and businesses, as well as measures to avoid competition in the same industry after listing, in light of the current operation of its own business and related party business, future development strategies, etc.
(3) How should the enterprise controlled by relatives verify and identify. If the controlling shareholder or actual controller of the issuer is a natural person, and there is competition between the enterprise controlled by the immediate family members of both husband and wife (including spouses, parents and children) and the issuer, it shall be deemed to constitute competition in the same industry.
Where there is a competitive relationship between the controlling shareholder of the issuer, other relatives of the actual controller and the enterprises under its control and the issuer, the above-mentioned relevant enterprises shall fully disclose the impact of the above-mentioned relevant enterprises on the independence of the issuer in terms of historical evolution, assets, personnel, business, technology, finance, etc., transactions or capital transactions during the reporting period, overlapping sales channels, major customers and suppliers, and whether the issuer has acquisition arrangements in the future.
【Analysis】Compared with the 2019 edition of the first Q&A, the 2020 edition clarifies the principle of "substance over form" in the verification and determination of whether the same or similar business constitutes "competition", which leaves a certain room for interpretation compared with the "one-size-fits-all" determination based only on the form. For example, if the issuer and the actual controller family business have a business that does not substantially constitute competition in the same industry, it can be analyzed from the perspective of independent judgment, information disclosure, risk warning, etc.
【Reference case】Shanghai Yongmaotai Automobile Technology Co., Ltd. (approved by the NDRC meeting on October 15, 2020)
The issuer is mainly engaged in the research and development, production and sales of automotive aluminum alloys and automotive aluminum alloy parts. When the company was established in August 2002, it was mainly engaged in aluminum alloy business, and began to enter the downstream auto parts industry in 2003, gradually increasing investment in the automotive aluminum alloy parts business, forming a business pattern with "aluminum alloy + auto parts" as the main industry and the integrated development of upstream and downstream.
The controlling shareholder of the company is Xu Hong, and the actual controller is the Xu Hong family. Enterprises controlled by family members who are closely related to the actual controller of the company include enterprises controlled by the Xu Hong brother Xu Xiaofei family, and enterprises controlled by xu Hong's nephew Xu Haojun family or serving as directors and executives. Enterprises controlled by family members close to the actual controller do not compete with the company in the same industry, as follows:
In addition to enterprises whose business scope does not have the same or similar business content as the issuer, and enterprises whose business scope is the same or similar to the issuer's business content, but which are not currently engaged in aluminum alloy business, there are also 7 enterprises engaged in the same or similar business with the issuer. In terms of historical evolution, assets, personnel, technology, procurement and sales channels, customer situation, supplier situation, financial independence, etc., in terms of historical evolution, asset situation, personnel situation, procurement and sales channels, customer situation, supplier situation, financial independence, etc., in addition to the existence of shareholders' mutual shareholding in the history of the issuer and the relevant enterprises controlled by the Xu Xiaofei family before May 2007, the relevant enterprises controlled by the issuer and the Xu Xiaofei family and the Xu Haojun family have developed independently, do not interfere with each other, and there is no situation of nominee shareholding; The relevant enterprises controlled by the Xu Haojun family are independent of each other in terms of business (including procurement channels and suppliers, production links, sales channels and customers), technology, assets, personnel, institutions and finances; the Xu Hong family, the actual controller of the issuer, cannot control or exert significant influence over the enterprises controlled by the Xu Xiaofei family and the Xu Haojun family. According to the relevant provisions of the Answers to Several Questions on initial Offering Business (20190325), it was determined that there was no competition in the same industry between the issuer and the relevant enterprises controlled by the Xu Xiaofei family and the Xu Haojun family, that there was no judgment on the competition in the same industry based solely on the scope of business, and that the issuer and the relevant enterprises controlled by the Xu Xiaofei family and the Xu Haojun family did not constitute competition in the same industry only based on the differences in the business region, subdivision products and market segments.
The issuer and the related parties are technically independent of each other, and there is no situation of common technology: the technical personnel of the issuer are recruited and trained by the issuer independently, and they are not part-time or paid in the affiliated enterprises. At present, the high-performance aluminum alloy material production technology owned by the issuer's aluminum alloy business is owned by the issuer separately, and there is no joint ownership of patented technology and non-patented technology with affiliated enterprises, nor has there been any disputes, including technical disputes.
The existence of joint customers between the issuer and the related party does not affect the independence of the issuer's business, and there is no situation of transmission through overlapping customer interests: the issuer independently develops customers, has an independent sales team and sales channels, and independently signs a sales agreement, although there is an overlap with individual customers with related parties, but the products sold by the issuer and the related parties to overlapping customers are different, and the amount of sales by the issuer to overlapping customers is small, and the sales price is not abnormal.
The existence of common suppliers between the issuer and related parties does not affect the independence of the issuer's business, and there is no situation of conveying benefits through overlapping suppliers: although there is an overlap between the issuer and the related parties in the reporting period, the procurement channels of the issuer and the related parties are independent of each other, and there are independent procurement departments, and the personnel of the procurement department do not cross-serve or co-sign the office, and they are independently procured and negotiated separately during procurement, and there is no situation of bundled procurement or joint bargaining. There are no significant differences in the unit price of purchases from major overlapping suppliers.
There is no competition in the same industry between the issuer and the controlling shareholder, the actual controller and other enterprises under its control. In order to avoid competition in the same industry, the Xu Hong family, the controlling shareholder and actual controller of the company, issued a "Commitment Letter on Avoiding Competition in the Same Industry".
2. Science and Technology Innovation Board
【Rules】 When an enterprise applying for listing on the Sci-Tech Innovation Board of the Shanghai Stock Exchange (20190303) determines whether the competition in the same industry constitutes a material adverse effect, the sponsoring institution and the issuer's lawyer should combine the business region, product or service positioning of the competitor and the issuer, whether the competition in the same industry will lead to unfair competition between the issuer and the competitor, and whether it will lead to the transmission of benefits between the issuer and the competitor. Verify and issue a clear opinion on whether it will lead to the mutual or unilateral transfer of business opportunities between the issuer and the competitor, and the potential impact on future development. If the competitor's income or gross profit of the same kind accounts for more than 30% of the issuer's income or gross profit of such business, if there is no sufficient evidence to the contrary, it shall in principle be deemed to constitute a material adverse effect.
【Analysis】The relevant rules of the Sci-Tech Innovation Board clarify the quantitative judgment criteria for the material adverse effect of "the proportion of the same type of income or gross profit of the competitor to the income or gross profit of the issuer's business of that type of business is more than 30%).
【Reference case】Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd. (approved by listing committee meeting on May 11, 2020)
The issuer is mainly engaged in the research and development, production and sales of antibody drugs, and is an innovative biomedical enterprise focusing on antibody drugs. With innovative therapeutic antibody drugs as the main research and development direction, the company provides high-quality, safe and effective clinical solutions for the treatment of major diseases such as autoimmune diseases and tumors. The business scope of the issuer is: the research and development of biological products, genetic engineering products, Chinese and Western pharmaceuticals, and biological reagents (except the development and application of human stem cells, genetic diagnosis and treatment technologies); the production and sale of self-produced products of biological engineering products; the technology transfer, technical services and technical consultation of the research and development results of related projects (projects that require approval according to law can only carry out business activities after approval by the relevant departments).
The controlling shareholder of the issuer is Fujian Pharmaceutical, and the actual controller is LOU JING, a natural person. Among the other enterprises controlled by the actual controller of the issuer, only Shenyang Sansheng, Zhejiang Wansheng, Shenzhen Saibaoer, Liaoning Sansheng, Guangdong Saibaoer, Hong Kong Sansheng and Sirton Pharmaceuticals S.PA engaged in pharmaceutical-related business, of which: (1) Shenyang Sansheng, Zhejiang Wansheng and Shenzhen Saibaoer are the pharmaceutical platforms under 3SBio and are engaged in drug research and development, production and sales business; (2) Liaoning 3Sei, Guangdong Saibaoer and Hong Kong 3son are the main body of drug sales or trade under 3SBio. (3) Sirton Pharmaceuticals S.PA acquired by 3SBio in December 2014 and mainly conducts drug commissioned R&D and production business in Italy.
The following is an explanation of the absence of inter-industry competition between such pharmaceutical-related entities and the issuer that poses a material adverse effect on the issuer:
(1) The main business locations are different and the main business places are independent of each other, there is no overlap between the indications of the listed products and the terminal departments covered by domestic sales, and there is no mutual substitution or competition relationship between the listed products: (1) the main business places are different, and the main business places are independent of each other; (2) there is no overlap between the indications of the listed products and the terminal departments covered.
(2) The issuer focuses on antibody drugs, and the business division between the issuer and other pharmaceutical-related entities controlled by the actual controller is clear, and there are significant differences in business positioning and product categories. Other pharmaceutical-related entities controlled by the actual controller do not have antibody drug research and development capabilities, nor can they produce antibody drugs: (1) the main research and development directions are different, and there are differences in research and development technology and core technology platform; (2) there are obvious differences in the main production process, and the main production technology is different from the production equipment.
(3) There is no competitive product income or gross profit accounting for more than 30% of the issuer's income or gross profit in the issuer's income or gross profit of similar business: (1) there is no competition between the listed products; (2) the four pharmaceutical-related products under development of 3SBio Pharmaceutical's subsidiaries intersect with the issuer's listed products and some of the products under research in terms of indications, but have not yet formed income. There is no situation where the revenue or gross profit of similar products of other pharmaceutical-related entities controlled by the actual controller accounts for more than 30% of the issuer's income or gross profit of such business. The actual controller of the issuer and other pharmaceutical entities controlled by the actual controller of the issuer undertake that the relevant cross-cutting products will be entrusted to the issuer to produce and/or sell them to the outside world after listing in the future, and other pharmaceutical-related entities controlled by the issuer and its actual controller will ensure the reasonableness and fairness of the pricing of the above-mentioned related party transactions, and strictly perform the decision-making procedures related to related party transactions.
(4) In view of the small number of crossovers in indications between the products under development, the issuer and relevant entities have taken solution measures and made public commitments that will not have a material adverse impact on the issuer's future production and operation: (1) it will not lead to unfair competition between the two; (2) it will not lead to the transfer of benefits between the two; (3) it will not lead to mutual or unilateral transfer of business opportunities.
(5) The issuer has an independent and complete R&D, procurement, production and sales system, as well as the assets and technologies required to carry out the antibody business, and there is no situation of sharing procurement or sales channels: (1) the issuer has an independent and complete business system, as well as the assets and technologies required to carry out the antibody business; (2) there is no sharing of procurement channels or sales channels between the issuer and other pharmaceutical entities controlled by the actual controller.
(6) The issuer has formulated and implemented effective measures to prevent the transmission of benefits, the occupation of resources and the protection of its independence.
In order to avoid competition in the same industry, the issuer's controlling shareholder, Fujian Pharmaceutical, and the actual controller, LOU JING, issued a Letter of Commitment on Avoiding Competition in the Same Industry.
3. GEM
【Rules】Q&A on the Review of the Initial Public Offering and Listing of Stocks on the Growth Enterprise Market of the Shenzhen Stock Exchange (20200613)
If an enterprise applying for listing on the Growth Enterprise Market (GEM) determines whether the competition in the same industry constitutes a material adverse effect, the sponsor and the issuer's lawyer should consider the business region, product or service positioning of the competitor and the issuer, whether the competition in the same industry will lead to unfair competition between the issuer and the competitor, whether it will lead to the transmission of benefits between the issuer and the competitor, whether it will lead to the mutual or unilateral transfer of business opportunities between the issuer and the competitor, and the potential impact on future development. Verify and issue a clear opinion. If the proportion of the competitor's income or gross profit in the issuer's main business income or gross profit reaches more than 30%, if there is no sufficient evidence to the contrary, it should in principle be considered to constitute a material adverse effect.
The issuer should fully disclose in the prospectus the future arrangements for the above-mentioned assets and businesses constituting competition in the same industry, as well as measures to avoid material adverse effects on competition in the same industry after listing, taking into account the current operating conditions and future development strategies.
【Analysis】The relevant rules of the ChiNext Board continue the criteria for judging whether the Star Market has a significant adverse impact on competition in the same industry, and further pay attention to the potential competition in the same industry that may arise in the future, and refine the information disclosure requirements for potential competition in the same industry. For the avoidance of competition in the same industry that has a material adverse impact after listing, the relevant entity may guarantee it by making a commitment to avoid competition in the same industry.
【Reference case】Shanghai Hairong Food Technology Co., Ltd. (Passed the Listing Committee Meeting on September 4, 2020)
The company takes the research and development, production and sales of baked food raw materials such as vegetable cream, chocolate and jam as its main business, of which the vegetable cream series products are the company's main products. The company's vegetable cream products are divided into two categories: creamy cream and cream-free cream, which are widely used in cakes, pastry surface decoration and filling. The company's chocolate products are mainly used for cakes, pastry surface decoration and bread, mooncakes and other fillings, which are developed and produced according to the special requirements of the above-mentioned baked foods for the coagulation speed, operability and gloss of the shape in the production process. The company's jam products are mainly used for cakes, pastry fillings and spread decorations. The customers are mainly bakery chain operating enterprises throughout the country, such as Miqi, Anhui Bali Tiantian, Eighty-five Degrees, Jinfeng Chengxiang and so on.
The controlling shareholder of the issuer is Huang Haixiao. The actual controllers of the issuer are Huang Haixiao and Huang Haihu, who act in concert. The operating companies controlled by Huang Haixiao include Shanghai Xinrong Food Ingredients Co., Ltd. and its subsidiaries, Zhejiang Dingheng Biotechnology Co., Ltd., U Foods (India) Private Limited, Shanghai Chuanyi Catering Management Co., Ltd., Shineroad InvestmentVietnam Company Limited, shineroad Food Technology VietNam Company Limited, Shineroad Food Holdings (Thailand) Co., Limited, Shineroad Food Technology (Thailand) Co., Limited, etc.
(1) Analysis of the main business situation of Shanghai Xinrong Food and its subsidiaries and its non-competition with the issuer: (1) The products operated are different and not fungible, and the downstream customers are different: Xinrong Food and its subsidiaries are mainly engaged in the agency business, material selection consulting and formula research of food raw materials and additives, and mainly sell some food raw materials and additives of large international well-known enterprises such as Nestlé, Mitsubishi Chemical Foods, Solvay and so on. Its agent products include sucrose fatty acid esters, condensed milk, creamer, coffee powder, cream, milk powder, pigment, microcrystalline cellulose colloid, edible colloid, polyglyceryl fatty acid ester, whey protein, monoglycerides and other food raw materials and various food additives, mainly used for the production of candy, milk-containing beverages and other foods, the main downstream customers are Alpine milk sugar, Mentos, Fujijia, Xu Fuji and other brands of food production enterprises ;(2) The raw materials purchased from major suppliers are different: the suppliers of Shanghai Xinrong Food are mainly well-known food raw materials and food additive manufacturers around the world, and the purchased food raw materials and food additives are directly supplied to their downstream customers, shanghai Xinrong Food is not engaged in the production and processing of food raw materials and food additives; (3) the industry is different: Xinrong Food belongs to the "wholesale industry" ;(4) Xinrong Food and its subsidiaries and issuers independently carry out business, establish their own complete business system, in business, assets, Personnel, finance, institutions and other aspects are independent of each other, do not rely on each other, have independent and complete assets and business systems, independent market-oriented independent operation capabilities, and differentiated business development planning, there is no situation of transferring or sharing commercial interests; (5) procurement, production, sales and other business models are different; (6) there is no overlap between competitors in the same industry: Xinrong Food's competitors in the same industry are mainly agents or distributors of food raw materials and food additives, and their business models and product characteristics. Different from the issuer and its competitors in terms of use, the main business of Xinrong Food and its competitors does not compete with the main business of the issuer, and there is no overlap between the competitors of Xinrong Food and the issuer and its competitors. In addition, Shanghai Xinrong Food and its subsidiaries have issued relevant commitments that Shanghai Xinrong Food and its subsidiaries will not compete with the issuer if the issuer may develop other products and business scope in the future development. There is no competition in the same industry between Shanghai Xinrong Food and its subsidiaries that poses a material adverse effect on the issuer.
(2) Zhejiang Dingheng Biotechnology Co., Ltd. is mainly engaged in the research, production and sales of tea-containing products, solid beverages and dried fruit products, etc., and its main products have product characteristics, technical and technological requirements, main equipment, main raw materials, main suppliers, main customers, sales networks and issuers are not the same, and the issuer's products are not competitive and replaceable, and there is no competition in the same industry.
(3) U Foods (India) Private Limited is mainly engaged in the production and sales of jelly products in India, jelly as a snack product, mainly through the channels of stores and supermarkets sold to the end consumer, its product characteristics, technical and technological requirements, the main equipment, the main raw materials, the main suppliers, the main customers and the issuer are not the same, and the issuer's products are not competitive and replaceable, there is no competition in the same industry.
(4) Shineroad Investment Vietnam Company Limited, Shineroad Food Technology Viet Nam Company Limited are newly established companies in 2019, mainly engaged in food raw materials and additives trading business in Vietnam, similar to the business of Xinrong Food, the main suppliers, major customers and issuers are not the same, The products with the issuer are not competitive and fungible, and there is no competition in the same industry.
(5) Shineroad Food Holdings (Thailand) Co., Ltd. and Shineroad Food Technology (Thailand) Co., Ltd are newly established companies in 2019, mainly engaged in food raw materials and additives trading business in Thailand in the future, similar to the business of Xinrong Food, the main suppliers, major customers and issuers are not the same, and the issuer's products are not competitive and fungible , there is no competition in the same industry.
(6) Shanghai Chuanyi Catering Management Co., Ltd. is a newly established company in 2019, mainly engaged in the catering industry, the main suppliers, major customers and issuers are not the same, and the issuer's products are not competitive and replaceable, and there is no competition in the same industry.
In order to avoid possible competition in the same industry in the future, safeguard the interests of the company and ensure the long-term stable development of the company, the actual controllers of the company, Huang Haixiao and Huang Haihu, issued a letter of commitment to avoid competition in the same industry.
IV. Conclusion
Judging from the practice of the initial offering business review, the reason why inter-industry competition is focused on is that inter-industry competition may affect the independence of the issuer, and there is a possibility that the issuer may transmit to the interests of competitors after listing, ultimately harming the interests of investors. From the perspective of the new regulatory trend under the registration system, it is necessary for intermediaries to judge the impact of inter-industry competition on the independence of issuers from the perspective of substance over form, reveal risks with full information disclosure, put forward higher requirements for intermediaries, and consolidate more responsibilities.