Xinyan Co., Ltd. issued shares and paid cash to purchase assets, and the counterparty and the performance commitment party failed to fulfill the performance compensation obligation in a timely manner, and was publicly reprimanded

On May 15, the Shenzhen Stock Exchange issued a disciplinary decision on Xinjiang Machinery Research Institute Co., Ltd. (hereinafter referred to as "Xinyan Co., Ltd." or "the Company"). The Shenzhen Stock Exchange decided that Hanwha, Yang Lijun, Lu Zhen, Liu Jiachun, Zhang Shun, Fang Ziheng, Hu Xin, Shifang Xingsheng Investment Management Partnership (Limited Partnership), Xinyan Co., Ltd. issued shares and paid cash to purchase assets, and the counterparty and performance commitment party were publicly reprimanded.

Screenshot of the announcement of the Shenzhen Stock Exchange

According to the Shenzhen Stock Exchange, after investigation, Hanwha, Yang Lijun, Lu Zhen, Liu Jiachun, Zhang Shun, Fang Ziheng, Hu Xin, and Shifang Xingsheng Investment Management Partnership (Limited Partnership, hereinafter referred to as Shifang Xingsheng) had the following violations:

In November 2015, Xinyan Co., Ltd. acquired 100% of the shares of Sichuan Tomorrow Aerospace Industry Co., Ltd. (hereinafter referred to as "Tomorrow Aerospace", which has now been renamed as "Sichuan Xinhang Titanium Technology Co., Ltd.") by issuing shares and paying cash. According to the Report on Issuing Shares and Paying Cash to Purchase Assets and Raising Matching Funds and Related Party Transactions, and the profit forecast compensation agreement signed by Hanwha, Yang Lijun, Lu Zhen, Liu Jiachun, Zhang Shun, Fang Ziheng, Hu Xin, Shifang Xingsheng and Xinyan Co., Ltd., Hanwha, Yang Lijun and other relevant parties promise that the net profit of Tomorrow Aerospace in 2015, 2016 and 2017 after deducting non-recurring gains and losses shall not be less than RMB 170 million, 240 million yuan and 400 million yuan respectively (hereinafter referred to as the "committed net profit"). If Tomorrow Aerospace does not reach the promised net profit during the performance commitment period, each performance commitment party shall compensate with the company's shares, and if the compensation is insufficient, the difference shall be compensated in cash; Each performance commitment party shall bear the corresponding share compensation liability for the proportion of the company's shares obtained in this transaction to the total number of shares obtained by all performance commitment parties.

On January 17, 2023, the "Administrative Penalty Decision" issued by the China Securities Regulatory Commission showed that Tomorrow Aerospace carried out financial fraud through fictitious business and early recognition of income, inflating operating income by a total of 3.347 billion yuan and inflating total profits by 1.311 billion yuan from 2015 to 2019. On January 22, 2024, Xinyan Co., Ltd. disclosed the "Progress Announcement on the Unfulfilled 2015-2017 Annual Performance Commitments of the Major Asset Restructuring in the Early Period" (hereinafter referred to as the "Progress Announcement") to correct the realization of Tomorrow Aerospace's performance commitments, after the correction, Tomorrow Aerospace achieved a cumulative net profit of -866 million yuan from 2015 to 2017, and Hanwha, Yang Lijun, Lu Zhen, Liu Jiachun, Zhang Shun, Fang Ziheng, Hu Xin, and Shifang Xingsheng should be compensated 1.072 billion yuan respectively. 562 million yuan, 186 million yuan, 36 million yuan, 97 million yuan, 34 million yuan, 55 million yuan, 184 million yuan.

As of the date of this decision, Hanwha, Yang Lijun and other relevant parties have failed to fulfill their performance compensation commitments in accordance with the publicly disclosed information.

According to the Shenzhen Stock Exchange, the merger and reorganization of listed companies is a major matter of concern to the market, and the performance compensation commitment of the counterparty, as an important part of the transaction plan, is an important safeguard measure for the interests of listed companies and investors, and once publicly disclosed, it may have an important impact on investors' trading decisions. Hanwha, Yang Lijun and other relevant parties failed to perform their performance compensation obligations in a timely manner in accordance with the publicly disclosed information, which damaged the reasonable trust of investors, seriously infringed on the legitimate rights and interests of listed companies and investors, and violated Articles 1.4 and 8.6.1 of the Rules Governing the Listing of Stocks on the ChiNext Board of the Shenzhen Stock Exchange (revised in August 2023).

In the course of the disciplinary action, the parties Lu Zhen, Liu Jiachun, Zhang Shun, Fang Ziheng and Hu Xin submitted written defenses to the Shenzhen Stock Exchange, and the remaining responsible persons did not raise objections and reasons for their defenses. The main reasons for the defense of the relevant parties include: first, the performance commitment party and Xinyan Co., Ltd. are in litigation on the performance commitment compensation and have not yet been adjudicated, the facts related to the disciplinary punishment and the division of responsibilities have not been confirmed by effective legal documents, and whether the parties should bear the performance compensation liability and the amount of compensation have not been determined. Second, the correction of accounting errors in the early stage of Xinyan shares was incomplete, resulting in an error in the amount of compensation to be compensated by the calculated performance commitment. Third, the unfulfilled performance commitment of Tomorrow Aerospace is caused by the financial fraud carried out by Xinyan shares and relevant responsible persons, and Xinyan shares should bear the responsibility for the unfulfilled performance commitments. Fourth, some parties indicated that the branch they were responsible for managing had good performance and should be exempted or mitigated.

Based on the facts and circumstances of the violation, combined with the parties' defenses, the Shenzhen Stock Exchange believes that:

First, the SZSE disposition is a self-regulatory measure for failing to fulfill the performance compensation commitment in accordance with the publicly disclosed information, which damages the reasonable trust of investors, and is a self-regulatory measure for failing to fulfill the commitment in accordance with the publicly disclosed information and misleading investors, rather than interfering in the contract performance of the compensation obligor or determining the distinction between civil liability.

Second, according to the "Administrative Penalty Decision", the violation of financial fraud during the performance compensation commitment of Tomorrow Aerospace has been ascertained, Xinyan shares combined with the facts of administrative punishment and self-examination, the corresponding period of financial statements accounting errors corrected, Daxin accounting firm on the corrected financial statements conducted a comprehensive audit, and at the same time issued a "performance commitment completion audit report" on the performance commitment, Xinyan shares at the same time disclosed the "progress announcement", clear tomorrow Aerospace performance commitment completion. The facts of the violation sanctioned by the Shenzhen Stock Exchange are consistent with the content of the above-mentioned documents, and there is no contradiction with the Administrative Penalty Decision.

Third, according to the inflated profits identified in the "Administrative Penalty Decision", as well as the "Audit Report on the Completion of Performance Commitments" issued by Daxin Certified Public Accountants and the "Progress Announcement" disclosed by Xinyan Shares, the fact that Tomorrow Aerospace has not fulfilled its performance commitments is clear, and the punishment is that the performance commitment party has not fulfilled its performance compensation commitment according to the publicly disclosed information, and it has no direct relationship with whether the relevant party is the person responsible for financial fraud.

Fourth, according to the public disclosure information and related agreements, all performance compensation obligors shall be liable for the completion of the overall performance of Tomorrow Aerospace in accordance with the proportion of shares obtained by them, and have nothing to do with the profit contribution of their respective branches or business segments to the target company. Therefore, the parties' defense grounds could not be established and were not accepted by the Shenzhen Stock Exchange.

In view of the facts and circumstances of the above-mentioned violations, and in accordance with Article 12.4 of the Rules Governing the Listing of Stocks on the Growth Enterprise Market (Revised in August 2023) and Article 33 of the Self-Regulatory Guidelines for Listed Companies No. 12 - Implementation Standards for Disciplinary Sanctions (Revised in 2024), the Disciplinary Committee of the Shenzhen Stock Exchange has deliberated and approved the following sanction decisions:

Hanwha, Yang Lijun, Lu Zhen, Liu Jiachun, Zhang Shun, Fang Ziheng, Hu Xin, and Shifang Xingsheng Investment Management Partnership (Limited Partnership), the counterparty of Xinyan shares and the performance commitment party, were given the punishment of public reprimand.

For the above-mentioned violations of Hanwha, Yang Lijun, Lu Zhen, Liu Jiachun, Zhang Shun, Fang Ziheng, Hu Xin, and Shifang Xingsheng Investment Management Partnership (Limited Partnership) and the sanctions given by the Shenzhen Stock Exchange, the Shenzhen Stock Exchange will record them in the integrity file of the listed company.

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Review: Sun Shijian