Qu Lili
"Right in the midst of being surrounded by countless mountains, one mountain lets you pass only for another to block your way." The seven-character quatrain by Yang Wanli of the Southern Song Dynasty seems apt to describe the current predicament of *ST Sanlian.
Apart from a series of unresolved ownership disputes, on March 25, after issuing a "risk warning announcement regarding uncertainty of profit in 2009," on April 8, *ST Sanlian issued another "risk warning announcement regarding suspension of stock trading."
"If before the issuance of the company's 2009 audit report, the company is unable to conduct prior error corrections, it will result in a loss for the company in 2009. Given that the company has already incurred consecutive losses in 2007 and 2008, if 2009 continues with a loss, the company's stock will face the risk of suspension." This is the important reason why *ST Sanlian's 2009 annual report has garnered much attention. For this very reason, the release of the annual report has been repeatedly delayed, from March 12 to April 10, and then to the current announcement delay until April 30. Whether the company incurs a loss or profit directly determines the fate of *ST Sanlian.
However, regarding the issue of whether error corrections can be made, this announcement seems to have provided a more definitive answer: "Based on opinions from relevant departments, the company will not make prior error corrections for the corresponding losses caused by the Industrial Bank case; instead, these losses will be included in the 2009 earnings. Due to the execution amount of 41.4226 million yuan in the Industrial Bank case, after including this loss in the 2009 earnings, the company expects a loss for the year 2009."
So, is the loss already set in stone? What exactly is the risk of suspension?
Does the infringement by *ST Sanlian's former major shareholder, Sanlian Group, still have repercussions? In a series of unresolved lawsuits, does *ST Sanlian, whose major shareholder is now a wholly-owned subsidiary of Gome, still have a chance to turn things around?
The Trouble Began with the 40 Million RMB Acceptance Bill Case
This matter dates back to 2006.
In December 2006, Sanlian Appliance Distribution Center Co., Ltd. (which had no property affiliation with the listed company, hereinafter referred to as "Sanlian Distribution"), a subsidiary of *ST Sanlian's former major shareholder, Sanlian Group, borrowed 40 million RMB from the Jinan branch of Industrial Bank. In this loan, apart from mortgaging a property to the bank, Sanlian Distribution also pledged four commercial acceptance bills, each worth 10 million RMB, totaling 40 million RMB, issued by the listed company, Sanlian Department Store (the predecessor of *ST Sanlian), as ticket guarantees to Industrial Bank.
The loan maturity date was June 2007, but due to its own reasons, "Sanlian Distribution" under Sanlian Group was unable to repay the principal and interest on time. On March 30, 2009, *ST Sanlian received the final judgment for this case, which ruled that *ST Sanlian would bear the responsibility of paying the pledged ticket amounts within the scope of unfulfilled claims by Industrial Bank, meaning joint liability with Sanlian Distribution.
During the execution phase, whether to directly auction the borrower's property or execute the ticket pledge for joint compensation by Sanlian Department Store became a significant issue. According to informed sources who told the China Business News reporter, "At the time, Sanlian Distribution did have properties, except there were numerous property disputes back then where many people paid but couldn't get their houses, causing disturbances at the government. According to relevant laws, these properties were mortgaged to Industrial Bank, and the mortgage right is a priority right. As the mortgagee, Industrial Bank could enjoy priority compensation among various claims, but at the time, Industrial Bank did not apply to the court for forced execution of these properties."
Later, although mediated by the Jinan Intermediate People's Court, Industrial Bank agreed to temporarily suspend the execution of *ST Sanlian's bank account and first initiate the auction procedure for the mortgaged properties of the borrower, Sanlian Distribution, using the proceeds from the auction to repay related loans. However, due to excessive debt owed by the entire Sanlian Group (understood to owe tens of billions of RMB), relevant authorities in Shandong Province planned to implement bankruptcy protection, resulting in the termination of the auction of the aforementioned properties.
Subsequently, Industrial Bank again requested the Jinan Intermediate People's Court to re-seal part of *ST Sanlian's settlement accounts on August 27, 2009, freezing 580,000 RMB (later increased continuously). At the same time, *ST Sanlian's properties located at No. 12 Baotuquan North Road in Jinan, specifically the ground floor to the second floor, which happened to be the main operating site of the listed company's most important West Jinan store, were also sealed. It wasn't until the bank demanded the transfer of over 41 million RMB from the listed company that *ST Sanlian's settlement accounts were unfrozen.
"It should be noted that the execution status of the 40 million RMB acceptance bill case, as well as whether the 41 million RMB forcibly executed from *ST Sanlian can be counted towards the 2008 earnings, directly relates to whether *ST Sanlian faces the dangerous situation of being suspended due to continuous losses for three years." Zhang Yucheng, attorney from Dacheng Law Offices representing the shareholders' derivative lawsuit against Sanlian Group by minority shareholders of *ST Sanlian, introduced to reporters.
The Acceptance Bill Case Raises Numerous Doubts
Although the case execution has long been completed, the accounting treatment of financial statements remains fraught with difficulties. However, even at this point, the story is far from over. Due to the change in *ST Sanlian's major shareholder, although the litigation may appear to be settled, the future destiny of *ST Sanlian in the capital market still appears unpredictable.
At the beginning of 2009, through an auction process, Longjidi Island, a wholly-owned subsidiary of Gome Electrical Appliances, became the largest shareholder of *ST Sanlian and convened the first extraordinary shareholders' meeting, restructuring the board of directors and the board of supervisors of *ST Sanlian. On the same day, the newly restructured board reappointed the management team. On February 2, 2009, the new management team began to take over the business management of *ST Sanlian and conducted a thorough investigation into the operation, management, and finance of *ST Sanlian.
"However, during the thorough company inspection, no purchase contracts signed between the company and Sanlian Distribution related to these four commercial acceptance bills were discovered, nor were there corresponding purchase invoices or delivery records. Sanlian Distribution did not notify the company about pledging the aforementioned tickets to the bank, and the company did not receive any pre-query confirmation letters from Industrial Bank regarding the necessary proof materials for the ticket pledge." Qian Weiqing, partner of Dacheng Law Offices handling this case, pointed out.
"In fact, because the major shareholder of *ST Sanlian at the time was still Sanlian Group, the authenticity of the tickets was not verified during the litigation process, and both parties did not comprehensively cross-examine the authenticity and legality of the acceptance bills in court, thus leaving major doubts in the case." An informed person told the China Business News reporter.
Under such circumstances, *ST Sanlian and a large number of small shareholders launched a series of self-rescue actions.
Starting from September 2009, the small shareholders of *ST Sanlian began to jointly write to the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the Ministry of Public Security, reporting "the shocking series of misdeeds committed by the former major shareholder, Sanlian Group (due to excessive debt, the shares it held have been forcibly executed by the court and auctioned off) over the years, causing *ST Sanlian to incur consecutive losses for two years and therefore be labeled with '*ST', further bringing the risk of delisting."
However, so far, these reports have not yet received responses from relevant departments. "It cannot be ruled out that *ST Sanlian and small shareholders may file litigation and other judicial procedures again regarding the 40 million RMB acceptance bill case," said Zhang Yucheng.
Securities industry professionals also pointed out that "the situations and evidence uncovered by the above-mentioned company investigations can be explained to the exchange as reasons for delayed handling."
In the stock bar of *ST Sanlian, regarding the harm caused by delisting and suspension to stockholders, netizens have the following insightful comments: "Delisting to the third board reduces the stock price to one-tenth, while suspension is like going to prison, losing the freedom to buy and sell, but there is still hope to come out later. When it comes out, depending on changes in the situation, the stock price may double or fall by half."
However, the 40 million RMB acceptance bill case is just the tip of the iceberg regarding how Sanlian Group, as the major shareholder, infringed upon the rights of the listed company and small shareholders. The fate of *ST Sanlian in the capital market still awaits the resolution of related cases.
Background Information
Major Shareholder Series Infringement Cases Concerning the Capital Market Fate of *ST Sanlian
A series of cases involving listed companies, small shareholders of listed companies, and Sanlian Group include trademark litigation, competition litigation, equity auction litigation, real estate infringement litigation, etc. Among them, the infringement lawsuit filed by small shareholders of *ST Sanlian against Sanlian Group regarding the Sanlian trademark and competition issues is the first shareholder derivative lawsuit with benchmark and exemplary significance in the Chinese securities market.
The Auction Contract Dispute Over the 27 Million Shares of *ST Sanlian
In the auction contract dispute over the 27 million shares of *ST Sanlian between Sanlian Group and Gome Electrical Appliances, due to Sanlian Group's dissatisfaction with the civil ruling made by the High People's Court of Shandong Province in 2009, it appealed to the Supreme People's Court. A month ago, the Supreme Court made a final ruling, dismissing Sanlian Group's appeal and upholding the original ruling (valid auction).
Trademark Dispute Case Between *ST Sanlian and Sanlian Group
Currently under trial at the Intermediate People's Court of Jinan City.
Small Shareholders of *ST Sanlian vs. Sanlian Group Derivative Lawsuit Infringement Dispute Case
Recently, due to Sanlian Group's objection to jurisdiction, the hearing was postponed. Recently, the High People's Court of Shandong Province ruled, "Dismiss the defendant Sanlian Group's objection to jurisdiction over the aforementioned case." Sanlian Group dissatisfied with the ruling, again appealed to the Supreme Court regarding the jurisdictional objection. Attorney Zhang Yucheng told reporters: "Sanlian Group hopes that the Supreme Court will handle this case as a first-instance case. Although there is theoretical support in the Civil Procedure Law (major civil cases with national impact can be heard in the first instance by the Supreme Court), whether this case constitutes a civil case with national impact lies in the discretion of the Supreme Court. Historically speaking, apart from the 'Gang of Four' case handled by the Supreme Court in the first instance, no other cases have been handled by the Supreme Court in the first instance." By the time this article went to press, Sanlian Group's appeal materials had been sent out by the Higher People's Court of Shandong, and this newspaper will separately track and report on the details of this case.