Sino-Ocean Xiangrui becomes a "drag" on Tanaka Precision Machinery, having no choice but to buy high and sell low

According to an announcement released by Tanaka Seiki Co., Ltd., in view of the fact that it has lost control of its holding subsidiary Ocean Xiangrui and its wholly-owned subsidiary Wolf, the company plans to sell its 55% stake in Ocean Xiangrui.

At the same time, the company stated that in view of the fact that the target company is out of control and has caused serious drag on the company's operations, from November 2019, the company plans to no longer include Ocean Xiangrui and its subsidiary Wolf in the scope of consolidated financial statements. This matter will have a significant impact on the company's 2019 annual financial report.

In order to improve the company's product line in the field of intelligent equipment manufacturing, Tanaka Precision Machinery (300461) spent 391 million yuan to acquire a 55% stake in Shenzhen Yuanyang Xiangrui Machinery Co., Ltd. at the end of 2016. However, things went against expectations, and Yuanyang Xiangrui became a "drag" on Tanaka Precision Machinery's performance, and even became the direct cause of the company's shell-keeping crisis in 2020.

Since November 2019, Tanaka Seiki's control efforts over the target company have been hindered by the target company, including but not limited to the inability of the auditing agency personnel hired by Tanaka Seiki to conduct auditing work on the target company, the target company prohibiting the company's personnel from entering the factory, the target company refusing to provide it with audit information, and refusing to communicate with it.

Tanaka Seiki said: "Judging from the current situation, it is difficult for the company to achieve control over the target company and reverse the fact that the target company is suffering from serious losses and may be insolvent in a short period of time. Therefore, in order to alleviate the operating difficulties of the listed company and safeguard the legitimate rights and interests of the majority of shareholders of the listed company, Party B agrees to transfer the target equity from Party A to help Party A get out of the crisis."

It is understood that the takeover parties this time, Yoshiji Takeda, Chenglin Qian, Shuji Takeda and Yasunari Fujino, are the current top four shareholders of Tanaka Precision Machinery. The above four shareholders intend to jointly establish a limited liability company as the transaction counterparty to acquire 55% of the equity of Ocean Xiangrui in accordance with the conditions agreed in the agreement. The valuation of the target equity is approximately 12.52 million yuan.

In addition, the Shenzhen Stock Exchange asked sharp questions about Tanaka Seiki's integration of acquired assets, its previous concealment of the risk of loss of control of its subsidiaries, whether the sale of equity complied with major asset restructuring, and whether there was insider trading among its directors, supervisors and senior managers.

First, the Shenzhen Stock Exchange requires Tanaka Seiki to provide additional explanations on the business integration after it acquired 55% of the equity of Sino-Ocean Xiangrui in November 2016; to explain whether there are major defects in the internal control measures taken for Sino-Ocean Xiangrui and Wolff; and to explain, based on the articles of association of Sino-Ocean Xiangrui, whether the company can currently exercise control over the selection of directors, supervisors and senior managers and business activities of Sino-Ocean Xiangrui.

Second, regarding the loss of control of Sino-Ocean Xiangrui and Wolff, the Shenzhen Stock Exchange required Tanaka Seiki to explain whether there were any information disclosure violations in the 2019 semi-annual report and other related announcements for not disclosing the risk of loss of control of subsidiaries and the obstruction of takeover work; and required Qian Chenglin, Yasunari Fujino, Zhang Yulong, Yang Xiaofang and other senior executives to explain whether they performed their duties diligently and conscientiously at Sino-Ocean Xiangrui. As for the issue of no longer consolidating Sino-Ocean Xiangrui and Wolff, the Shenzhen Stock Exchange required Tanaka Seiki to explain the specific time point and rationality; whether the decision to no longer consolidate the financial statements falls within the authority of the company's board of directors; and whether the three related directors Qian Chenglin, Yasunari Fujino and Zhang Yulong abstained from voting in accordance with regulations, and whether there were any flaws in the board of directors' resolution.

Third, now, Tanaka Seiki plans to sell 55% of Yuanyang Xiangrui’s equity to four directors. In response, the Shenzhen Stock Exchange requires Tanaka Seiki to explain whether this transaction constitutes a major asset reorganization; whether it has notified other shareholders of Yuanyang Xiangrui in advance and obtained the consent of more than half of them, whether there are other shareholders who claim to exercise the right of first refusal; and report the relevant insider information insiders and the transaction progress memorandum.

It is worth noting that in May and July 2019, Tanaka Seiki signed agreements with Gong Lunyong and Peng Jun twice. First, it planned to sell 55% of the equity of Ocean Xiangrui and performance compensation debt (213 million yuan) for 391 million yuan, and then sold 55% of the equity of Ocean Xiangrui for 80 million yuan.

Based on this, the Shenzhen Stock Exchange asked Tanaka Seiki to explain why there was a large difference between the transaction prices before and after, and questioned whether this transaction involved transferring benefits to related parties; whether it had hired an accounting firm and disclosed the audit report in a timely manner; and required additional explanation on the current progress of performance compensation recovery, and whether this transaction would affect the recovery of performance compensation.

Fourth, the Shenzhen Stock Exchange requires Tanaka Seiki to explain whether there is any insider trading or market manipulation in the recent stock trading (since March 1) of shareholders, directors, supervisors and senior managers holding more than 5% of the shares, and whether there is any plan to reduce holdings in the next three months. In fact, in September 2019, the actual controller of Tanaka Seiki and its concerted actors Takeda Kyoji and Takeda Shuji, as well as director and senior executive Fujino Yasunari, reduced their holdings by no more than 9.8675 million shares, accounting for 7.92% of the total share capital.

Fifth, in response to recent media interviews, institutional and investor surveys, etc., the Shenzhen Stock Exchange requires Tanaka Seiki to explain whether there are any violations of the principle of fair information disclosure.

It is worth noting that on February 28 this year, the Zhejiang Securities Regulatory Bureau also issued a warning letter to Tanaka Seiki, pointing out that when it responded to investors' questions about the "new coronavirus pneumonia" medical protective mask production line on the Shenzhen Stock Exchange interactive platform, it failed to objectively, truthfully and accurately introduce and reflect the actual situation of the relevant products.

In December 2019, Tanaka Seiki also responded to investors on the Interactive Easy platform, saying that the company's existing technology can be applied to the production and manufacturing of some components of wireless headphones, and has received a small number of related equipment orders. This also caused Tanaka Seiki's stock price to rise by the daily limit for two consecutive days. In response, the Shenzhen Stock Exchange asked Tanaka Seiki to conduct an investigation and explain whether there was any situation of catering to market hotspots and misleading investors.