The saga of a three-year performance guarantee, with audit results twice landing just below the threshold, raises at least three major points of suspicion. This also casts doubt on the underlying motivations of Shandong Hiking International Co.,Ltd. (ST Xinhua Jin) in pursuing over ten million yuan in performance compensation payments.
A court hearing in Laoshan District, Qingdao City on June 9th brought a performance compensation dispute between a listed company and its subsidiary into the public eye.
The central figures in this lawsuit are ST Xinhua Jin and the shareholders of Shanghai Lizhi Industrial Co., Ltd., Wang Liyang and Ke Yi. Based on an audit report issued by Zhongtianyun Certified Public Accountants, ST Xinhua Jin determined that Shanghai Lizhi failed to meet its 2023 performance guarantee and is demanding the two individuals pay 15.9797 million yuan in compensation.
At first glance, this appears to be a straightforward case of seeking damages for failing to meet agreed-upon performance targets. However, a closer examination of the entangled history between the parties reveals a conflict driven by interests far more complex than what appears on the surface.
As the trial progressed and more information came to light, the contours of the case became clearer. One day after the hearing commenced, ST Xinhua Jin hastily issued a clarification announcement on June 10th. Far from quelling doubts, this announcement brought more details to the surface.
The Three-Year Guarantee and Two Reversals
The story begins with a performance guarantee agreement.
In 2021, ST Xinhua Jin acquired a 50% stake in Shanghai Lizhi, a cross-border import e-commerce company, for 252 million yuan in cash, bringing it into the listed group. The acquisition was accompanied by a three-year performance guarantee agreement. Shareholders Wang Liyang and Ke Yi committed to achieving cumulative adjusted net profits of no less than 152 million yuan from 2021 to 2023, with annual targets of 42 million, 50 million, and 60 million yuan respectively. Failure would require full cash compensation.
The first year passed without issue, with the target being met. This harmony, however, was short-lived. The real conflict began to simmer quietly in 2022.
Documents submitted to the court by Shanghai Lizhi show that the company, based on its own calculations, believed it had achieved the 50 million yuan target for that year. However, after an audit conducted by Zhongtianyun Certified Public Accountants, unilaterally hired by ST Xinhua Jin, the performance figure showed a discrepancy of over 30 million yuan compared to the company's own calculation.
ST Xinhua Jin demanded compensation based on this audit. Shanghai Lizhi, despite having doubts, ultimately paid the compensation, considering the possibility that its own understanding of listed company audit standards might have been flawed and expressing confidence in making up the shortfall in the third year. On June 12th of that year, the company's board secretary responded to investor inquiries on a platform, stating that the performance compensation payment was received on May 22nd.
In 2023, to avoid a repeat of the previous year's outcome, Shanghai Lizhi took extensive measures.
Based on email correspondence between Wang Liyang and ST Xinhua Jin's financial staff obtained, as well as a "Third Party Opinion" submitted by Shanghai Lizhi to the Laoshan District People's Court, the company invited Zhongtianyun auditors to participate in monthly reviews. A pre-audit was specifically arranged in November, before the formal year-end audit, with all checks confirming no issues. Internal calculations even showed net profit exceeding 66 million yuan.
Yet, when the annual audit report was finalized, the same scenario played out again. The performance figure was once again reduced by over ten million yuan, landing precisely in the range of failing to meet the commitment. ST Xinhua Jin promptly demanded substantial compensation again.
This time, Shanghai Lizhi did not comply. According to email correspondence, Shanghai Lizhi's General Manager, Ke Yi, explicitly stated, "We cooperated with the audit, conducting relevant training and pre-audit work in advance. Before the final audit, we received no warning of a potential performance shortfall. It is unfair to us that performance compensation is being demanded again." The emails repeatedly requested a clear analysis of the reasons for the performance discrepancy.
An email from a staff member to Wang Liyang indicated that representatives from ST Xinhua Jin flew to Shanghai twice around the time the report was issued for face-to-face communication. However, ST Xinhua Jin failed to provide a convincing explanation for the significant discrepancy in performance figures.
It is reported that Shanghai Lizhi consistently refused to sign the audit report. However, citing the urgency to make an announcement, the listed company allegedly pressured Zhongtianyun to forcibly consolidate this "unrecognized" performance report into the financial statements and publicly announce it.
With communication failing and no avenue for reconsideration, the conflict between the two parties escalated until ST Xinhua Jin filed a lawsuit. During the legal proceedings, the emergence of an "Irrevocable Letter of Commitment" fundamentally altered the nature of the entire matter.
This letter, signed by Zhang Jianhua, the actual controller of Shandong Hiking International Co.,Ltd., and Chairman Zhang Hang, explicitly acknowledged that Hiking International unilaterally hired Zhongtianyun for the audit without the consent of the performance guarantee obligors, and that there were significant disputes among the parties to the equity transfer agreement regarding the audit results.
According to the letter, Zhang Hang repeatedly and explicitly promised that the audit results issued by Zhongtianyun were solely for internal assessment purposes and would not be used as a basis to claim performance compensation from the other party. He also agreed to use two properties under his name in Laoshan District, Qingdao City, Shandong Province, as collateral for the "Irrevocable Letter of Commitment."
In other words, the listed company's actual controller essentially admitted that the audit report was merely an internal assessment tool, lacking the legal validity to support external compensation claims. Therefore, the legitimacy of any performance guarantee compensation claim based on this audit report appears questionable.
Audit Discrepancy or Tailored Audit?
A three-year performance guarantee, with audit results twice landing just below the line, coupled with the "Irrevocable Letter of Commitment" where the listed company itself admits the "audit is only for internal assessment," suggests at least three major points of suspicion regarding the audit process of this performance guarantee that warrant re-examination.
The first is the contradictory nature of the audit conclusions. Public information indicates that from late March to early June 2022, Shanghai was under lockdown due to the pandemic, preventing Zhongtianyun from sending personnel on-site. During this period, Shanghai Lizhi successfully met its 2021 performance commitment.
However, after Zhongtianyun resumed on-site audits in 2022, Shanghai Lizhi's performance began to show significant "shrinkage."
The situation in 2023 was even more extreme. The same audit team, in the same fiscal year, confirmed "no issues" when reviewing data from January to November. Yet, in the December annual audit report, the performance suddenly shrank by over ten million yuan. Such a contradictory outcome is difficult to explain away with just the phrase "audit discrepancy."
If the first point of suspicion relates to the result itself, the second points to the qualifications of the audit firm.
Zhongtianyun has had a long-standing cooperative relationship with ST Xinhua Jin, with deep ties between them. The independence and objectivity of Zhongtianyun Certified Public Accountants have been questionable from the outset.
Furthermore, the Ministry of Finance and the China Securities Regulatory Commission have imposed administrative penalties on Zhongtianyun multiple times, finding issues such as failure to exercise due diligence, issuing audit reports with false records and major omissions, expressing inappropriate audit opinions, and inaccurate verification of financial data in multiple audit projects. Penalties included warnings, confiscation of illegal gains, and substantial fines.
For instance, due to failure to exercise due diligence in auditing Shengton Group's annual financial statements from 2013 to 2017, including defects in identifying and assessing material misstatement risk factors, internal control audit procedures, and substantive audit procedures, the CSRC investigated and adjudicated Zhongtianyun, ultimately ordering corrective measures, confiscating business income of 5.75 million yuan, and imposing a fine of 11.5 million yuan.
In fact, ST Xinhua Jin itself seems aware of this. In 2024, the same year Zhongtianyun issued the performance verification report for Shanghai Lizhi, ST Xinhua Jin announced a change in its accounting firm, deciding not to renew Zhongtianyun's appointment. The stated reason was precisely "to further enhance the independence and objectivity of the company's audit work." This inevitably raises the question: is Zhongtianyun's independence insufficient?
If the choice of audit firm is debatable, the third point of suspicion relates directly to procedural justice in executing the agreement.
In performance guarantee agreements, performance confirmation should typically be conducted by an audit firm jointly recognized by both parties to ensure fairness of the results. However, ST Xinhua Jin unilaterally hired an audit firm with which it has a long-term relationship, a firm that the company itself has deemed lacking in "independence and objectivity." How convincing are its audit conclusions?
Considering these three aspects—the contradictory audit conclusions, the questionable qualifications of the audit firm, and procedural flaws—they are interconnected and collectively point to one question: can the audit report issued by Zhongtianyun serve as a legal basis for performance guarantee compensation?
Issuing a Clarification: Did It Provide Answers?
Following media reports raising the aforementioned questions, ST Xinhua Jin issued a clarification announcement on the evening of June 10th.
The announcement primarily contained three points. First, it stated that Shandong Xinhua Jin Textile Co., Ltd. and Shanghai Lizhi are both subsidiaries within the consolidated scope, so transactions between them do not require related-party transaction review or disclosure obligations. Second, it claimed that since rectifying fund misappropriation, self-inspections have found no new instances of fund misappropriation. Third, it noted that the performance compensation case is under trial, and specific facts should be based on the court's judgment and the company's subsequent announcements.
However, a brief analysis reveals that this clarification announcement did not directly address the core questions. It made no mention of the key contents of the "Irrevocable Letter of Commitment" or the 40 million yuan "Fund Usage Agreement."
In April 2024, ST Xinhua Jin's Chairman, Zhang Hang, approached Shanghai Lizhi's shareholders, Wang Liyang and Ke Yi, stating an urgent need for 50 million yuan in funds and promising repayment within three days. According to a loan breakdown obtained, the funds were transferred to the account of Shandong Xinhua Jin Textile Co., Ltd., a company under Hiking, whose legal representative is Zhang Hang's husband, Wang Xiaomiao. The loan was not repaid on time after three days. Following demands for repayment, Hiking repaid 10 million yuan, with the remaining 40 million yuan still outstanding. Is this a normal transaction between subsidiaries, or is it essentially related-party fund misappropriation? The clarification announcement's statement that it "does not require related-party transaction disclosure" precisely avoids addressing the essence of the issue.
Moreover, this 40 million yuan constitutes an existing, unresolved loan, not a so-called "new misappropriation." By stating "no new instances have occurred" to prove its innocence, the announcement inadvertently acknowledges that the old debt remains unsettled.
As for the statement "awaiting the court judgment," it seems to indicate ST Xinhua Jin's confidence in winning the lawsuit.
However, the "Irrevocable Letter of Commitment" already promises "not to claim performance compensation based on the audit results," with two properties under the names of actual controller Zhang Jianhua and Chairman Zhang Hang serving as collateral. This means that regardless of the court's final judgment, the actual bearers of that performance compensation payment would be the Zhang father and daughter, not the defendants Wang Liyang and Ke Yi. In other words, even if ST Xinhua Jin wins the lawsuit, the target of the claim has already shifted from the compensation obligors specified in the agreement to Zhang Jianhua and Zhang Hang, who signed the commitment letter.
The entire clarification announcement neither explained the credibility of the Zhongtianyun audit report, nor addressed the legal validity of the commitment letter, nor clarified the true destination of the 40 million yuan loan. It seemed more focused on shifting public attention from the audit issues to "awaiting the judgment."
More notably, even before the performance compensation case is adjudicated, ST Xinhua Jin has taken a more aggressive step.
According to informed sources, shortly after receiving a transfer of 444 million yuan from the administrator of Shandong Lujin Import & Export Group Co., Ltd., ST Xinhua Jin quickly proposed convening an interim board meeting. The aim was to appoint Wang Xiaomiao—the legal representative of Shandong Xinhua Jin Textile Co., Ltd., who is also Zhang Hang's husband and the debtor of the 40 million yuan loan—as the Chairman and legal representative of Shanghai Lizhi, thereby excluding founders Wang Liyang and Ke Yi from management.
If this arrangement succeeds, it would have two direct consequences.
First, the 40 million yuan loan might be quietly written off. After all, if the debtor becomes the legal representative of the creditor entity, the loan naturally need not be pursued. It could even allow for further borrowing in Shanghai Lizhi's name, continuously siphoning funds for their own use.
Second, with the founding team ousted, Shanghai Lizhi, losing its core leadership, would struggle to maintain its channel resources, supply chain relationships, and customer trust. It might completely devolve into a "cash cow" for the two actual controllers, ceasing to be a high-quality enterprise focused on real operations. For the listed company and its shareholders, this would mean losing a continuously revenue-generating asset.
Additionally, the performance compensation case might harbor another motive. The fundamental purpose of ST Xinhua Jin initiating this lawsuit might not be to recover the over ten million yuan in compensation, but to use it as leverage in the battle for control, further enabling manipulation of the subsidiary's assets.
In summary, the dispute between ST Xinhua Jin and Shanghai Lizhi appears on the surface to be a compensation conflict arising from a performance guarantee. However, peeling back the layers reveals governance issues within a listed company—the one-way extraction of funds and decision-making power between the listed company and its subsidiary, rendering "integration and empowerment" an empty promise.
As for where this lawsuit will ultimately lead, perhaps only the court's judgment and further regulatory scrutiny can provide an answer. Regardless, the truth should not be buried.
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