COMMITMENTS AND CONTINGENCIES | 9 Months Ended |
Sep. 30, 2014 |
Commitments and Contingencies Disclosure [Abstract] | ' |
COMMITMENTS AND CONTINGENCIES | ' |
NOTE 13 – COMMITMENTS AND CONTINGENCIES |
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Capital commitments |
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At September 30, 2014, commitments outstanding for the purchase of property, plant and equipment approximated $5,050,000. |
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Legal proceedings |
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Dispute among Guizhou Taibang Shareholders over Raising Additional Capital |
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In May 2007, a 91% majority of Guizhou Taibang’s shareholders approved a plan to raise additional capital from private strategic investors through the issuance of an additional 20,000,000 shares of Guizhou Taibang at RMB2.80 per share. The plan required all existing Guizhou Taibang shareholders to waive their rights of first refusal to subscribe for the additional shares. The remaining 9% minority shareholder of Guizhou Taibang’s shares, Guizhou Jie’an Company, or Jie’an, did not support the plan and did not waive its right of first refusal. In May 2007, the majority shareholders caused Guizhou Taibang to sign an Equity Purchase Agreement with certain investors, pursuant to which the investors agreed to invest an aggregate of $7,475,832 (or RMB50,960,000) in exchange for 18,200,000 shares, or 21.4%, of Guizhou Taibang’s equity interests. At the same time, Jie’an also subscribed for 1,800,000 shares, representing its pro rata share of the 20,000,000 shares being offered. The proceeds from all parties were received by Guizhou Taibang in accordance with the agreement. |
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In June 2007, Jie’an brought suit in the High Court of Guizhou province, China, against Guizhou Taibang and the three other original shareholders of Guizhou Taibang, alleging the illegality of the Equity Purchase Agreement. In its complaint, Jie’an claimed that it had a right to acquire the 18,200,000 shares offered to the strategic investors under the Equity Purchase Agreement. In September 2008, the Guizhou High Court ruled against Jie’an and sustained the Equity Purchase Agreement. In November 2008, Jie’an appealed the Guizhou High Court judgment to the People’s Supreme Court in Beijing. In May 2009, the People’s Supreme Court sustained the original ruling and denied the rights of first refusal of Jie’an over the 18,200,000 shares. |
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During the second quarter of 2010, Jie’an requested that Guizhou Taibang register its 1.8 million shares of additional capital injection with the local Administration for Industry and Commerce, or AIC, pursuant to the Equity Purchase Agreement, and such request was approved by the majority shareholders of Guizhou Taibang in a shareholders meeting held in the second quarter of 2010. However, the Board of Directors of the Company is withholding its required ratification of the shareholders’ approval of Jie’an’s request, pending the outcome of the ongoing litigation. In March 2012, the Company received a subpoena that Jie’an brought suit in the People’s Court of Huaxi District, Guizhou Province, against Guizhou Taibang, alleging Guizhou Taibang’s withholding of its request. Jie’an requested that Guizhou Taibang register its 1.8 million shares of capital injection, pay dividends associated with these shares, as well as the related interest and penalty from May 2007 to December 2011 amounting to $3,967,500 (or RMB25,000,000) in aggregate, and return the over-paid subscription of $228,528 (or RMB1,440,000), as well as the interest and penalty, amounting to $1,587,000 (or RMB10,000,000) in aggregate. The People’s Court of Huaxi District, Guizhou Province, has accepted Jie’an’s suit. In May 2012, Guizhou Taibang was informed by the court that the case was postponed upon the request from Jie’an. In July 2013, the People’s Court of Huaxi District issued an order declaring that the suit shall be set aside because the court has no jurisdiction over the suit. Jie’an did not appeal the case to the upper-level court. |
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In December 2013, Jie’an brought suit again in the People’s Court of Huaxi District, Guizhou Province, against Guizhou Taibang, alleging that Guizhou Taibang withheld Jie’an’s request to register 1.8 million shares under its name with the local AIC. The People’s Court of Huaxi District, Guizhou Province, accepted Jie’an’s suit and heard the case on February 26, 2014. In July 2014, the People’s Court of Huaxi District ruled against Jie’an, denying its request to register such shares. However, as part of its ruling, the People’s Court of Huaxi District ordered the Company to pay dividends of $2,240,542 (or RMB 13,809,197) associated with these shares and the related interest expenses to Jie’an. Both the Company and Jie’an appealed the case to the upper-level court in July 2014. As this case should be closely tied to the outcome of the strategic investors’ dispute stated below, the Company does not expect Jie’an to prevail. |
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In November 2013, Guizhou Taibang held a shareholders meeting and the shareholders passed resolutions, or the November 2013 Resolutions, that, inter alia, (i) determined that it was no longer necessary for Guizhou Taibang to obtain additional capital from investors; (ii) rejected Jie'an's request that Jie'an subscribe for additional shares of Guizhou Taibang alone and one or more other shareholders reduce their shareholding in Guizhou Taibang; and (iii) approved the issuance of a total of 20,000,000 new shares to all existing shareholders on a pro rata basis. In December 2013, in addition to its lawsuit against Guizhou Taibang for Guizhou Taibang's failure to register its purchase of 1,800,000 shares in 2007 with the local AIC before the People's Court of Huaxi District, Guiyang, Jie'an filed another lawsuit against Guizhou Taibang with the People’s Court of Huaxi District and requested that the court declare the November 2013 Resolutions void. The case was heard on March 6, 2014. In July 2014, the People’s Court of Huaxi District ruled against Jie’an denying its request to declare the Resolutions void. Jie’an appealed the case to the upper-level court on July 28, 2014. The Company does not expect Jie’an to prevail. In March 2014, Guizhou Taibang held a shareholders meeting and the shareholders passed resolutions, or the March 2014 Resolutions, that, inter alia, recalculated the ownership percentage in Guizhou Taibang based on the November 2013 Resolutions and the additional capital injections from existing shareholders. Guizhou Taibang updated the registration with the local AIC regarding the additional capital injections in August 2014. In September 2014, Jie’an and Yigong Shengda Technology Company Limited, or Yigong, another minority shareholder of Guizhou Taibang, appealed to People’s Court of Huaxi District and requested that the court declare both the November 2013 Resolutions and the March 2014 Resolutions void and instruct Guizhou Taibang to withdraw the AIC registration regarding the additional capital injections. The Company does not expect Jie’an or Yigong to prevail. |
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If the Company decides to ratify the approval or the case is ruled in Jie’an’s favor, Dalin’s ownership in Guizhou Taibang will be diluted to 71% and Jie’an may be entitled to receive its pro rata share of Guizhou Taibang’s profits since the date on which Jie’an’s capital contribution became effective. As this case is closely tied to the outcome of the strategic investors’ dispute stated below, the Company does not expect Jie’an to prevail. As of September 30, 2014, the Company had recorded, in its balance sheet, payables to Jie’an in the amounts of RMB5,040,000 (approximately $819,000) for the additional funds received in relation to the 1.8 million shares of capital infusion, RMB1,440,000 (approximately $234,000) for the over-paid subscription and RMB3,235,544 (approximately $525,776) for the accrued interest. |
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As a result of this dispute, the strategic investors’ equity ownership in Guizhou Taibang and the related increase in registered capital of Guizhou Taibang have not been registered with the local AIC. In January 2010, the strategic investors brought suit in the High Court of Guizhou Province against Guizhou Taibang alleging Guizhou Taibang’s failure to register their equity interest in Guizhou Taibang with the local AIC and requesting the distribution of their share of Guizhou Taibang’s dividends declared since 2007. Dalin was also joined as a co-defendant as it is the majority shareholder and exercises control over Guizhou Taibang’s day-to-day operations. |
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In October, 2010, the High Court of Guizhou ruled in favor of the Company and denied the strategic investors’ right as shareholders of Guizhou Taibang, as well as their entitlement to the dividends. In light of this ruling, the Company returned the proceeds of $1,699,040 (or RMB11,200,000) to one of the strategic investors in November 2010. In October 2010, the other strategic investors appealed to the PRC Supreme Court in Beijing on the ruling of the High Court of Guizhou. The PRC Supreme Court overruled the decision of the High Court of Guizhou and remanded the case to the High Court of Guizhou for retrial. In January 2012, the strategic investors re-filed their case to the High Court of Guizhou requesting, in addition to the share distribution, the distribution of dividends and interest in the amount of RMB18,349,345 (approximately $2,981,769) and RMB2,847,000 (approximately $462,638), respectively. In December 2012, the High Court of Guizhou affirmed the judgment against the strategic investors. In January 2013, the strategic investors appealed to the PRC Supreme Court on the ruling again and the appeal was accepted. |
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In September 2013, the PRC Supreme Court made the final judgment against the strategic investors and denied the strategic investors’ right as shareholders of Guizhou Taibang and their claim for the related dividend distribution. In November 2013, the strategic investors requested the PRC Supreme Court to reconsider the judgment and such request was rejected by the PRC Supreme Court on January 17, 2014. As of September 30, 2014, Guizhou Taibang had made provision for the strategic investors’ initial fund along with RMB19,003,712 (approximately $3,088,103) in accrued interest, and RMB509,600 (approximately $82,810) for the 1% penalty imposed by the agreement for any breach in the event that Guizhou Taibang is required to return their original investment amount to the strategic investors. |
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