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Zhongnongfa Seed sues Henan Agrichemical for investment damages

On 15 Aug., 2017, Zhongnongfa Seed Industry Group Ltd. (Zhongnongfa Seed) made an announcement, stating that the Beijing Second Intermediate People’s Court had accepted its lawsuit against three of Zhongnongfa Henan Agrichemical Co., Ltd. (Henan Agrichemical)’s shareholders Guo Wenjiang, Zhao Junfeng and Song Quanqi for a claimed compensation of USD26.4 million. As of the time of writing, the court has yet to be held.


In 2015, Zhongnongfa Seed acquired a 67% stake in Henan Agrichemical (formerly known as Henan Yingtai Agrochemical Co., Ltd.) from Guo Wenjiang and other 11 shareholders for USD56.9 million, of which USD19.0 million would be raised through share issue. For this investment, the company aimed to extend into the pesticide market to progress its “seed-pesticide-fertiliser integrated business strategy”. Later in Oct. 2015 when Zhongnongfa Seed received its raised funds, the two parties completed the deal and documentation of related share ownership changes.


According to the signed agreement, Henan Agrichemical would reach a full-year extraordinary item-deducted net profit of USD9.5 million, USD11.1 million and USD11.2 million in 2015-2017 respectively. In case of failure to fulfil this commitment, Guo Wenjiang will have to pay Zhongnongfa Seed certain amount of compensation in cash.


Unfortunately, Henan Agrichemical failed to meet its performance promises in both 2015 and 2016, with respective extraordinary item-deducted net profit reaching a mere:

Ÿ   2015: USD5.0 million – compensation for the year: USD8.2 million

Ÿ   2016: USD0.87 million – compensation for the year: USD18.3 million


“Judging from its H1 financial performance, we estimate that Henan Agrichemical still cannot realise its goal in 2017,” noted Zhongnongfa Seed, “In fact, Guo Wenjiang had promised in the acquisition agreement that the 2018 extraordinary item-deducted net profit would reach USD12.0 million. Yet, he will probably face further compensation should such poor performance continue.”





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