Green Star announces proposed corporate reorganization

TORONTO, Nov. 22, 2011 /CNW/ - China Green Star Agricultural Corporation (TSXV: GRE) ("Green Star" or the "Corporation") announced that its board of directors has approved a proposed corporate reorganization whereby its indirect subsidiary, Pucheng Hongli Agriculture Products Technology Development Co., Ltd. ("WFOE"), is to acquire the 100% equity interest in Fujian Pucheng Star of Green Foodstuff Co., Ltd. ("China Opco"), resulting in China Opco becoming a wholly-owned subsidiary of the Corporation (the "Acquisition"), and terminating the variable interest equity ("VIE") structure currently in place between WFOE and China Opco.

Background of Reorganization

PRC regulations issued in 2006, known as Circular 10, made it necessary to obtain central Ministry of Commerce ("MOFCOM") approval to transform a Chinese company into an offshore holding company owned by the PRC entrepreneurs.  As it was virtually impossible to obtain central MOFCOM approval for small and medium sized companies, the PRC professionals have used two structures which they believe would make the transactions not subject to Circular 10 approval.

VIE arrangement

Under the VIE structure, the PRC entrepreneurs set up an offshore entity, which enters into a "series of contracts" with the PRC operating company.  These series of contracts shift the bulk of the economic benefits and obligations of the operating company to the offshore company.  In most cases, the series of contracts result in the offshore company having effective control over the PRC operating company, or at least over major decisions, and the operating company's financials will be consolidated with those of the offshore company under Canadian GAAP and IFRS.

The Corporation used the VIE structure where WFOE entered into a series of contracts with China Opco and China Opco shareholders to transfer all economic benefit, obligations and control in and over China Opco to WFOE.  The equity interest in China Opco remains with the China Opco shareholders.

"Slow walk" or "option" arrangement

The Circular 10 approval requirement applies to a "round-trip investment" where an offshore company owned or established by PRC nationals acquires their company in China.  PRC professionals believe MOFCOM approval may be not applicable when an offshore company that was neither established by, nor is owned by PRC nationals, at the time of its acquisition of the Chinese operating company.  Instead of an immediate ownership interest in the offshore company, the PRC entrepreneurs are granted the right, but not the obligation, to acquire that interest in the future.  This structure is called the "slow walk" or "option" structure.

With respect to the Corporation, the slow-walk structure was used in addition to the VIE structure before the proposed Acquisition.  Under the slow-walk structure, the China Opco shareholders, Mr. Guan Lianyun and Ms. Luo Huirong, have not acquired ownership in the controlling shareholders of the Corporation (and indirectly, WFOE).  The controlling shareholders of the Corporation (and indirectly, WFOE), being Bliss Time Limited and Ally Fast Limited, two BVI companies, have always been, and are still being, owned by a U.S. national.

Reasons for Reorganization

Following the completion of the Corporation's qualifying transaction, the Corporation encountered some practical difficulties related to the VIE structure.  First, under the VIE structure, China Opco was not a true subsidiary of WFOE.  The local PRC governmental officials do not have experience with or understanding of the VIE structure.  Accordingly, China Opco encountered difficulties from the local government when applying for approval under the foreign currency control rules in transferring foreign currency directly to China Opco where Corporation conducts its main business operations.

In addition, the Corporation believes that its shareholders and prospective investors would prefer a direct equity structure as opposed to a VIE structure.

Lastly, the VIE structure has its own associated risks in not having equity ownership of China Opco.  These risks were disclosed in the prospectus with respect to the qualifying transaction and management believes that the Acquisition would eliminate the risks specifically associated with the VIE structure.

For these reasons, Green Star's board has approved in principal the proposed Acquisition by WFOE from China Opco shareholders to acquire a 100% equity interest in China Opco.

Terms of Reorganization

To effect the Acquisition, it is expected that the WFOE will enter into an equity purchase agreement with each of Mr. Guan Lianyun and Ms. Luo Huirong, to purchase 60% and 40% of the equity interest in China Opco, respectively.  According to equity purchase agreement to be executed, the purchase price is to be RMB 3.822 million and RMB 2.548 million respectively.  However, it is proposed that no consideration will actually be paid by WFOE to Mr. Guan or Ms. Luo for the Acquisition, as Mr. Guan and Ms. Luo will be waiving the purchase price.  The Corporation's PRC counsel has advised that the waiver of consideration does not contravene PRC law.

WFOE is expected to enter into termination agreements with China Opco and its shareholders to terminate all contractual agreements with respect to the VIE structure, with such termination taking effect upon completion of the Acquisition.  In all of the termination agreements, there will be a clause stating that in the event the proposed Acquisition is held to be invalid or void by the PRC government in the future, the original VIE agreements will become effective.

Each of the sellers, Mr. Guan Lianyun and Ms. Luo Huirong, is a director, officer and principal shareholder of the Corporation.  Accordingly, the Acquisition constitutes a "related party transaction".  Green Star anticipates that the Acquisition will not be subject to any formal valuation or a requirement for minority shareholder approval.  Both Mr. Guan and Ms. Luo declared their interest in the Acquisition and abstained from voting at the board meeting approving the Acquisition.  The Acquisition will have no effect on Mr. Guan or Ms. Luo's security holdings in the Corporation.  As the Corporation already consolidates its financial results with China Opco, it is expected that the Acquisition will have no significant impact on the operations or financial condition of the Corporation.

The Acquisition is conditional upon receipt of approval of the TSX Venture Exchange as well as approval of the applicable PRC regulatory authorities.  The Acquisition is expected to be completed after all required regulatory approvals are obtained.

About Green Star

Green Star operates two main divisions, agricultural and food processing.  The agricultural division is involved in the cultivation and harvesting of agricultural products such as fresh fruit and vegetables, for sale either directly as fresh fruit and vegetables or canned, and sold overseas and domestically.  The food processing division is primarily involved in the manufacturing of canned food which includes canned tomato paste, canned boiled bamboo shoots, canned oranges, canned peaches and various other types of fruits and vegetables.  The historical revenue mix is approximately 80% canned foods and 20% agricultural produce.

Green Star's PRC operating company has been operating for over 18 years, and has focused on maintaining product and reputational excellence and a high standard of food quality, through the application of science and technology in production, quality control and assurance, business operations and management. Key assets include a well established management team, modern production facilities, and a close partnership with local farmers.

China Green Star Agricultural Corp. is listed on the TSX Venture Exchange under the symbol "GRE."

For more information on the Company, please visit our web site at www.cgsac.com.

Caution Regarding Forward-Looking Information:

Certain statements in this press release may constitute ''forward looking'' statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. When used in this press release, such statements may use such words as ''may'', ''will'', ''expect'', ''believe'', ''plan'' and other similar terminology. Forward looking information in this press release includes management's expectation of waiver of consideration by the sellers and the Acquisition being exempt from formal valuation and minority shareholder approval requirements, management's expectation of impact of the Acquisition on the Corporation's operations and financial results and on security holdings of the sellers, the expectation on the receipt of regulatory approvals for the Acquisition and expected completion time for the Acquisition. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this press release. These forward looking statements involve a number of risks and uncertainties. Some of the factors that could cause actual results to differ materially from those expressed in or underlying such forward looking statements are the effects of, as well as changes in: international, national and local business and economic conditions; political or economic instability in the Company's markets; competition; legislation and governmental regulation; and accounting policies and practices. The foregoing list of factors is not exhaustive.  Please see the Company's annual Management's Discussion & Analysis dated April 28, 2011, available on www.sedar.com, for a more detailed description of the risk factors.  The Company undertakes no obligation to update publicly or revise any forward looking information, whether a result of new information, future results or otherwise, except as required by law.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

SOURCE China Green Star Agricultural Corporation

For further information:

Green Star Agricultural Corp.      TMX Equicom                              
Michael Lam                            Philip Dale
Chief Financial Officer                           416-815-0700 ext. 253
416 849 3858                                        pdale@equicomgroup.com

 

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China Green Star Agricultural Corporation

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