The predecessor of Zhen Gongfu was a dessert shop founded by Pan Yuhai, which was doing well. Later, Pan Yuhai’s sister Pan Minfeng and brother-in-law Cai Dabao joined in and invested in a catering company. The equity structure was 50% for Pan Yuhai, 25% for Pan Minfeng and 25% for Cai Dabao respectively. After the operation of the small shop, the business grew bigger and bigger and developed into a Chinese catering brand – Zhen Gongfu.
The career was booming, but there were problems in the relationship. His wife Pan Minfeng filed for divorce. In exchange for the custody of their two children, Pan Minfeng transferred 25% of his shares to Cai Dabao. Since then, the equity structure of Zhen Gongfu has become a situation where Cai Dabao and Pan Yuhai each hold 50%. Neither of them is willing to give in. In order to compete for the control of the company, they began to do various “small moves” openly and secretly.
In 2007, Zhen Gongfu was favored by capital due to its good business model and performance. Today’s Capital and Zhongshan Liandong, two private equity investment funds, invested in Zhen Gongfu. The valuation of Zhen Gongfu is as high as 5 billion yuan. The two companies invested 150 million yuan each, each holding 3% of the shares. The equity structure of Zhen Gongfu has changed to Cai Dabao and Pan Yuhai each holding 47% (including 5.26% each for Shuangzhongzi), and Today Capital and Zhongshan Liandong each holding 3%. Originally, neither of them had absolute control or relative control, which was a balanced situation where no one was willing to submit to the other. However, this balance was broken with the entry of capital. Since capital is more biased towards Cai Dabao, who has stronger company management capabilities, it supports Cai Dabao more on the board of directors, making Pan Yuhai very passive. In addition, in order to go public, Cai Dabao’s series of measures to de-familyize are equivalent to undermining Pan Yuhai. He is not allowed to intervene in the company’s daily management affairs and finances, and the conflict between the two has further intensified.
Later, Cai Dabao secretly acquired 3% of Zhongshan Liandong Capital’s shares and embezzled a large amount of funds from the company, and other shareholders were unaware of these operations. Cai Dabiao did not allow Pan Yuhai to access the management and financial accounts of Zhen Gongfu. Pan Yuhai took Zhen Gongfu to court, demanding the exercise of the company’s shareholder right to know, and requested the court to seal up the company’s financial reports, financial books and accounting vouchers from July 2007 to December 2008, which the court supported.
Through this right to know lawsuit, Pan Yuhai found evidence of Cai Dabiao’s suspected embezzlement and misappropriation of huge amounts of company funds when auditing Zhen Gongfu’s company ledgers. Therefore, the civil case became a criminal case. In April 2011, Cai Dabiao was arrested on suspicion of economic crimes. On December 12, 2013, the Tianhe District Court of Guangzhou City found Cai Dabiao guilty of embezzlement and misappropriation of funds and sentenced him to 14 years in prison.
Cai Dabiao originally had a good hand, but it was played badly. The originally good road to listing was ruined, and the ending was regrettable. The main reason is that Cai Dabao’s infidelity in marriage and the equity distribution issue caused the former relatives to turn against each other. Although the reason behind it is Cai Dabao’s character problem and equity setting problem, the main reason for Cai Dabao’s imprisonment is the crime of embezzlement and misappropriation of funds.
Regarding the crime of embezzlement, Article 271, Paragraph 1 of the Criminal Law of the People’s Republic of China stipulates: If the staff of a company, enterprise or other unit uses the convenience of their position to illegally take the property of the unit for their own use, if the amount is large, they shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and a fine; if the amount is huge, they shall be sentenced to fixed-term imprisonment of not less than three years but not more than ten years and a fine; if the amount is extremely huge, they shall be sentenced to fixed-term imprisonment of not less than ten years or life imprisonment and a fine.
Regarding the crime of misappropriation of funds, Article 272, Paragraph 1 of the Criminal Law of the People’s Republic of China stipulates that if a staff member of a company, enterprise or other unit uses his or her position to misappropriate the funds of the unit for personal use or lends them to others, and the amount is large and has not been repaid for more than three months, or if the amount is large but has not exceeded three months and is used for profit-making activities or illegal activities, he or she shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention; if the amount of misappropriation of the unit’s funds is huge, he or she shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years; if the amount is particularly huge, he or she shall be sentenced to fixed-term imprisonment of not less than seven years.
It can be seen from this that if a corporate legal person or shareholder does not distinguish between public and private, takes the funds that originally belonged to the enterprise for himself or herself, or misappropriates the company’s assets for a long time and does not return them, or the company’s accounts are not transparent, etc., he or she may be subject to tax payment, fines, or even face imprisonment!
To understand my country’s fund supervision policy in more depth, readers can refer to the two documents, Order No. 3 of the People’s Bank of China [2016] and No. 105 of the People’s Bank of China [2022], and the Pilot Program for Large Cash Management.