date when Tongmei withdraws its IPO application. Tongmei would be required to sell a minimum of 10% of its equity in the IPO. The process of going public on the STAR Market includes several periods of review and is therefore a lengthy process. Tongmei does not expect to complete the IPO until mid-2022. The listing of Tongmei on the STAR Market will not change the status of AXT as a U.S. public company.
An additional step in the STAR Market IPO process involves certain entity reorganizations and alignment of assets under Tongmei. In this regard, our two consolidated raw material companies, Nanjing JinMei Gallium Co., Ltd. (“JinMei”) and Beijing BoYu Semiconductor Vessel Craftwork Technology Co., Ltd. (“BoYu”) and its subsidiaries, were assigned to Tongmei in December 2020. As of June 30, 2021, AXT-Tongmei, Inc., a wholly owned subsidiary of AXT, was assigned to Tongmei. The assignment to Tongmei of JinMei, BoYu and its subsidiaries, and AXT-Tongmei, Inc. will increase the number of customers and employees attributable to Tongmei as well as increase Tongmei’s consolidated revenue.
We are neither a People’s Republic of China operating company nor do we conduct our operations in China through the use of variable interest entities.
The board of directors of Tongmei (the “Tongmei Board”) consists of nine members, eight of whom are nominated by AXT and one of whom is nominated by Liaoning Haitong New Energy Low-carbon Industry Equity Investment Co., Ltd. The directors nominated by AXT include five employees of AXT, including Dr. Morris S. Young, who also is the Chief Executive Officer and Chairman of the Board of Directors of AXT, and three independent directors.
Consistent with STAR Market listing requirements and applicable law, Tongmei has adopted a dividend distribution policy, which generally contemplates that it will pay dividends, typically annually, based on its then-existing situation by fully considering and accepting the opinions of shareholders (especially small and medium shareholders), independent directors and supervisors through a variety of channels. In the absence of major investment plans or major cash expenditures, if Tongmei is profitable and has met the statutory reserve, surplus reserve and similar legal requirements with respect to a year, the annual cash dividend amount will be at least 10% of any profits for that year, but any profit distribution established by the Tongmei Board will be subject to shareholder approval. We do not expect Tongmei to pay dividends under this policy for the foreseeable future because of its business strategy and growth plans.
Certain Proposed IPO Terms
Tongmei currently proposes to offer at least 10% of its shares in the IPO. The net proceeds of the IPO are expected to be used for capital expenditures to grow the business and general working capital.
There have not been any decisions made regarding the timing or terms of the STAR Market listing and the IPO or whether the proposed actions will ultimately be approved by the Shanghai Stock Exchange. Accordingly, there is no assurance that the proposed STAR Market listing and IPO will be completed.
The Tongmei shares referred to in the PID and this Item 7.01 have not been, and will not be, registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent registration under the Securities Act or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. This report is neither an offer to sell nor a solicitation of an offer to buy, nor shall there be any offer, solicitation or sale of these shares in any jurisdiction in which such offer, solicitation or sale would be unlawful.
AXT Undertaking Agreements
In connection with Tongmei’s submission of the PID, AXT, as the controlling shareholder of Tongmei, was required to enter into certain agreements with the STAR Market, which became effective upon acceptance of the PID by the Shanghai Stock Exchange and are described below:
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Letter of Commitment on Share Lock-up, pursuant to which AXT has agreed to a three-year lockup of its shares in Tongmei, including a prohibition against directing Tongmei to repurchase any of its shares following the closing of the IPO. The lockup period will be extended for six additional months if the daily closing price of Tongmei shares for 20 consecutive trading days during the first six months following the IPO is lower than the issue price of shares in the IPO or if the closing price at the end of six months after the listing is lower than the issue price of shares in the IPO.
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