Original title: exclusive counterattack of Lu Zhengyao! Ruixing will restructure the board of directors to kick Li Hui and Liu Erhai out
Surging news reporter Cheng tianmeng Wang Qifan
At a time of turmoil, Ruixing coffee, deeply involved in financial fraud scandal, suddenly announced that it would restructure the board of directors.
In the early morning of June 20, Ruixing coffee (NASDAQ: LK) issued a notice on its official website, which will hold an interim shareholders’ meeting on July 5 to discuss the removal of the appointment of independent directors Sean Shao, Li Hui and Liu Erhai, as well as the appointment of Chairman Lu Zhengyao.
However, two people close to Ruixing told the surging news reporter that Lu Zhengyao was interfering with the special committee’s investigation into Ruixing’s financial fraud in order to consolidate his control over Ruixing coffee.
A person close to Ruixing said that after “cleaning up” the external independent directors through this method, even if he is not in the position of chairman of Ruixing, Lu Zhengyao is still the largest shareholder of Ruixing coffee and currently has the absolute control of the company.
Another person close to Ruixing said that as early as mid March, Ernst & Young had submitted the report of Ruixing’s financial fraud to the corresponding independent directors, and a number of external independent directors supported the disclosure of Ruixing’s financial fraud, which triggered Lu Zhengyao’s hatred.
Lu Zhengyao has yet to respond to the surging news.
On the evening of April 2, Beijing time, Ruixing coffee submitted a notice to the securities and Exchange Commission (SEC) to publicly admit financial fraud, involving about 2.2 billion yuan of trading volume. Subsequently, Ruixing’s financial fraud caused close attention of the regulatory and public opinion. The chief executive officer (CEO) Qian Zhiya, the chief operating officer (COO) Liu Jian and others involved in the fraud have been removed from their posts and withdrawn from the board of directors. Lu Zhengyao is also likely to face criminal prosecution for Ruixing’s financial fraud.
At present, several banks, including Credit Suisse Group and Morgan Stanley, still have a debt gap of 300 million US dollars to Ruixing.
Lu Zhengyao asked for a general meeting of shareholders to discuss the whereabouts of Ruixing’s major personnel
According to the announcement issued by Ruixing, the extraordinary general meeting of shareholders will be held in Beijing at 3:00 p.m. on July 5, and all shareholders of Ruixing can attend. In addition to discussing whether Li Hui, Liu Erhai, Sean Shao and Lu Zhengyao will be removed from the appointment, Ruixing coffee also mentioned in the announcement that it will discuss whether Ying Zeng and Jie Yang will be appointed as independent directors.
“This general meeting of shareholders was requested by Lu Zhengyao, which is actually a” blind way “, that is, to get rid of all the external people, while none of the management Lu Zhengyao’s own people moved.” The people close to Rui told the surging news reporter.
On the same day, Haode investment, a family trust controlled by Lu Zhengyao, sent a letter to the shareholders’ meeting of Ruixing coffee, asking for the convening of the independent board of directors, proposing the above-mentioned resolution to replace the independent directors, including removing the positions of Sean Shao, Li Hui and Liu Erhai, and discussing whether Ying Zeng and Jie Yang were appointed as independent directors, while Ying Zeng and Jie Yang are Lu Zhengyao’s own people.
According to the announcement, Ying Zeng is now a partner of Orrick Herrington & Sutcliffe LLP, with more than 25 years of work experience in the field of business and law; Jie Yang now holds several positions in China University of political science and Law (CUPL), including Dean of business school, deputy director of MBA center, Chief Secretary of business school, etc.
“He knew that his position as chairman of the board of directors could not be guaranteed. He was about to join his own people, so he pushed two new independent directors. He just thought that even if he was not in the future, the company would be under his control.” A person familiar with the matter told surging journalists.
Another person familiar with the matter said that Lu Zhengyao was already “hateful” to several external directors because of his initial support for making Ruixing’s financial fraud public.
The person familiar with the matter said that as early as mid March, Ernst & Young had reported to a number of independent directors about Ruixing’s financial fraud, among which a number of independent directors supported the disclosure of Ruixing’s fraud. Subsequently, under the attention of public opinion, the supervision enters the market, the company’s executives are exempted, and Lu Zhengyao himself may face criminal prosecution, all of which cause Lu Zhengyao’s hatred.
Previously, on April 2, Ruixing coffee announced that Liu Jian, the chief operating officer of the company, had been found to have made false financial statements, involving about 2.2 billion yuan in transaction value. The board of directors of the company set up a special committee to conduct internal investigation. In addition, a number of US law firms launched a class action against Ruixing coffee, accusing it of making false and misleading statements in violation of US Securities Law.
In May this year, as the investigation of Ruixing coffee fraud continued to advance, the chief executive officer (CEO) Qian Zhiya, the chief operating officer (COO) Liu Jian and others involved in the fraud have been removed from their posts and have withdrawn from the board of directors.
Lu Zhengyao is also likely to face criminal prosecution for Ruixing’s financial fraud.
At the beginning of June, according to Caixin, citing regulators, the relevant departments have obtained the mandatory e-mail of Ruixing Chairman Lu Zhengyao about the company’s financial fraud. Lu Zhengyao will be prosecuted, and is likely to face criminal prosecution.
In addition, last week, Lu Zhengyao resigned as chairman and non-executive director of the Shenzhou car rental board, and his shares in Shenzhou Youche have all been frozen by the judiciary, which is believed to be a move to further cut relations with Ruixing coffee.
Earlier, according to the Wall Street Journal, the counterfeiting of Ruixing coffee involved upstream and downstream. Not only did employees design fake transactions to increase sales, but also companies associated with Lu Zhengyao bought a large number of vouchers and forged orders of at least 1.5 billion yuan.
There is still a $300 million gap in bank debt. How much control can Lu Zhengyao have?
According to Wande data, as of January 21, 2020, among the top three shareholders of Ruixing coffee, Lu Zhengyao holds 23.94%, Qian Zhiya, the former CEO of Ruixing coffee, holds 15.43%, and Wang Sun Ying, Lu’s sister, holds 9.72%.
However, Lu Zhengyao’s bank loans obtained by pledging his own, Qian Zhiya’s and his sister’s shares are in danger of not being fully recovered.
According to the prospectus of Ruixing coffee, as of January 2020, Lu Zhengyao holds 4851500 class B common shares of Ruixing coffee, equivalent to 36.86% of the voting rights. Lu Zhengyao has pledged part of his personal shares (145455450 class B common shares) and 610800752 common shares held by Qian Zhiya and Lu Zhengyao’s sister Wong Sun Ying, with a loan of US $518 million from the bank.
On April 2, after the company admitted that there was financial fraud, Ruixing coffee’s share price fell sharply from $26.20, triggering the bank’s forced closing line. On April 6, Goldman Sachs announced that it was entrusted by various banks to dispose of these common shares. After that, the average share price of Ruixing coffee was $3.18.
According to Bloomberg news on June 16, lenders, including Haitong International Securities Group and Goldman Sachs Group, have sold Lu Zhengyao’s mortgaged shares of Ruixing in the past two months, raising about $210 million, people familiar with the matter said. In a statement at the time, Goldman Sachs said that Lu Zhengyao defaulted on $518 million in margin debt in early April after the news of financial fraud caused Ruixing coffee shares to plummet. After selling the shares pledged by Lu Zhengyao, several banks, including Credit Suisse Group AG and Morgan Stanley, still face a $300 million gap in debt to Ruixing.
As Lu Zhengyao provides unlimited joint and several liability guarantee for the Pledged Shares, the bank claims the right to recover Lu Zhengyao’s personal property to repay the debts, including the remaining shares he holds in Ruixing coffee.
To this end, the aforementioned people close to Rui said that Lu Zhengyao’s method of interfering with the investigation of the special committee was “stupid”, “sooner or later, his shares will be taken away by the bank, which is a matter of time.”
At the end of June 19 local time, shares of Ruixing coffee fell 3.54% to close at $3.82.
Kicking Li Hui and Liu Erhai out, the “iron triangle” relationship broke?
Ruixing coffee is one of the companies in Shenzhou department. The largest shareholders of Shenzhou car rental and Ruixing coffee are Lu Zhengyao. Liu Erhai, founding partner and executive partner of joy capital, Li Hui, founding partner of Dazheng capital and former president of Huaping investment group in Asia Pacific region, all have deep ties with Lu Zhengyao. They are also known as “Shenzhou iron triangle”.
But if Lu Zhengyao does try to kick Li Hui and Liu Erhai out this time, it can be said that the “iron triangle” relationship has broken.
Dazheng capital and joyful capital participated in two rounds of investment of 200 million US dollars each for Ruixing coffee a and B. According to Wande data, as of January 21, 2020, among the top five shareholders of Ruixing coffee, Lu Zhengyao holds 23.94%, Qian Zhiya, former CEO of Ruixing coffee, holds 15.43%, Wang Sun Ying, Lu Zhengyao’s sister, holds 9.72%, Li Hui and Liu Erhai are the fourth and fifth shareholders, holding 7.15% and 5.3% respectively.
On January 8, 2020, Dazhen capital reduced 38.4 million shares of Ruixing, with the shareholding ratio reduced from 14.06% to 12.15%, and cashed out $230 million. On February 13, joyful capital officially issued a statement saying, “since the investment in Ruixing coffee in 2018, joyful capital and its related parties have never sold any shares of Ruixing coffee.
It’s not just luck.
When Lu Zhengyao’s first IPO of car rental in Shenzhou failed, Li Hui invested $200 million in car rental from Huaping, where Li Hui was then. After leaving Huaping in February 2016, Li Hui briefly became Vice Chairman of the company. In 2017, Li Hui founded Dazheng capital. Li Hui is also the chairman and managing partner of the excellent car industry fund created by Lu Zhengyao. Liu Erhai has invested in three companies founded by Lu Zhengyao, namely, in 2006, in Shenzhou car rental, in 2015, and in 2016, in Ruixing coffee.