Lu Zhengyao was impeached, and the “iron triangle” turned against him. The night before Ruixing’s exit, the situation suddenly changed

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Source: financial 11
Li Hui, chairman of Dazheng capital, and Liu Erhai, executive partner of joy capital, have cooperated with Lu Zhengyao for many years, and have successively participated in three projects: Shenzhou car rental, Shenzhou excellent car and Ruixing coffee, which were once known as the “iron triangle”. However, in Ruixing’s financial fraud and delisting crisis, the “iron triangle” turned against each other.
Picture / visual China
Wen Yule
Editor mark
Lucky coffee is destined to be an “unusual” company. After setting a series of records, such as the fastest listing, the fastest delisting, Ruixing made a series of exclamation marks and question marks in the last trading day before the suspension.
In the early morning of June 27, Ruixing issued a notice that the board of directors, through most resolutions, requested Lu Zhengyao to resign as chairman and director, and would hold a board meeting on July 2 to discuss the removal of Lu Zhengyao. The announcement also suggested that the company’s internal investigation had found evidence of Lu Zhengyao’s participation in financial fraud.
On the evening of June 26, LK. O announced that it would give up the delisting hearing and stop trading at the opening on June 29. This means that the 26th is Rui Lucky’s last trading day. After the opening, Ruixing’s share price plummeted. After several fusions, it finally closed at $1.38, down 54%. Since listing on May 17, 2019, Ruixing has completed the whole process from listing to delisting in only 13 months.
On May 15, Ruixing received Nasdaq’s delisting notice. On May 19, Ruixing announced that it planned to apply for a hearing to defend itself. On May 23, NASDAQ informed Ruixing that it would hold a hearing on June 25, but Ruixing informed NASDAQ to abandon the hearing on June 24.
Not long ago, Lu Zhengyao proposed to hold an extraordinary shareholders’ meeting on July 5, on the topic of removing himself and four directors, including Li Hui, Liu Erhai and Sean Shao. Ruixing’s board of directors, in a June 27 announcement, called on shareholders to oppose the removal of Shao Xiaoheng from his post, so as not to interfere with his leadership’s internal investigation. This shows that the contradictions within Ruixing’s board of directors have been completely open.
Two people familiar with the matter told Caijing that Li Hui and Liu Erhai knew that Lu Zhengyao was going to hold a shareholders’ meeting and remove their directors only after seeing the news, and neither of them agreed to withdraw from the board of directors.
Li Hui, chairman of Dazheng capital, and Liu Erhai, executive partner of joy capital, have cooperated with Lu Zhengyao for many years, and have successively participated in three entrepreneurial projects of the latter, namely, Shenzhou car rental (0699. HK), Shenzhou excellent car (838006. OC) and Ruixing coffee, which have played an important role in the high-speed listing process of Ruixing coffee. The three of them were once known as the “iron triangle”. However, in Ruixing’s financial fraud, delisting and power struggle, “iron triangle” finally turned against.
Board of directors
According to the people familiar with the matter, after Ruixing’s financial fraud was discovered by Ernst & young, there was a crack in the relationship between the “iron triangle”. Li Hui and Liu Erhai, after receiving Ruixing’s fraud report submitted by Ernst & young, supported the publicity of the results, and supported Shao Xiaoheng to lead the independent investigation committee to investigate the original cause of fraud in detail, which contradicted Lu Zhengyao’s opinion. The delay in releasing the results of the investigation has also deepened the dissatisfaction of Li Hui and Liu Erhai.
In this regard, Caijing asked Lu Zhengyao for confirmation. As of the time of publication, no reply had been received.
The contradiction between the two sides is finally reflected in the appointment and removal of board members. The company’s board of directors has been in turmoil since its April 2 disclosure of financial fraud. In the same month, Thomas Meyer, the foreign independent director, resigned. On May 11, COO Liu Jian and CEO Qian Zhiya, who were found to be involved in the fraud, were removed from their posts and added to the new senior vice president Cao Wenbao and vice president Wu Gang. On June 16, Pu tianruo, an independent director, announced his resignation.
On June 19, Ruixing coffee issued a notice on its official website, saying that it would hold an extraordinary general meeting of shareholders in Beijing on July 5 to discuss the removal of Lu Zhengyao, Li Hui, Liu Erhai and Shao Xiaoheng as directors, and the addition of Zeng Ying and Yang Jie as independent directors.
Zeng Ying is a partner in the Beijing Office of orri law firm in the United States, while Yang Jie is the vice dean of the Business School of China University of political science and law. According to the public information, neither of them has ever met with Ruixing before.
The notice, signed by Mr. Lu, did not appear in the SEC’s announcement system until the early hours of June 27, when it was released along with the board’s announcement that Mr. Lu had resigned.
After June 20, the external directors of Ruixing’s board of directors launched a counterattack against Lu Zhengyao, and the announcement on June 27 is believed to reflect their will. The announcement requires Lu Zhengyao to resign as chairman of the board of directors, and the board of directors will be convened on July 2 to discuss the issue of removing Lu Zhengyao from the post of chairman of the board of directors. In addition, although the board of directors confirmed that an extraordinary general meeting of shareholders would be held on July 5, it called on shareholders to oppose the removal of Shao Xiaoheng as an independent director, because it would disturb the investigation of financial fraud by the special committee chaired by Shao Xiaoheng.
The special committee was initially composed of three independent directors, Shao Xiaoheng, Pu tianruo and Zhuang Weiyuan, but Pu tianruo has left. If Shao Xiaoheng also leaves, the committee will only have Zhuang Weiyuan left.
Lu’s resignation was requested on the basis of “documents and other evidence found by the special committee of the board of directors in the internal investigation, as well as an assessment of Lu’s cooperation in the internal investigation,” the statement said The implication is that the results of the investigation found that Lu Zhengyao personally participated in the fraud and did not cooperate with the internal investigation.
The announcement pointed out that the decision to impeach Lu Zhengyao was made by a majority of the board of directors. At present, there are eight members of Ruixing’s board of directors. In addition to Lu Zhengyao, Li Hui and Liu Erhai, Guo Jin is the “Shenzhou Department” General of Lu Zhengyao, Wu Gang and Cao Wenbao are the directors introduced from outside after the fraud, and Shao Xiaoheng and Zhuang Weiyuan are the independent directors and special committee members. “Majority decision” means that at least five of the eight agreed to ask Lu Zhengyao to resign.
According to people familiar with the matter, some directors believe that it is intolerable to change directors from counterfeiting to initiating temporary shareholders’ meeting, which has caused great damage to their investment in Ruixing and their future market reputation.

Lu Zhengyao’s last fight
Lu Zhengyao’s decision to hold an extraordinary general meeting on July 5 is likely to be related to a case to be heard the next day in the remote British Virgin Islands. If the court makes a judgment against Lu Zhengyao, he will lose control of the company.
According to information on the official website of the Eastern Caribbean Supreme Court, the BVI business court will hear Credit Suisse’s request for the liquidation of Haode investments Inc. and summer fame Limited on July 6. Both institutions hold shares in Ruixing, Haode is controlled by the Lu Zhengyao family and summer fame is controlled by the Qian Zhiya family.
In addition to Haode, there are Primus Investments Fund LP and Mayer Investments Fund LP controlled by Lu Zhengyao’s sister. Haode is registered in the British Virgin Islands and both are registered in the Cayman Islands.
After the listing of Ruixing, Lu Zhengyao and Qian Zhiya pledged a large number of shares to Credit Suisse, Goldman Sachs and other banks, of which Lu Zhengyao pledged about 30% shares held through Haode and Primus, Lu Zhengyao’s sister pledged 100% shares, and Qian Zhiya pledged 86% shares.
Table 1: pledge rate of Lu Zhengyao and Qian Zhiya
Source: sec
Table 2: equity and voting structure of Ruixing company after the judgment of Cayman Court on June 16
Source: sec
Credit Suisse and other borrowers recovered part of the loan through the sale of Pledged Shares after Ruixing’s self disclosure of fraud. However, due to the collapse of Ruixing’s share price, this revenue cannot make up for the loss of the borrower. Borrowers such as Credit Suisse filed separate lawsuits in the British Virgin Islands and the Cayman Islands for the liquidation of the above-mentioned institutions controlled by the Lu Zhengyao family and the chandelier family.
Credit Suisse made the above request on the basis that in the pledge loan agreement, Lu Zhengyao promised to assume full resource for the loan, that is, when the Pledged Shares are not enough to cover the debt, the creditor can recover other properties of the debtor.
On June 16, the Grand Court of the Cayman Islands ruled that several banks, led by Credit Suisse, would be allowed to liquidate the shares held by Primus and Mayer. According to the judgment, on September 10, 2019, Lu Zhengyao obtained a loan of $518 million through equity pledge. The borrower has sold the Pledged Shares since Ruixing’s disclosure, but as of June 1, $324 million of debt remains outstanding. Lu Zhengyao applied for repayment through refinancing, asset sale and other means, but the judge thought that “there is no reasonable reason to show that the arrears can be repaid within a reasonable time”.
It is not clear where Lu Zhengyao will use the above $518 million. There is speculation in the market that he has invested in the baowo automobile project, but there is no evidence to confirm this speculation.
This ruling greatly weakened Lu Zhengyao’s control over Ruixing. According to SEC data, Primus previously held 187 million class B shares, of which 56 million were pledged by Lu Zhengyao. The Cayman Islands court’s decision means Primus will hand over the unencumbered class 131 million B shares for liquidation. Class B shares have 10 times the voting rights of class A shares, but once the ownership is sold, it will automatically convert to class A shares. According to foreign media reports, Lu’s voting rights fell about 25% after losing the ownership of the 131 million shares.
Lu Zhengyao previously held 297 million class B shares through Haode, later pledged 89 million shares, and now has 208 million shares. At present, the 208 million shares hold about 37.2% of the voting rights, Ruixing said in a June 27 announcement. In addition, among the shares held by Qian Zhiya through summer fame, 44 million class B shares have not been pledged, accounting for about 7.9% of the voting rights.
So far, Lu Zhengyao and Qian Zhiya together still have about 45% of the voting rights of Ruixing, higher than other directors. However, if the British Virgin Islands court ruled that creditors such as Credit Suisse would liquidate Haode and summer fame, they would lose their voting rights completely.
According to the analysis of Caijing’s reporters by the people familiar with the matter, the reason why Lu Zhengyao held the shareholders’ meeting the day before the court hearing may be to reorganize the board of directors according to his own ideas before losing the majority voting rights, so as to continue to exert influence after the establishment of the new board of directors.
People familiar with the matter said Lu Zhengyao was not optimistic about his future and wanted to leave as much wealth as possible for his family.
In this regard, Caijing asked Lu Zhengyao for confirmation. As of the time of publication, no reply had been received.
However, even if Li Hui and Liu Erhai withdraw, Dazheng capital and joyful capital, as major shareholders, still have the right to nominate directors for the new board of directors.
At 6 a.m. on June 27, Ruixing coffee issued a statement on its official Weibo account, confirming that the company would suspend trading on NASDAQ on June 29 and make delisting filing. At the same time, the statement said that “more than 4000 stores of Ruixing coffee in China will operate normally, and nearly 30000 employees will continue to provide users with high-quality products and services as always.”