Luckin Coffee founder and chairman Charles Zhengyao Lu has been ousted by shareholders at the scandal-hit Chinese coffee chain, just days after a proposal to unseat him failed to win board approval.
Three other directors, including two major investors in the company and Sean Shao, head of a special committee investigating the accounting fraud at the group, were also removed from the board while two independent directors were added at an extraordinary meeting in Beijing on Sunday.
The shake-up is the latest twist in the Luckin saga after Nasdaq last month delisted the company, known as China’s answer to Starbucks. That followed an earlier disclosure that the chain had fabricated Rmb2.2bn ($313m) in sales last year, equivalent to three-quarters of the sales for the nine months the fraud covered. Luckin went from launch to a New York listing in just 18 months, disclosing the falsified accounting in April, less than a year after its market debut when it raised $695m.
The revenue scandal has prompted a backlash against US-listed Chinese companies, with the US Congress passing bills in May to strengthen disclosure requirements for foreign groups. Multiple Chinese regulators are also investigating the Luckin fraud, in part at the request of the US Securities and Exchange Commission.
Also ousted were David Li, founder of Centurium Capital, and Liu Erhai, founder of Joy Capital, significant early investors in Luckin who have said they knew nothing about the falsified sales. Mr Li led early capital raising rounds for the coffee chain and pulled all his firm’s money out of Luckin in January, when the company raised $865m.
The board reshuffle left many stock market investors convinced that Mr Lu, who is widely suspected of involvement the fraud, was still exercising control from behind the scenes. “He initiated the meeting knowing that he would be asked to resign,” said one person close to the internal probe on Monday.
A lawyer representing Luckin minority investors claimed Mr Lu had rigged the shareholder meeting in his favour. Half of the remaining six-person board are current Luckin executives that stand by the former chairman.
Mr Lu also played an active role in picking the two new independent directors, including a university professor and a law firm partner, who may be unlikely to challenge his decisions.
Charles Zhengyao Lu, front left, and Jenny Zhiya Qian, second from the right, at Luckin’s New York debut last year © REUTERS
Mr Lu and Jenny Zhiya Qian, his confidant and former Luckin chief executive who was ousted in May, still control about 45 per cent of the voting rights of the group, far more than other shareholders. That allows the former chairman to wield significant influence over the company despite his departure, the lawyer said.
“There is no way the board could challenge the will of major shareholders,” the lawyer added.
Mr Lu survived an earlier attempt to oust him after a board meeting last week failed to reach a two-thirds majority that was needed to dismiss him.
Luckin last week concluded an internal investigation into the scandal. The company accused executives, including the former chief executive and chief operating officer, and other employees of falsifying sales figures, but stopped short of mentioning Mr Lu.
Creditors are pursuing Mr Lu and Ms Qian, who put up sizeable holdings of their shares as collateral for loans worth $324m. A group led by Credit Suisse recently filed a lawsuit, requesting a liquidation of two offshore vehicles that own shares in Luckin and are controlled by Mr Lu and Ms Qian. The lawyer said Mr Lu could be completely sidelined if his shares were liquidated.
“That could lead to another reshuffle of the board,” said the lawyer.
Luckin declined to comment.