Luckin Coffee Seeks To Oust Chairman As Banks Win Debt Ruling

China’s troubled coffee chain Luckin Coffee (LK) is set to hold an extraordinary general meeting for shareholders on July 5, the Wall Street Journal reports.

The company is proposing that shareholders vote out Chairman Charles Lu, as well as directors Sean Shao, David Li and Erhai Liu- and replace them with two independent directors.

LK is desperately trying to rescue its reputation following allegations that Chief Operating Officer Jian Liu, and several employees, fabricated 2.2B yuan ($310 million) in transactions from 2Q-4Q19. Subsequently a special committee was formed to oversee an internal investigation, and both Jian Liu and CEO Jenny Zhiya Qian were fired.

Six employees who “were involved in or had the knowledge of the fabricated transactions” were also suspended or placed on leave. Shares have now plunged an eye-watering 90% year-to-date.

At the same time, banks such as Credit Suisse Group AG have now won court orders in the Cayman Islands to liquidate $63 million in LK stock owned by Chairman Charles Lu, says the Wall Street Journal. The liquidation would slash Lu’s class B shares, which have 10x the voting rights of ordinary shares, by about 25%.

According to the judgment, Lu owes the banks $324 million after defaulting on a margin loan facility. A separate entity controlled by Lu’s sister- which owns 196.88 million class B Luckin shares- was also ordered to wind up.

Unsurprisingly, KeyBanc’s Eric Gonzalez downgraded the Starbucks rival to Hold following the scandal and removed his $56 price target, explaining: “it will take several years for management to repair its credibility.”

Meanwhile Needham analyst Vincent Yu wrote: “all previous financial numbers can no longer be relied upon. Given the ongoing audit investigation process and reduction in visibility into Luckin’s financials, we are suspending our rating.”

In just over two years, Luckin has expanded to over 4,500 stores across China. (See LK stock analysis on TipRanks).

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