Luckin Coffee chairman faces second ouster effort after surviving first

Luckin Coffee is now under investigation by Chinese and US regulators for fabricated transactions. PHOTO: AFP

SHANGHAI (BLOOMBERG) - Luckin Coffee's chairman Charles Lu Zhengyao is facing a second attempt at ousting him from the scandal-plagued company days after surviving an effort by some directors to strip him of control.

A proposal to remove Mr Lu from the coffee chain he founded wasn't approved by the required two-thirds of the directors present at a special meeting on Thursday (July 2), Luckin said in a statement.

But the reprieve is only temporary as an extraordinary general meeting scheduled for Sunday in Beijing will see shareholders vote on eight resolutions, including one to remove Mr Lu as a director. According to Luckin's articles of association, a director can be removed by shareholders or other board directors.

The ongoing public tussle for control is a sign that the company won't easily be able to move past an accounting scandal that's made its stock worthless. Once considered among China's brightest growth stories, the chain is now under investigation by Chinese and US regulators for fabricated transactions.

The company said earlier this week its internal investigation concluded that net revenue last year was inflated by about 2.12 billion yuan (S$418.5 million) while costs and expenses were boosted by 1.34 billion yuan. After the conclusion of the investigation, a majority of directors had requested Mr Lu's resignation, the statement said.

Luckin's fall has ensnared banks including Credit Suisse Group and Morgan Stanley as they face a US$300 million (S$418.4 million) shortfall on margin loans made to Mr Lu. The scandal is also a black eye for China Inc as the US Congress moves closer to passing legislation that could bar Chinese companies from trading on US stock exchanges.

Mr Luckin said it would fire a dozen workers and discipline 15 others following the internal investigation. It already dismissed CEO Jenny Zhiya Qian, COO Jian Liu and some employees who reported to them in May after uncovering the scheme that funneled funds to the company from several third parties with links to the participants. The board said it fired the executives based on evidence showing their participation in the false transactions.


The board had sought Mr Lu's removal on the recommendation of a special committee based on its investigation, and an assessment of Mr Lu's cooperation in the internal investigation, according to Wednesday's statement.

Now that the effort has failed, all eyes are on Sunday's extraordinary general meeting, where shareholders will also vote on resolutions to remove at least three other directors besides Mr Lu, and appoint two independent directors.

Mr Lu became a billionaire after his fast-growing Chinese chain went public in the US, but much of his wealth was wiped out by the plunge in Luckin's stock. Mr Lu last month resigned as chairman of Car Inc, China's biggest rental-car fleet operator, as scrutiny increased over Luckin and the accounting scandal.

Luckin, founded in 2017, raised US$645 million in its US IPO last year and counted BlackRock, the world's largest find manager,and Singapore sovereign wealth fund GIC among its backers. It took direct aim at Starbucks in China, with a strategy to open more stores in two years than the Seattle-based heavyweight has in two decades.

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