Luckin Coffee, the coffee chain dubbed as China’s Starbucks, has been asked by some shareholders to reverse some of its boardroom changes in July following the ouster of its co-founder and chairman, as Chinese regulators prepare to clamp down on accounting fraud.

Hong Kong-based Centurium Capital is seeking to reinstate Sean Shao as a director and remove Jie Yang and Ying Zhen as independent directors, the company said in US exchange filings on Monday. These would undo the changes that took place at a shareholders’ meeting on July 5.

The two independent directors, however, have resigned from the board with immediate effect, Luckin said in a separate filing. The duo were both reported by local Chinese media to be the nominees Haode Investment, the family trust of co-founder Charles Lu Zhengyao. Lu was separately removed as chairman at a board meeting on July 12.

Luckin has called for an extraordinary general meeting in Beijing on September 2 to consider Centurium Capital’s request. After the two resignations, however, it will thus ask shareholders to vote only on Shao’s reappointment, it said.

The special meeting was requisitioned on July 30 by Centurium Capital on behalf of its units Lucky Cup Holdings and Fortunate Cup Holdings. Centurium Capital is ultimately controlled by investor Li Hui, who was last reported to own 11.7 per cent of voting power in Luckin, according to its IPO prospectus.

Charles Lu Zhengyao, co-founder and former chairman of Luckin Coffee. Photo: Handout alt=Charles Lu Zhengyao, co-founder and former chairman of Luckin Coffee. Photo: Handout

The circumstances around the July 5 meeting “caused concerns over the independence of the directors” nominated by Haode and elected then, Centurium said. The reinstatement of Shao will allow for the board to fully implement the remedial measures recommended by a special investigation committee, it added.

Shao was the chairman of the special committee probing the accounting scandal, which first surfaced in April. The committee discovered that some key executives fabricated about 2.12 billion yuan (US$300 million) of sales in 2019, a scandal that erased more than US$11 billion of its market value within three months.

The fraud prompted China’s Ministry of Finance to delve into the matter. It corroborated the findings and promised punitive action against the perpetrators.

Beijing watchdogs to punish Luckin Coffee, related firms after accounting scandal

Separately, the State Administration for Market Regulation has said it was taking steps to punish Luckin Coffee and related companies for their misconduct in violating fair competition, and to protect consumers and the market.

China has since taken other steps to protect investors by unveiling a historic legal reform. For the first time, It will allow small investors to file class action lawsuits against a defendant for corporate malfeasance, such as fraud or stock price manipulation, the Supreme Court decided last week.

Luckin, based in Xiamen in Fujian province, has since fired its chief executive, Jenny Qian Zhiya, and chief operating officer, Liu Jian, among others, for the scandal. The company is also being delisted from Nasdaq, burning investors less than 15 months after its May 2019 debut.

Luckin Coffee appoints liquidators, financial advisers to restructure and salvage business after scandal

Lu is said to have lost control of Haode Investment after a court in the British Virgin Islands granted on July 9 an application by banks to wind up his family trust and liquidate its assets, The Wall Street Journal reported on July 14.

Luckin called in provisional liquidators and external financial advisers in the middle of last month to oversee a corporate restructuring and negotiate with creditors to salvage its business.

“We understand that the company has been placed into provisional liquidation to restructure its debt position,” Centurium said in its notice to Luckin Coffee.

“It is therefore even more important that the bona fides and ability to exercise independent judgment on the part of the directors be certain and there be no doubt that the directors will duly fulfil their fiduciary duties.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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