Luckin Coffee’s Chairman Finally Ousted By Shareholders- Report

Luckin Coffee’s (LKNCY) chairman, Charles Zhengyao Lu, has been voted out from the troubled coffee chain by shareholders, according to local media reports from 21st Century Business Herald and Sina.

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The news comes just days after Lu survived attempts by directors to terminate his employment at the company’s recent board meeting. The proposal to oust him failed to gain the required two-thirds approval from the board.

According to reports, three board directors including Sean Shao were also removed at the Beijing extraordinary shareholders meeting, while Ying Zeng and Jie Yang were voted in as independent board directors.

Earlier this month, Luckin Coffee Inc announced that its Special Committee of the Board of Directors found that the fabrication of transactions began in April 2019. The Board also resolved to require Lu to resign as director and chairman.

According to the investigation, the company’s net revenue in 2019 was inflated by approximately RMB 2.12 billion (with RMB 0.25 billion in the second quarter, RMB 0.70 billion in the third quarter, and RMB 1.17 billion in the fourth quarter).

Meanwhile Luckin’s costs and expenses were inflated by RMB 1.34 billion in 2019 (consisting of RMB 0.15 billion in the second quarter, RMB 0.52 billion in the third quarter, and RMB 0.67 billion in the fourth quarter).

Former CEO, Jenny Zhiya Qian, former COO, Jian Liu and certain employees reporting to them participated in the fabricated transactions, the committee stated, adding that the funds were funneled via third parties.

Formed on March 19, 2020 the Special Committee and its advisors reviewed over 550,000 documents collected from over 60 custodians, interviewed over 60 witnesses, and performed extensive forensic accounting and data analytics testing.

Following the Special Committee’s recommendations, the Board of Directors terminated the employment of the CEO and COO.

To prevent further fraud, the company has now “implemented several immediate enhancements to its finance functions and engaged an internal controls consultant to evaluate the existing controls environment and recommend enhancements.”

Shares in Luckin Coffee have plunged by a staggering 94% year-to-date. 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 LKNCY stock analysis on TipRanks).