Caixin
May 29, 2020 08:18 PM
BUSINESS & TECH

Despite Stalling Tactics, Luckin Likely to Get Thrown Off Wall Street: Experts

A Luckin Coffee shop in Shanghai, May 20. Photo: IC Photo
A Luckin Coffee shop in Shanghai, May 20. Photo: IC Photo

Scandal-wracked former Starbucks challenger Luckin Coffee Inc. is likely to be delisted from the Nasdaq, cutting off a critical funding channel, despite its ongoing delay tactics that could prolong the process for as much as a year, analysts said.

In its brief lifetime, Luckin has become a poster child for both the rapid growth that draws investors to some Chinese startups, as well as the financial shenanigans that sometimes take place at such firms due to looser accounting standards. That history includes a year on the Nasdaq in New York, which could soon come to an end if the stock exchange operator has its way following Luckin’s April disclosure of massive fraud.

Luckin said last week it was notified by the Nasdaq on May 15 that the bourse operator intends to delist the company for two rule violations. It said it planned to request a hearing on the matter, which would typically be convened within 30 days to 45 days of the request.

The request for a hearing, and other legal steps Luckin has taken to counter pending litigation related to its fraud case, are stalling tactics that take advantage of procedural factors, said Shanghai policy lawyer Dong Yizhi. The company may be trying to buy time for its major shareholders to potentially try to transfer assets, or find ways to reduce the penalties against them, Dong said.

Luckin began its brief lifetime as an investor darling, after starting operations less than three years ago with an aim to take on much larger rival Starbucks in China. The company was opening around 100 stores each week at the height of its expansion last year, and ended 2019 by officially surpassing Starbucks in terms of China store count with more than 4,500 locations.

Luckin Chart

But its fortunes took a dramatic turn when it disclosed in early April that nearly half of its revenue in the last three quarters of last year was faked. The company inflated its sales by selling vouchers to companies that were tied to its chairman and controlling shareholder, the Wall Street Journal reported.

Luckin’s shares plunged more than 80% after the fraud was disclosed, prompting the Nasdaq to take the rare step of halting trading in the company’s stock for more than a month. The delisting notification came five days before the company’s shares resumed trading on May 20.

Nasdaq rules dictate that a company must request a hearing within seven days of getting notified of the delisting, as well as the fact that such hearings must be scheduled within 30 days to 45 days. Accordingly, such a hearing should take place in early July at the latest.

The purpose of the hearing is to determine whether there is sufficient evidence to justify the delisting, said Luo Wei, a professor at Peking University’s Guanghua School of Management. The hearing will likely look at whether the company could make the changes necessary to prevent similar fraud from happening again, as well as whether timely reports could be made on progress and results from the company’s ongoing internal investigation, said Zhang Jiannan, head of the capital markets division at Yingke Law Firm.

Luckin has already started making changes, including firing its CEO and COO earlier this month. It also overhauled its board to make sure all of the board’s committees were chaired by an independent director, a source close to the board told Caixin.

But both Luo and Zhang weren’t optimistic that Luckin might win a reprieve after the hearing. “Even if it can be proved that the fraud was the act of an individual, it will be difficult to avoid delisting because the company’s board and other senior executives failed to perform their diligence responsibilities and the company lacks mechanisms to prevent such fraud,” said Zhang.

If the Nasdaq hearing finds against Luckin, the company can still appeal to the Nasdaq’s board to retain its listing. The entire process could take several months to exhaust all avenues of appeal, and Zhang said it typically takes six months to a year from the time of notification for such a forced delisting to occur.

Contact reporter Yang Ge (geyang@caixin.com) and editor Gavin Cross (gavincross@caixin.com)

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