Fugitive Leshi Founder Offers Compensation to Stockholders

Embattled Chinese entrepreneur Jia Yueting pledged to compensate his company’s shareholders in China after completion of his personal bankruptcy case in the U.S., he said Thursday in a public letter.

Jia, the fugitive founder of once high-flying tech conglomerate LeEco and U.S.-based electric-car startup Faraday Future, filed for Chapter 11 bankruptcy in October in the U.S. state of Delaware. He listed personal net debt of around $2 billion claimed by 154 creditors, according to court filings. The bankruptcy process ended June 26, Jia said in the letter posted on social media.

A creditor trust was established with his equity interests and earning rights in Faraday to compensate creditors, mainly Chinese institutions, Jia said. The entrepreneur will hold 10% of the credit trust assets for future compensation to shareholders of Leshi Internet Information & Technology Corp., he said.

Stockholders of Leshi, the Shenzhen-listed arm of LeEco, were unable to take part in the American restructuring process. Jia said compensation to shareholders will begin after completion of legal procedures. Leshi’s market value has mostly evaporated amid the company’s financial turmoil, declining from 170 billion yuan ($24 billion) at its peak to around 1 billion yuan. As of June, about 280,000 stockholders still held Leshi shares.

But legal experts said Jia’s proposal might not be feasible under Chinese law. Leshi said in a regulatory filing Thursday that it had not heard from Jia regarding a compensation plan or a related arrangement. It was unable to verify whether shareholders would be compensated, Leshi said.

Leshi has been crippled by the founder’s debt woes since 2016. The company posted a net loss of 11.2 billion yuan in 2019 after writing down 9.8 billion yuan for debt losses due to previous deals related to Jia and LeEco. Leshi entered a delisting transitional period June 5 after failing to turn its financials around and is set to be dropped from the Shenzhen bourse this month.

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Jia built LeEco from a video-streaming site to a technology conglomerate and later expanded into electric car making. But the company was hit with a cash crunch after years of aggressive expansion. Jia fled China to the U.S. to develop Faraday and has not returned since the summer of 2017, leaving behind 11.9 billion yuan ($1.7 billion) of debts. Jia was blacklisted as a debt defaulter by a Chinese court.

Before the bankruptcy, Jia held 33% of Faraday, which has produced only a small number of test models. He stepped down as Faraday’s CEO in September but remained as the company’s chief product and user officer. Jia said in the public letter that Faraday’s business is going well and the company is advancing an initial public offering plan, without giving details.

According to the U.S. bankruptcy ruling, creditors tapping compensation will give up any legal actions against Jia and his wife — who are in the middle of a divorce — for their personal responsibility for debts.

China’s securities regulator launched an investigation in April 2019 of Jia and Leshi over alleged violations on information disclosure. The regulator hasn’t released any conclusion from the probe, but if any violation is confirmed, domestic investors will be entitled to sue the company and Jia.

Xu Shengfeng, a bankruptcy law expert at the Renmin University in Beijing, said Jia’s proposal to compensate domestic shareholders still needs to be validated by a Chinese court. But so far there is no precedent for China to recognize a bankruptcy ruling in the U.S., Xu said.

If the proposal is rejected by Chinese courts and if the regulatory investigation proves Jia’s violations, Jia will face lawsuits by domestic investors and bear lifelong responsibility to repay the debts, said Zang Xiaoli, a lawyer at Yingke Law Firm in Beijing.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com)