What led to Luckin Coffee Inc – ADR (NASDAQ: LK) stock fall

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Luckin Coffee Inc – ADR (NASDAQ: LK) stock plunged 16.75%  on June 22nd, 2020 (Source: Google finance) after there is report that banks including Credit Suisse Group AG had extended margin loans to Luckin chairman Charles Lu have sued and won the right to sell tens of millions of dollars’ worth of Luckin stock owned by the chairman to collect money he owes them. In this development the chairman’s control would weaken his control over the company as a crucial shareholder vote looms. Luckin’s chairman owes $324 million to the banks, which had now become due after he had defaulted on his margin loan facility. To collect part of the money owed, courts have ordered that 131.25 million Luckin shares in China held by Primus Investments Fund LP, an entity controlled by Lu’s family trust, is of worth of about $63 million based on the recent $3.82 closing price of Luckin’s American Depositary Shares, be transferred within two business days to accounting firm KPMG for liquidation.

Further, Mayer Investments Fund LP, which is an entity controlled by Suying Wong, Lu’s sister, was also ordered to be wound up. Mayer is an owner of 196.88 million class B shares of Luckin, all of which have been pledged to secure a loan, according to a Luckin filing. This means that another 196.88 million Chinese shares of now worth about $126 million will also get liquidated in repayment of a loan.

Meanwhile, Lu and his family are the largest shareholders in Luckin and own class B shares that carry extra voting rights. Lu had controlled approximately 36.8% of Luckin’s voting rights as of March this year, according to the company’s regulatory filings. The liquidation is projected to reduce the number of class B shares he holds by about a quarter. Such shares have 10 times the voting rights of Luckin’s ordinary shares.

Moreover, the lenders, including Morgan Stanley, Goldman Sachs Group and Barclays Bank PLC have also filed a winding-up petition in the British Virgin Islands against Haode Investment Inc., another entity held by the Lu Family Trust.

Additionally, this morning Luckin has planned to hold a special meeting of shareholders on July 5, at which it is likely the chairman will be voted out of office, alongside at least three of the company’s other directors. Therefore, once removed from the company, these directors will also see little sense in retaining any Luckin shares they own, which added to the selling pressure.

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