GS Wealth LP (“GS Wealth”) today issued a letter to the shareholders and convertible bondholders of Luckin Coffee Inc. (in Provisional Liquidation) (“Luckin Coffee” or the “Company”) (OTC: LKNCY) in connection with its Extraordinary General Meeting (“EGM”) scheduled to be held on December 11, 2021.
In the letter, GS Wealth expressed concerns that the Board’s proposed amendments to the Articles of Association and the recently adopted Poison Pill will facilitate a process for Centurium Capital to take a controlling stake in Luckin Coffee with close to 60% of the voting power. This voting control would give Centurium Capital the ability to handpick Directors and influence every decision of the Company, without taking into account the minority shareholders’ interests. GS Wealth also noted that with approximately 6% more voting power, Centurium Capital would control two-thirds of the voting power and could unilaterally approve a shareholder resolution take Luckin private.
GS Wealth strongly urges the Company’s shareholders and convertible bondholders to immediately contact the Board to demand that they cancel the EGM and make a full disclosure of Centurium’s attempt to become a controlling shareholder, and the true impact of the proposed amendments.
The full text of the letter is below:
December 3, 2021
Dear Luckin Coffee Shareholders and Convertible Bondholders:
PLEASE READ THIS LETTER BEFORE VOTING OR GIVING VOTING INSTRUCTIONS
AT THE UPCOMING SHAREHOLDER MEETING
I am writing to you on behalf of GS Wealth LP (“GS Wealth”), an investment fund with substantial assets under management. GS Wealth is not a shareholder in Luckin Coffee Inc. (the “Company”), but it has important information for you about the lack of transparency your company has provided about the Poison Pill that it recently adopted and the special meeting of shareholders it has called for December 11, and for which it is currently soliciting your proxies:
On December 16, the High Court of the British Virgin Islands is scheduled to hear important arguments from GS Wealth and Golden Planet (another major investment holding company), on one hand, and Centurium Capital, on the other hand. The purpose of this hearing is for the Court to determine whether to approve a Share Purchase Agreement whereby Centurium Capital, the Company’s largest shareholder, would acquire the Luckin shares held by three Special Purpose Vehicles (“SPVs”) currently in liquidation.
The Background of the Situation
Before the SPVs went into liquidation, they were controlled by Luckin’s founders Charles Lu and Jenny Qian. The Luckin shares held by the SPVs represent approximately 16.5% of the total outstanding shares and approximately 10.5% of the voting power. If the Court approves the Share Purchase Agreement between Centurium Capital and the SPVs, then Centurium Capital will obtain close to 60% of the voting power. This would make Luckin Coffee a controlled company.
GS Wealth and Golden Planet are creditors of the SPVs, and have proposed that the SPVs engage in a process pursuant to a Debt Restructuring Support Agreement (“DRSA”) by which we will exchange the Luckin shares owned by the SPVs for the debt owed to GS Wealth and Golden Planet. The DRSA would enable the SPVs to pay off their debts in full and, as a result, GS Wealth and Golden Planet would obtain most of the Luckin shares that were held by the SPVs, leaving significantly less than 5% of the Luckin shares in the hands of the SPVs (the “Debt Restructuring”).
Centurium Capital is using one of its affiliate companies to attempt to acquire these same Luckin shares. Centurium Capital entered into a Share Purchase Agreement with the liquidators of the SPVs in August 2021 to acquire the shares at a price that can be seen to be a steep discount compared to the shares’ market value. This new agreement follows the private placement with Centurium Capital that was approved by the Board and closed on December 11, which increased its voting power to 48.11%.
The Board Is Seeking to Assist Centurium Capital in its Attempt to Take Voting Control
Ahead of the Court hearing, we are not aware that Luckin has disclosed the existence of the Share Purchase Agreement (the “Centurium SPA”) to shareholders or convertible bondholders or any fact about Centurium Capital’s attempt to acquire those shares, let alone our proposed Debt Restructuring alternative.
If the Centurium SPA is completed, Centurium Capital will hold a controlling stake in Luckin with close to 60% of the voting power. This voting control would give Centurium Capital the ability to handpick Directors and influence every decision of the Company, without taking into account the minority shareholders’ interests. This could potentially damage the value, transferability and liquidity of your interests in Luckin. With approximately 6% more voting power, Centurium Capital would control two-thirds of the voting power and could unilaterally approve a shareholder resolution take Luckin private.
Under the Debt Restructuring, by contrast, GS Wealth and Golden Planet will each hold less than 10% of the economic interests and significantly less than 10% of the voting power, enabling the Company to maintain a more diversified shareholder base, instead of consolidating power to one shareholder.
You should be aware of steps recently taken by Luckin’s Board of Directors, which appear to be aimed at blocking the Debt Restructuring from proceeding, in favour of the Centurium SPA. It is unclear to us why Luckin’s Board has taken these actions. And absent any clear and reasoned response, our only conclusion is that the Board is not acting independently in the best interests of Luckin and all of its shareholders, but is seeking to assist Centurium Capital in its attempt to take voting control of the Company, which is extremely alarming.
Board’s Proposed Amendments and Poison Pill Would Block the Debt Restructuring
In advance of the Extraordinary General Meeting (EGM) scheduled for December 11, the Board has asked shareholders to adopt a series of excessively broad and unnecessary amendments to the Company’s Articles of Association. The Board’s proposed amendments would give it ultimate authority to veto all future transfers of Luckin shares that it does not support. This is a highly unusual step for a widely-held public company, such as Luckin, to take. Despite our repeated requests, the Board has yet to answer our straight-forward questions regarding whether they would refuse to register a transfer to independent third-party financial investors, like us.
We also believe the Board’s Shareholder Rights Plan (the “Poison Pill”) is another attempt to undermine the proposed Debt Restructuring transaction. The Poison Pill was announced on October 14, only hours after the High Court of the BVI’s first hearing, which Luckin’s representatives attended. The Debt Restructuring poses no threat of a hostile takeover or change of control that necessitates the Poison Pill. It involves the opposite scenario: Centurium Capital currently has 48.11% of the voting power, while shares held by the SPVs in total only account for approximately 10.5% of the voting power. The only party that can affect control of Luckin is Centurium Capital.
When the Board announced the Poison Pill, it made no mention of the Centurium SPA, the fact that Centurium Capital is actively trying to become the controlling shareholder or that the Poison Pill does not apply to the Centurium SPA because it was entered into before the Poison Pill was announced. The Poison Pill also contains language that clearly targets the Debt Restructuring or any restructuring of the debts owed by the SPVs.
Poison Pills are supposed to protect the interests of all shareholders by preventing a shareholder or investor from gaining control of the company – they are not supposed to be used to help a single shareholder, like Centurium Capital, to obtain control.
In addition to failing to disclose the true intention of their actions to shareholders and bondholders, the Board appears to have neglected to properly inform the Joint Provisional Liquidators (“JPLs”) of Luckin, who were appointed by the Court in Cayman Islands to oversee Luckin’s management, when it sought their approvals of the Poison Pill and proposed amendments. By not sharing that Centurium Capital was behind the SPA or the steps being taken against the proposed DRSA, the Board deprived the JPLs of critical information.
Ignore the Board’s Red Herring Rationale for the Proposed Amendments and Poison Pill
We believe the Board’s restrictive and one-sided changes go far beyond what is necessary to achieve the purported purpose of preventing Charles Lu and the former management team from affecting control. Under the DRSA, the SPVs would hold substantially less than 5% of the shares, while Centurium Capital would still hold 48.11% of the voting power.
Furthermore, GS Wealth and Golden Planet are creditors of the SPVs and are not affiliated with any of the former management of Luckin. The only relationship that GS Wealth and Golden Planet have with the SPVs’ owners, including Charles Lu and Jenny Qian, is through the Debt Restructuring that we have proposed. Neither entity is seeking a controlling position and do not intend to enter into any agreements with other shareholders.
Protect Your Interests by Demanding the Board Cancel the EGM and Give the Debt Restructuring Due Consideration
As a public company, Luckin’s Board has a responsibility to all of its shareholders. We do not believe that Luckin’s Board should be taking active steps to disrupt the proposed Debt Restructuring transaction in order to benefit or improve the position of a single, large shareholder.
We strongly urge shareholders to immediately contact Luckin’s Board of Directors to demand that they cancel the EGM, make a full disclosure of Centurium Capital’s attempt to become a controlling shareholder, and explain the true impact of the proposed amendments. We also urge shareholders to demand that the Board give fair consideration to the proposed Debt Restructuring as an alternative to handing total control of the Company over to Centurium Capital.
The Board needs to know that you do not support the actions taken to date and require full and proper information disclosure in order to consider the proposed amendments in their proper context. This includes the potential impact on the ability to make transfers to independent third parties and the Board’s proposed power to block any new share transfer as they see fit.
As Luckin gets back to normal, the opportunity to capture future value hangs in the balance. Do not let the Board’s actions unfairly tip the scales against you.
GS Wealth LP
1 Luckin Coffee December 1, 2021 press release: https://investor.luckincoffee.com/news-releases/news-release-details/luckin-coffee-announces-closing-investment-agreement-centurium