After the litigants settled for $300 million, Renren's stock price soared due to false hopes

Shares of Renren(NYSE: RENN) surged 45 percent in early trading on Friday as news came that the company's lawsuit ended in a settlement of $300 million or more. Investors please note that the plaintiff's victory should not be misinterpreted as a signal that the business of Renren Network will improve.

Litigation firm Reid Collins & Tsai LLP announced today that in the 2019 lawsuit brought by Renren against its controlling shareholder, including Chairman and CEO Chen Yizhou, Renren's minority shareholders will settle it with a rare settlement agreement that exceeds the amount of compensation requested. The company called the result "a precedent case law to protect investors."

lawsuit

The plaintiffs in this case are Heng Ren Silk Road Investments LLC, Oasis Investments II Master Fund Ltd and Jodi Arama. In addition to co-founder Chen Yizhou, the defendants included CoO Liu Jian, former director Keren Zhao and his investment fund, Renren's financial advisers Duff & Phelps LLC and Oak Pacific Investment (OPI). The lawsuit alleges executives violating fiduciary duties by using the company's funds for personal investment purposes, Duff & Phelps provided help in the process, and OPI received the funds.

As stated in a derivative lawsuit filed in March 2019, executives turned the company into a venture capital fund as Renren's social networking business became unpopular. Its IPO was funded by a fintech startup, Social Financial, Inc., in which Chen holds a personal interest. The complaint alleges that another shareholder, SoftBank, supports the transition. In addition, Chen used Renren's IPO proceeds and returns to make several other investments that were not related to the failed social networking platform. In the early popular period of Renren, Renren was likened to Facebook.

While these investments could bring profits, Renren's shareholders did not have access to information about the portfolio, and Renren's shares continued to depreciate as its operating businesses experienced growing losses. In 2015, Chen Yizhou tried to privatize Renren's outstanding shares at a "low offer," angering shareholders, the complaint said.

So Chen, Zhao, and Liu took a different path. They set up OPI as a subsidiary and transferred Renren's profitable portfolio to it. They then arranged for OPI to be spun off into private holdings, offering "unfair" cash dividends to Renren investors or offering OPI's shares on uncontrolling "disadvantages." The plaintiffs say executives also grossly underestimated OPI, valuing it at $500 million — while Renren alone owns nearly $600 million worth of social finance companies. Taking into account other portfolio companies, the plaintiffs estimate that OPI's long-term investment is worth at least $1 billion. Renren and its investors lost millions of dollars in the deal — a plan that was made public and forebes called "Chen stealing SoFi shares."

In May 2020, New York State Supreme Court Justice Andrew Borrok vetoed the defendants' motion to dismiss the case and went on to argue that any rebuttal was unconvincing, JD Supra reported. The court further upheld the plaintiffs, saying in March 2021 that they "fully defended" the defendants for "committing fraud at the expense of the company for personal gain".

Reid Collins & Tsai said in today's press release: "Gaining jurisdiction over these foreign defendants is not a small task, but qualifying for derivative litigation is an even greater achievement."

Peter Halsworth, founder and manager of plaintiff Hengrun, commented: "This is an important message from U.S. investors to Chinese companies. U.S. shareholders will be fighting the original deals of bad actors from China on our stock market. ”

Dying shell companies

After the news of the settlement, Renren shares were quoted at $24.30 per share at noon on Friday. Over the past month, its stock price has more than doubled from $11 a share. But this seems to be a gross overestimation of false hopes. In the past few years, Renren's business has either failed or been spun off. The company, which raised more than $777 million in its 2011 initial public offering (IPO), had to make several reverse splits in response to warnings on the NYSE that it was trading below $1 per share. And its announcement today does not provide plans for a commercial recovery.

In 2020, Renren appointed several new CHIEF Financial Officers and hired new auditors, Marcum Bernstein & Pinchuk LLP. Last month, Renren named a new chief financial officer, Chris Palmer. Palmer previously served as Vice President of Finance for Twist Bioscience and Chief Financial Officer at Telewardde, and held general management roles at Intel Corporation.

Renren no longer controls the failed social networking platform Renren.com to Beijing Duoniu Interactive Media Co., Ltd. for $60 million at the end of 2018. Although Yizhou found a new home through the sale as a social platform, he and COO Liu Jian are both shareholders of Beijing Duoniu Media.

According to the company's filing documents, OPI ceased to be a subsidiary of Renren in June 2018.

In filing with the SEC, Renren attributed most of its revenue since 2017 to Happy Auto (Nasdaq: KXIN), a used car trading market that listed on the NASDAQ in 2019 through a reverse merger. At the same time, Happy Motors also recently exited its holding company. At the end of 2020, Renren said that Happy Auto reached a merger agreement with the auto market Haitaoche, which triggered some "investors be careful" media reports.

According to the agreement, Happy Auto will exchange 51% of the shares for 100% of the shares of Haitao Car, while Renren retains 33.8% of the non-voting shares of Happy Motors. Earlier this year, however, Happy Motors received another $6 million investment from Renren to delve into the electric vehicle and RV markets.

In April, Happy Motors said it had received nasdaq approval for its merger deal with Haitao, and soon after, Happy Motors Chairman Chen Yizhou resigned. On June 25, the merger was completed; Happy Auto is now led by Lin Mingjun, the founder of HaitaoChe.

Renren wrote in its annual report: "Although we have excluded Happy Auto from its operating performance, due to our remaining investment in Happy Auto, our operating results may continue to be significantly negatively affected by Happy Auto's financial and operating results."

Renren's annual report shows that the company's revenue was $18.2 million in 2020, $66.8 million in 2018 and $15.1 million in 2019. Overall net loss narrowed from $107.5 million in 2019 to $22.1 million in 2020, which was the reason for Happy Motors' suspension of production. Losses from continuing operations narrowed from $38.4 million in 2019 to $16.8 million in 2020.

Renren currently has several SaaS businesses in the United States. These include the real estate platform Chime and the Trucker Path app. Geologic Farming, another U.S. real estate platform acquired by Renren in 2017, was discontinued in 2020. Renren has not yet reported its financial position for the first half of 2021.