Alibaba and SoftBank-backed China’s biggest mobile device power bank startup Energy Monster has been caught in an ownership dispute which clouds its chances of a Nasdaq debut, already buffeted by new U.S. regulations to delist foreign companies that do not comply with US auditing standards..
Energy Monster has been accused of reneging on a deal to give two Shanghai-based venture capitalists a 3% joint stake in the business. Both VCs are pressing a case through Chinese and US courts again Energy Monster’s Chief Executive, Guangyuan Cai.
Earlier this month, Energy Monster, which rents out charging stations for customers in Chinese restaurants, shopping malls, bars and other public places, filed for an initial public offering (IPO) on Nasdaq.
While it has however not set a date for its $300 million IPO, a discovery filing by Yiming Feng and Sicheng Yin, partners at Atom Venture Capital, in the United States last week described it as “imminent”.
Earlier this year in January, Feng and Yin filed a lawsuit in China stating that they played a critical role in the conception and development of Energy Monster but Cai reneged on the equity transfer promise. In order to bolster their claims, both Feng and Yin applied for and won a U.S. court order authorizing them to obtain information “related to the 3% equity agreement”, from Citigroup Global Markets Inc and Goldman Sachs & Co LLC, the IPO’s underwriters.
The petition document filed in the U.S. District Court for the Southern District of New York said the information “will help (the) petitioners prove their claims in the Chinese litigation.”
“We are very pleased that the Court granted the requested discovery,” said Michael Carlinsky, a managing partner at Quinn Emanuel Urquhart & Sullivan LLP, who represents Feng and Yin.
Energy Monster, Goldman and Citi declined comment.
Cai, who has a 6.6% stake in Energy Monster, did not immediately respond to requests for comments.
Last week the U.S. securities regulator adopted measures which would delist foreign company from U.S. stock exchanges if they do not comply with U.S. audit standards, triggering a sell-off in U.S.-listed Chinese companies.
The legal challenge adds to headwinds for Energy Monster’s IPO.
In its IPO filing, Energy Monster said, “there can be no assurance that Mr. Cai will be able to prevail in the lawsuit or that he will be able to settle the lawsuit on terms favorable to him. An adverse ruling could have a materially adverse effect on our reputation, capital structure, business and financial condition”.
The claim against Energy Monster centres on a 3% stake in Shanghai Zhixiang Technology Co Ltd, which is ultimately controlled by Energy Monster’s listing vehicle, Cayman Islands-registered Smart Share Global Ltd.
In order to skirt regulatory hurdles, Chinese companies, including technology ones, use a variable interest entity (VIE) structure, where an overseas listing vehicle controls onshore operations through contractual agreements.
According to Feng, if he and Yin secure the 3% stake in Shanghai Zhixiang, they could potentially disrupt the VIE structure.
“If the VIE structure is broken, where is the legality of listing?” asked Feng.
According to the IPO filing, with a stake of 16.5%, a unit of Alibaba Group Holding Ltd is the largest shareholder in Energy Monster; SoftBank subsidiaries together hold a stake of 7.7% in the company.