Renren Inc. (RENN) - Hearing on the Order to Show Cause.

A Hearing on the Order to Show Cause as to why Oak Pacific Investment (“OPI”) should not be restrained from Disposing (or any other related activity) of Social Finance, Inc. (“SoFi”) shares is currently scheduled to be held on Friday, May 14, 2021 at 9:30 AM ET in the Case of: “In Re RenRen, Inc. Derivative Litigation” (Case #653594/2018 in the Supreme Court for the State of New York).  This email provides an overview of this Case and a brief summary of the arguments we expect to hear during this upcoming Hearing.  Please note that we currently plan on virtually attending this Hearing and distributing any updates that we believe may be relevant to the share price of Renren Inc. (RENN).    

The Plaintiffs in this Case (which includes Hedge Funds Heng Ren Silk Road Investments LLC and Oasis Investments II Master Fund Ltd) filed this Derivative Complaint on behalf of Renren Inc. (RENN) on March 7, 2019 in the Supreme Court of the State of New York.  In their Complaint, the Plaintiffs allege that Renren’s CEO, Joseph Chen, (along with other Defendants) fraudulently stripped assets away from Renren in a transaction that was far below fair value.  This transaction included assets in Social Finance, Inc. (“SoFi”) – which is scheduled to potentially start trading via a SPAC merger (Ticker: IPOE) on June 1, 2021 (according to the Company’s TWEET).  

More details on the history of Renren and this Case are provided below; however, it is worth noting in advance that we currently believe that this upcoming Hearing has the potential to be a significant share-price catalyst for Renren Inc. (RENN).  In its Motion, the Plaintiffs seek an Injunction preventing the Defendants from further transferring away shares of SoFi held by Oak Pacific Investment during the pendency of this Case.  The Defendants argue that a transfer of shares makes a recovery and return of these shares to Renren much more difficult.  

According to the Plaintiff’s Amended Complaint, Joseph Chen purchased a Chinese social-media business in 2006 called Xiaonei and renamed it Renren following the Chinese government’s decision to block Facebook in China in 2009.  Renren (which means “everyone” in Chinese) quickly became incredibly popular, and raised $777 million from its IPO in May 2011 (Renren also raised additional funding bringing its proceeds to $985 million).  Soon after its IPO, Renren’s popularity started to decrease, and by 2014, it was termed the “MySpace of China.”  Following the failure of its Social-Media Business, Chen transformed Renren into a Venture Capital firm and began using the proceeds from its 2011 IPO for investments.  The Plaintiffs write the following in their Amended Complaint (but please note that it appears that Renren’s investment activity increased beyond what is listed below):

                “According to the FY 2015 Annual Report, proceeds from the IPO were used for the following:

• “US$79.8 million in the acquisition of 56.com”

• “US$118.4 million for an equity investment in Social Finance, Inc.;”

• “US$26.6 million for a long-term investment in Mapbar Technology Limited;”

• “US$80.0 million for a long-term investment in Japan Macro Opportunities Offshore Partners, LP;”

• “US$32.1 million for a property purchased in Shanghai;”

• “US$35.0 million for an investment in shares and warrants issued by Snowball Finance Inc.;”

• “US$17.2 million and US$10.0 million for equity investment in Rise Companies Corp. and Fundrise, L.P. respectively;”

• “US$18.1 million for an investment in Eall Technology Limited;” and

• “US$12.4 million for an equity investment in Koolray Vision Inc.”

It is worth noting that Renren’s investment in SoFi appears to have been made in 2012, which was following Chen’s personal investment of $4 million in 2011.  Chen became one of SoFi’s Directors following this initial investment (note that the Plaintiffs indicate that Chen was a Board Member of multiple of the companies Renren invested in).  Renren then made additional investments in SoFi (the Plaintiffs refer to Renren as a funding vehicle for SoFi), with a total investment of $242.1 million between 2012 and 2015.  According to the Amended Complaint, this amounts to a 21.06% ownership in SoFi.

Then in 2015, Chen attempted to buyout Renren shareholders in an effort to take the company private at an offered price of $4.20 per American Depository Share (ADS) or $1.40 per share.  The Plaintiffs argue that this offer took advantage of Chen’s inside information given his position in most of the Companies that Renren invested in by offering a “lowball” price that didn’t account for the true value of Renren’s investment portfolio.  The Plaintiffs write that this offer enraged shareholders, and they include the following section of a letter dated June 24, 2015 authored by two stockholders:

“$4.20 per ADS offer by Chen and Liu ($1.428 Billion valuation on roughly 340MM ADS outstanding) is offensive and ludicrous. In fact, when utilizing information available in the public domain, one could reasonably and realistically value Renren’s SoFi stake alone, exclusive of the aforementioned assets, at $1 B when it hits the public markets.” 

Chen later abandoned this original take private offer; however, on September 30, 2016, Renren announced a plan to spin-off a new company called “Oak Pacific Investments” (OPI) and then transfer Renren’s investment portfolio to this newly created company.  The Plaintiffs allege that Duff & Phelps (which was hired to provide a valuation analysis) valued the assets that were transferred between $676 to $775 million, which is far below the over $1 billion estimate the plaintiffs argue is fair.  With regards to a valuation of SoFi at the time of the transfer, the Plaintiffs estimate a SoFi value on its own of between $581.3 and $615 million - this is in contrast to the value of $269 million to $328 million (or between $7.75 and $9.45 a share) that was estimated during the transfer.  In consideration of this valuation, shareholders of Renren at the time of the transfer were given a choice: 1) take a special cash dividend based on the valuation that the Plaintiffs allege was undervalued; or 2) Accredited Investors meeting certain criteria could receive a private offering of shares in OPI.  The Plaintiffs argue that most Renren shareholders at the time were only eligible for the cash dividend.  The Plaintiffs add that “… the Offering Circular warned that because of the sizeable stakes in OPI held by Chen, Renren COO Liu, and Softbank, participating stockholders would “have no power to change the composition of the board of directors” and that Chen and Softbank could unilaterally “revise [OPI’s] articles of association” without any stockholder vote. And because OPI was a private company, participating stockholders could expect far less information about the status of the investment portfolio and had far fewer means of protecting themselves from any future self-interested transactions.”  In sum, the plaintiffs allege that Duff & Phelps provided a flawed valuation, which assisted a conflicted special committee in approving the spin-off at an unfair value, resulting in a breach of its Fiduciary Duties. 

It is worth noting that the Plaintiffs allege that SoftBank also played a role in the transaction that stripped away assets from Renren.  In the Amended Complaint, the Plaintiffs write:

“… each of the SoftBank Defendants played a pivotal role in enabling the Cash Dividend and, in turn, the scheme as a whole. SoftBank Group gave its consent and approval to Renren’s April 2017 tender offer of SoFi stock that raised $91.9 million to facilitate the Cash Dividend, and thereafter SoftBank Group consented to and approved the Cash Dividend, Separation, and interrelated transactions. SoftBank PPC pre-committed to participate in the Private Placement and waive the Cash Dividend. Had it not done so, Renren could not have funded the Cash Dividend, and the Transaction could not have been implemented. SoftBank GCL provided the SoftBank Loan, earmarking $25 million of the proceeds to help pay the Cash Dividend. In short, without the SoftBank Defendants’ “consent and cooperation” and provision of such substantial assistance, the overall Transaction could not have been implemented. … The Special Committee was fully aware of the SoftBank Defendants’ perspective. Indeed, the Special Committee’s determination of the OPI Value was influenced not just by the $500 million price target set by Chen (with the backing of SoftBank GCL and Liu) in 2016, but also by the infeasibility of paying a higher cash dividend (due to SoftBank GCL’s refusal to provide any additional funding). Moreover, the Special Committee was aware that SoftBank Group’s approval was required for the Separation and related transactions. Thus, the SoftBank Defendants’ influence over the Special Committee’s process helped ensure that the Special Committee would merely rubber stamp the $500 million price target for the OPI Value set by Chen (with SoftBank GCL’s backing) in 2016.” (Emphasis added).

The Plaintiffs further allege that since this Litigation has begun, OPI has fraudulently began transferring many of its SoFi shares away in an attempt to complicate the judgment and extract as much value out as they can for themselves.  Specifically, the Plaintiffs argue that the Defendants (in a complicated transaction) gave SoFi Call Options for 17 million SoFi shares with an exercise price of $8.80 per share.  This appeared to be a way to replace the “Everbright Loan,” and effectively removed strict guidelines included in this Loan that prevented OPI’s ability to transfer shares and extract value.  The Plaintiffs primarily seek compensatory damages and a restitution of the assets that were stripped from Renren.

Prior to answering the Complaint, the Defendants filed a Motion to Dismiss, which the Court Denied on May 20, 2020.  Although this was an early-stage Motion to Dismiss, it may be important to highlight the following paragraph from the Judge’s Decision on the Motion:

“The allegations of deliberate and dishonest breaches of duty of the Director Defendants and DCM Defendants leap off the pages of the Amended Complaint, including, without limitation: (i) they raised $777 million in an IPO and deployed that capital in violation of the underlying agreements by making significant investments in other companies and funds, including sizable investments in SoFi, (ii) the Director Defendants were conflicted as they were also directors of and investors in SoFi, (iii) having had their going private transaction rejected, they structured a transaction (a) that allowed them to strip all of the valuable assets out of Renren for a song, (b) limited the eligibility of minority shareholders to participate so as to freeze them out, (c) put together a Special Committee of unqualified or conflicted directors to approve the Transaction, (d) had Duff & Phelps put together a valuation which had a cash dividend price at the price originally offered in the going private transaction that had been rebuked and (e) diluted the few that could participate through a Share Incentive Plan allocating extra shares to themselves. Put another way, the argument that there are insufficient allegations that the Director Defendants and the DCM Defendants derived a personal benefit at the expense of Renren’s minority shareholders is simply wrong. The Amended Complaint specifically alleges that they pre-committed to the Separation and in exchange, they increased their effective ownership in Renren’s investment portfolio, received the rights to receive special distributions of SoFi shares, plus an additional distribution of SoFi shares from OPI after the SoftBank Loan is repaid, and Mr. Chao personally received restricted OPI shares and options that minority shareholders did not receive through the Share Incentive Plan that he voted to approve (Amend. Compl., ¶¶ 10, 101, 185-189).” (Emphasis added).

Following this Order on the Motion to Dismiss, the Plaintiffs filed a Motion for an Order to Show Cause on April 13, 2021.  In its Memorandum in Support of this Motion, the Plaintiffs argue for a Preliminary Injunction preventing the transfer of any SoFi shares following the conclusion of the SoFi SPAC merger, or for a Prejudgment Attachment of the SoFi shares held by Oak Pacific Investments.  According to the Plaintiffs, Oak Pacific Investments transferred over half of the shares of SoFi it held following the filing of this Case.  The Plaintiffs argue that these 22 million shares that were transferred would be worth approximately $400 million if they were still held by Renren.  In an effort to curb these transfers and ensure that the Court has the ability (if awarded) to return these assets back to Renren, the Plaintiffs seek and injunction preventing a transfer without notice to the Plaintiffs and/or a court order allowing the transfer.  These transfers appear to have been conducted during the pendency of this litigation and includes the call option transfer discussed above and also includes personal share sales from Chen.  The Plaintiffs summarize why they believe a Permanent Injunction is necessary below:

“First, the threat of irreparable harm is high because if OPI transfers its remaining SoFi shares, the Court will be unable to rescind the Separation or impose a constructive trust over and ultimately return to Renren the assets that were taken from it. There are now no contractual restraints that can check Chen from causing OPI to engage in self-dealing transactions or transferring Renren’s assets beyond the Court’s reach. Given that OPI’s shareholder agreement requires it to liquidate its SoFi shares as quickly as possible, there is a high likelihood of imminent irreparable harm. Injunctive relief or attachment is necessary to maintain the status quo and hold OPI accountable.

Second, Plaintiffs’ claims in their Amended and Supplemental Complaint (the “ASC”) relating to the Separation and the Call Option Transfer have substantial merit. Admissions in publicly filed documents show Chen’s self-dealing and flagrant breaches of his fiduciary duties in the Separation and OPI’s knowing receipt of Renren’s assets. Moreover, the Call Option Transfer brims with badges of fraud—among them, the fact that the transfer occurred during litigation that seeks the return of the very shares transferred away.

Third, the equities strongly support injunctive relief because Plaintiffs only seek to maintain the status quo and prevent the dissipation of the assets at issue for less than fair value. OPI will suffer no prejudice if it must hold rapidly appreciating SoFi stock pending the resolution of this dispute, or if it must prove that any proposed transactions are above-board, at fair prices, and negotiated transparently. …”

The Court granted this Motion for an Order to Show Cause (D.E. 443) on April 15, 2021 and set a Hearing on the matter for May 14, 2021 at 9:30 AM ET.  Oak Pacific Investments then filed a Brief in Opposition to a Preliminary Injunction, and Joseph Chen then filed an Affidavit in Opposition to the Motion on April 30, 2021.  Please note that Joseph Chen (along with other Defendants) filed their Answers to the Complaint on May 6, 2021; however, Mr. Chen’s Affidavit in Opposition provides the best look into his side of the story.  In his Affidavit, Joseph Chen begins by discussing Investments made using IPO proceeds.  He indicates the initial goal was to identify promising startups that Renren may have been able to integrate into its operating business.  His Decision to attempt to take Renren private related to these initial investments, as (according to the Affidavit) Mr. Chen felt that “… Renren’s public company status also resulted in an intense focus by public investors on quarterly financial results, reducing management’s flexibility to explore and invest in high long term potential, high growth, but capital-intensive new business lines.”  Joseph Chen argues that the offer of $4.20/ADS was a 22% premium over the average closing price for the last 30 days.  Please note that in the Complaint, the Plaintiffs argue that this price was “… lower than: (a) the daily high for every trading day in June 2015 through the date of the announcement; and (b) the daily close for the June 3-8 trading days.”  Mr. Chen then indicates that this transaction ultimately fell through because their potential capital partners felt that the valuation was too HIGH and they wouldn’t back the offer.  

In his Affidavit, Joseph Chen goes on to say that in 2015, the SEC contacted Renren to demand that the Company come into compliance with the Investment Company Act of 1940 given the company’s shift away from its Social Media business and into a focus on investments.  This compliance, according to Mr. Chen, required the divestiture that the Plaintiffs challenge.  It appears that the Board considered several options to come into compliance, including a distribution of the portfolio companies to Renren shareholders; however, Mr. Chen indicates that all their initial plans failed (he again indicates that potential capital providers felt that Renren’s portfolio was too risky and too highly valued by the company).  Mr. Chen terms the contested 2016 spin-off proposal as a “last-ditch” effort.  With regards to the value of the SoFi shares during the proposal negotiation period, Joseph Chen indicates that the value of SoFi tanked as its performance “fell off a cliff,” and its CEO resigned in the face of sexual harassment charges.  This is what led to what seemed to be a lower value than what was considered fair by shareholders.  Mr. Chen writes the following with respect to the Dividend that was paid out to Renren shareholders as a result of this deal:

“Renren ultimately paid $9.1875 per ADS to all shareholders who received the Cash Dividend. The aggregate amount of the Cash Dividend payable by Renren to all the non-participating shareholders was approximately $134.3 million. The ADSs closed at $2.36 on June 22, 2018, the first trading day on which the ADSs traded without the rights to the dividend. I understand that this price implies ADS holders opting for the Cash Dividend received total value in the Transaction of $11.56/ADS. In comparison, the ADSs closed at $10.21 on April 20, 2018, the trading day before the Transaction was announced. Thus, shareholders receiving the Cash Dividend obtained a 13% premium over the pre-announcement ADS price. I believed then and now that the Cash Dividend was fair. In fact, I wanted to take the Cash Dividend myself.”

Finally with regards to the call option transfer, Joseph Chen indicates that shortly after the spin-off was complete, OPI faced a liquidity crisis due to the Everbright Loan maturing in October 2018.  He indicates that OPI’s decision to approach SoFi for funding was a last resort – note that it appears that OPI had to sell further shares to repay SoFi in 2020.  Mr. Chen defends the $8.80 per share strike price for the options stating: 

“I do not consider the $8.80/share SoFi strike price too low in view of the headline prices for SoFi’s Series G and H capital raises in March 2017 and May 2019, respectively. The value of OPI’s SoFi Series B, D, E, and F shareholdings held in March 2019 is not comparable to the prices that SoFi received for its Series G funding round, priced at $17.18 per share in March 2017. 

The Series G round occurred before Mr. Cagney’s resignation and the serious shareholder value destruction thereafter. In addition, SoFi’s Series G shares had a superior liquidation preference to the SoFi Series B, D, E, and F shares. The cumulative liquidation preference from Series D-G was $1.8 billion post-Series G. As a result, should SoFi become distressed and liquidate at an enterprise value less than $1.8 billion, all investors other than Series D-G, including all of the Series B shares (which accounted for 64% of OPI’s SoFi holdings) would have the value of their holdings substantially diminished if not wiped out. This level of risk inherent in the junior stock made it improper for OPI to value Series B, D, E, and F as equivalent to the Series G headline price.”

Mr. Chen concludes his affidavit by arguing that an Injunction would be incredibly detrimental to Oak Pacific Investments.  He argues that although the transfer of SoFi shares allowed OPI to pay off its Debt, OPI still has $3-$4 million in expenses every year.  He concludes by stating: “if OPI cannot pay its expenses as they come due, OPI cannot operate or defend itself in this litigation.”

We currently plan on following the entirety of this interesting Case and updating our views regarding a potential outcome and/or a possible share-price impact as this Case continues forward.  Please note that the share-price of Renren Inc. (RENN) has been incredibly sensitive to this litigation, and we believe that this sensitivity will continue.  Shares of Renren Inc. (RENN) moved a maximum of about 83% on May 20, 2020 following the Court’s Denial of the Defendants’ Motion to Dismiss.