Renren (RENN) – Litigation Settlement – 20%+ Upside

Current Price: $25

Target Price: $30

Upside: 20%

Expiration Date: Q1 2022

This idea was shared by blades.

 

The recent settlement between Renren’s activists and management should net ADS shareholders at least $25 per share after legal fees. A seemingly comparable settlement case suggests that lower legal fees and distribution of $30/share is in play. Investors are also getting the remaining RENN stub for free. The downside is fully protected and there’s a strong chance of potentially significant upside within 3-4 months.

Renren’s litigation saga is finally coming to an end – activists have settled with the defendants (management), who basically stole Renren’s best assets from the minority shareholders in 2018. The settlement includes a payment of $300m or $38.69 per ADS to all eligible (ex. defendants and their affiliates) class A shareholders minus attorneys fees and expenses awarded by the court to the plaintiffs counsel, and less administrator fees associated with the settlement. The payment will be made directly to eligible shareholders by the payment agent and there should be no issues here as the judge has already frozen $560m of the defendants’ assets. The distribution won’t be taxed, as, in essence, it is a recovery of ill-gotten gains from the defendants.

After the settlement announcement, the stock trades at $25/ADS. I believe that this is near the minimum amount that ADS holders will receive in distribution, and the stock is trading as if there were no potential for any upside from lower legal fees or any value in the other Renren assets. The market might be missing that the lawyer expenses are capped at 1/3rd of the settlement (This fact is indicated in the stipulation of settlement filed in court, but not in the press release.).

A recent example of a much lower attorneys fee award was the case of GCI Liberty, which involved a $110 million settlement. The fee and expense award was indicated to be not in excess of $22 million. That’s a 22% recovery for the lawyers of fees and expenses, which might be the lower bound of possible results. If applied to the Renren case, shareholders would receive $30.95 per share. I think $5m for other fees is reasonable and would reduce the proceeds by a further $0.65 per ADS.

The settlement hearing will take place on the 9th of December. After that, the payments should come within a few months.

Case docket can be found here.

From the stipulation document:

“In light of the risks undertaken in pursuing the Action on a contingency basis and the benefits created for Renren and Renren’s shareholders through the Settlement and the prosecution of the Lawsuit, Plaintiffs’ Counsel intend to apply to the Court for an award of attorneys’ fees in an amount not to exceed thirtythree percent (33%) of the Settlement amount…”

It’s quite likely that something less will be received by the lawyers in this case, which as these things go was resolved pretty quickly, did not involve a trial, and the stipulation of settlement indicates that mediation and settlement were ongoing for about a year. The case was brought March 7, 2019. The plaintiffs won a major victory in May, when the court approved an order of attachment which levied on the assets of the defendants up to the amount of $560 million. The investors who spearheaded the case are sophisticated hedge funds, who have a substantial interest in keeping lawyer fees as low as possible. I believe that the judge will likely have an interest in protecting the shareholders generally from an excessive award.

Aside from the settlement distribution, Renren currently owns the below-listed assets. However, any value in the stub is gravy.  In January 2020, it traded about $1.70/share.

  • 33.8% stake in a publicly listed Chinese used car auto dealership group (ticker KXIN, $220 market cap), which amounts to $4.5 per RENN share. As of Dec’20 KXIN had 14 dealerships and was significantly impacted by COVID-19 (revenues down 90% in 2020), but should be recovering now. This year KXIN merged with Chinese luxury auto e-commerce platform Haitaoche and signed a 5 year supply contract with s state-0wned China National Vehicle (will supply old cars to sell through Haitaoche platform) – the contract was valued at $2.3bn. So at a quick glance, it seems KXIN has a legitimate business although I am not in a position to comment on the valuation. KXIN exposure could be hedged at 13% borrow fees.
  • Two young SaaS businesses – Chime (client relationship management platform for real estate agents) and Trucker Path (trip planning app for truck drivers). SaaS segment was growing 44% in 2019 and 112% in 2020. During 2020 these businesses generated $17.5m in revenues and burned $12m cash.
  • At the beginning of the year Renren also had c. $75m net cash (after deducting OPI’s note repayment in January), not clear how much of this cash balance has been burned since.

 

Background

Renren was founded by Joseph Chen (current CEO and Chair). The company became famous around 2010 for developing a “Chinese Facebook”. It made an IPO in 2011, raising $760m at $14 per ADS and was said to be the latest social networking platform in China. In 2012 the company had 56 monthly logins and 178m activated accounts. However, the rise of smartphones and competing apps (WeChat, Weibo, etc.) pretty much killed the platform – it was finally sold in 2018 for $20m.

Renren began to transform into something similar to a VC fund. In 2012 it invested in SoFi (Social Financial) – a mobile-first American personal finance company with a number of different products including student loan refinancing, mortgages, personal loans, etc. SoFi started growing rapidly and attracted well-known names such as Third Point management, Softbank, etc.

RENN’s management quickly understood that they’ve stumbled upon a potential goldmine. Joseph Chen tried to privatize Renren at a lowball $1.4bn offer in 2015 but the move infuriated shareholders and Chen backed down. However, his wish to snatch SoFi did not disappear and as he was writing to the COO in 2016 (document #743, p.112): “Starting to have second thoughts on letting go SoFi so early… How can we hold on to it in longer terms?”. They quickly found how – management decided to spin-off RENN’s stake in SoFi together with most of its investment portfolio at a materially depressed valuation. The spin was completed in April 2018 with the investment portfolio being spun into OPI (Chen’s vehicle) for a total valuation of $500m, whereas SoFi’s stake alone was worth $600m at that time, based on the last funding round. The move received criticism and attention from Oasis Investments – prominent Asian activist, who acquired a 5% Renren stake in 2018 (eventually raised to 16.5% as of Feb’21) and filed a lawsuit in 2019 against the management/Softbank/Duff & Phelps.

The first major win was in Sept’20 when the judge denied the defendant’s motion to dismiss. In September 2021, the document containing all of management’s/DF/Softbank correspondence was released (the already mentioned document #743) pretty much proving that management tried to undervalue the portfolio. I particularly liked the correspondence between Chen/Liu (COO) and Shinzo Nakano (independent director of RENN), who refused to sign the spin-off (p. 148/149), was forced to resign and was even told how to explain it to the auditor (p. 193). Page 208 shows comments on the initial valuation made by Duff & Phelps, where the consultants claimed that they need “some evidence” to make such a huge discounts on spin-offs assets. The initial discount on SoFi’s last funding round proposed by DF was 30%, but on P.307 Liu (COO) writes that after all, they want to make it 50% based on the uncertainty of its IPO and competition. Eventually, SoFi’s discount ended up at 50% and all other assets received 30%-75% discounts vs their last funding rounds.

On the 29th of September 2021, the judge denied the motion to seal Duff & Phelps valuation documents. Then on the 7th of Oct when it was pretty much clear that the defendants won’t make it, both parties have reached a settlement of $300m. The settlement also includes a Governance Change – with conditions involving that RENN must never hire Duff & Phelps again, etc.

148 COMMENTS

  1. tony

    Your first post here!
    thank you and well written. You may want to have a look at the Alemtuzumab CVR as well for reference.

  2. apqnm

    At the maximum payout, what’s the total cash payment to all share classes before legal fees? Just looking at the market cap on google and backing into it it looks to be well more than the frozen $560mm. How do you think about the risk that the highest amount possible isn’t paid out? What is $560mm of gross proceeds less est fees on a per share basis?

    “In consideration for the full and final dismissal with prejudice of the Lawsuit and the releases described below, the Defendants have agreed to pay the greater of (a) $300 million or (b) the sum of (x) $38.6866 per ADS multiplied by the number of issued and outstanding ADSs held by Renren Shareholders as of the Record Date and (y) $0.859701 per Class A ordinary share multiplied by the total number of issued and outstanding Class A ordinary shares held by Renren Shareholders as of the Record Date (the “Settlement Amount”). The Settlement Amount will be paid into a common Settlement Account (the “Settlement Account”).”

    1. Ilja

      Maybe I didn’t understand the question, but I think you’ve got your answer in the quote that you’ve dropped. Maximum payment is $300m, which excluding all class B shares and class A shares held by the defendants and their affiliates amounts to $0.859701 per class A or $38.6866 per ADS. So you can’t really compare it to the market cap as eligible shares are only about 40%+ of total outstanding. The risk of the amount not getting paid out is basically non-existent as $560m of assets are already frozen. Most of that is probably SOFI stock.

      1. snowball

        If the frozen assets are mostly SOFI stocks, is there a need to hedge SOFI tail risk by buying SOFI deep OTM puts ($11 strike, at which point the $560 million assets may depreciate to below $300 million?

      2. apqnm

        Got it thanks – it’s the eligible shares piece I was missing

      3. apqnm

        One more question, if I may. Is there somewhere I can read about the tax treatment referenced in the write up? I supppse I don’t see exactly why it would be untaxed by virtue of being a recovery of ill-gotten gains, but I’m the furthest thing from a tax expert.

    1. WeagleWeagle123

      In the stipulation of settlement it states:

      G. TAX TREATMENT
      27. For U.S. federal income tax purposes, Renren and OPI will treat the portion of the Settlement Amount paid by the OPI Payors as a payment from OPI to Renren relating back to the original split-off of OPI that is governed by Section 361 of the Internal Revenue Code of 1986 (the “Code”). Renren shall report the payment of this portion of the Settlement Amount as an item of income in the taxable year received of which only Renren Shareholders have a “pro rata share” within the meaning of Section 1293 of the Code.

      1. WeagleWeagle123

        Forgot to include this, but I think in a sense he is right that the settlement amount will not be taxed as Section 361 states:

        (a) General rule
        No gain or loss shall be recognized to a corporation if such corporation is a party to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

        I might be just completely wrong so if anyone has a different interpretation of the facts I would be glad to hear so. Also I could not find where in the stipulation of settlement it states that the settlement amount will be deposited into a 468B trust or a qualified settlement fund. The only mention of something along those lines was it being qualified as a common settlement fund.

  3. blades

    It is clear in my opinion that G. relates to the tax reporting status of the stub company, and is in no way a deduction from the Settlement Amount.

    See this language from B. SETTLEMENT CONSIDERATION AND SCOPE OF THE SETTLEMENT, paragraph 5:

    “ The Settlement Account shall be the sole source of payment of: (i) any taxes payable on any income generated by the Settlement Account; (ii) Notice Costs, Distribution Costs, and administration expenses; (iii) any Litigation Fee and Expenses Award ; (iv) any other fees and expenses awarded by the Court; (v) any Administrator fees associated with the Settlement (such amounts (i)-(v) being collectively referred to as the “Settlement Fund Expenses”); and (vi) any settlement payments to Renren Shareholders as provided herein. ”

    Note the only taxes contemplated to be paid out of the Settlement Account are taxes generated in the account. That will be, if anything, minuscule.

    Note, as the writeup says, if you play, you get the stub as a bonus. So any effect on the stub is not a major factor for the idea.

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  4. apqnm

    It seems the question is whether it will be taxable to individuals receiving the payment. That to me is unclear based on all of the above.

    2
  5. blades

    Buy in an IRA and you’ll have no tax issues. Buy options and it’s clearly capital gains. In a taxable account, worst case scenario: the entire distribution is taxable as a dividend (doubtful, but let’s go with it), then you can sell the stub and have a short term capital loss, essentially offsetting the effect of the taxable dividend. Not an expert, but can’t see why tax is an issue.

    1
  6. blades

    The attorneys late yesterday filed their application for fees and are asking for the full 33%, about $100 million in fees! The filings indicate that the hours worked on the case bear no reasonable relationship to an award in this amount (the filings focus on what a skillful job the attorneys did). However, a major fact to their advantage is that Oasis and the other named plaintiffs support the award of 33%. I don’t think that seals the deal though, and plan to file an objection, which we are entitled to do through a simple filing process, to be made on or before November 24. The 33% award is far in excess of other awards in large cases which we can direct the judge to. Anyone who is a holder may also wish to object. I still like this idea and note that at the current stock price holders have no downside risk.

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  7. blades

    Yes, still set for a hearing on the ninth of December. On that date we can expect: 1. Approval of the overall settlement amount of $300 million. That should not be controversial. 2. The court’s determination of an appropriate level of attorneys fees. Either of these issues may be taken under advisement by the court, with the decision to be rendered sometime after that, but it shouldn’t be too long.

    As I indicated, I think that the attorneys fee proposal is egregious, and I plan to file an objection. If anyone is interested in doing the same, let’s have a direct message conversation. It is a simple process, and I think the more objectors, the better.

    One thing I omitted to mention in my last note is the residual value that will remain in the RENN stub, as indicated in DT‘s initial write up, which is additional to the share of cash to be received.

    3
    1. snowball

      Yes the remaining stub has value.

      However, if the fee and expense turns out not to be $27 million (22% cut + $5 million) as assumed in the write-up, but $100 million (33% cut), does it imply that the initial pay-out will be much less than $25 per ADS (our cost basis), and our return will rely heavily on the stub’s value.

      In other words, in the bear case where the attorneys’ fee request prevails, then the stub is not just icing on the cake in our thesis but what we are relying on.

      I assume that every $1 million in fees reduces the payout by $0.13 per ADS. So an additional $73 million in fees will reduce the payout by $9.5 per ADS, to only $21 per ADS.

      Good news is that SOFI stock has been on a tear lately and credit risk of the collateral has been substantially reduced.

      1. Yardir

        you’re sure about your math in the optimistic case? 22% of 300m -> 66m
        or taken differently, between 22% cut and 33% cut there are 11% or 33m in fees, or 4.29 USD in total (trusting your 0.13/ADS)

      2. snowball

        My bad. I took the wrong number from the GCI Liberty case.
        So the additional fee (vs. the 22% cut assumption) should reduce payout by $33m or $4.29 per ADS, to about $26 per ADS.

      3. maximin3

        Have you looked at the True-Up mechanism in the stipulation document? I think you are assuming 300mm when it is actually the max of (300, 38.50/share). So even if the lawyers get there 33%, that would be an implied payout of about $25.80 per share less some costs, so maybe closer to $25. Then you have the stub value.

        Am I missing something?

        Also, happy to join the filing, but what is the mechanism for DM on this site?

      4. Joshua

        Maximin3 is correct. The payout is approximately $25.90 net of fess and $1mm of expenses vs $38.686 gross per share.

        1
  8. blades

    Right, There are expenses of about $950,000 that gets deducted from the $300 million. The lawyers are asking for 33% of the proceeds net of the expenses. The shareholders would get the remainder. There are 7,753,942 eligible shares (divide $300M by $38.69). So, worst case scenario each share would receive ($300M-950,000) * .67= $25.84 plus the stub.

    I’ll reach out to dt to inquire about dm-ing.

    2
    1. RW

      Thanks blades for sharing the idea. Do you know how the settlement will impact options – will the strike prices adjust for the payout?

      For example April $25 calls are about $4. A covered call with $25 strike is about $22.60 (RENN $26.60 less call premium). What happens to this position if the payout is $25.84 prior to April expiration? Calls exercised and covered call position receives $25? Curious if this is a way to enter a new trade while eliminating downside to the potential worse case scenario and potentially increasing the gain if payout is only slightly above $25.84.

      1
      1. snowball

        My guess is that you will receive $25.84 from your long RENN position, and the strike price will be reduced by the same amount to negative $0.84. OCC (Options Clearing Corporation) makes such decisions.

        However, I have not seen options with negative strike prices, although I am sure historically there were certainly cases where special dividend amount was greater than strike price .

        So it’s possible (I am just guessing) that OCC’s rule is to settle such options immediately: You keep the $4 premium but the option is automatically exercised.

        There is also non-zero possibility that the payment is not considered by OCC as a dividend, adjustment to strike prices is not made, and option buyers are screwed.

        Anyway, in any of the above scenarios there are bound to be some confusion/chaos and some money is left on the table (e.g. some in-the-money option holders fail to exercise because of lack of capital).

        1
      2. maximin3

        No one knows what will happen with the options. This is an extremely unusual situation with respect to option strike adjustment protocols. I don’t know of any precedents although there must be some?

      3. Grayson

        There is money to be made if we can figure out how to OCC will treat it. If the scenario where the options are settled immediately, selling covered calls could be very lucrative given that the premium would be realized much sooner than expiration date with minimal risk at the $25 strike. Definitely something we should look further into.

      4. tony

        Hello Tony,

        Thank you for contacting us at OCC. When a company undergoes a corporate action, the options typically get adjusted according to the terms of the action. Meaning, if XYZ were to merger into a new company, options would be adjusted accordingly. If the company liquidated and shares no longer exist, it is likely that the options would be adjusted according to the terms of the liquidation.

        Regards,

        cid:[email protected]

        MARK BENZAQUEN

        Principal / OCC Investor Education

        2
      5. snowball

        Selling April $25 put is very good bet too, if we believe that the payout with 33% cut places a floor at around that level.

        However, if OCC somehow determines that the payout is not a dividend or corporation action, but direct payment from the third-party defendants to RENN’s shareholders, and decides not to adjust the strike prices, then put sellers are completely destroyed (collecting $2.7 in premium but potentially losing >$20).

        Call sellers are not exposed to this operational risk.

        1
    2. maximin3

      Also, you assume that there are 7.75mm eligible shares of Renren Shareholders (i.e., non-defendant owners). The reality is that no one knows. This part of the settlement was based on a shareholding estimate from the lying scumbags that run this company as of June 30, 2021.

      It could be more (for example if Chen sneakily transferred his position to an unrelated third party), in which case the True-Up will kick in.

      It could be less, resulting in higher per-ADS recovery as the cash amount will still be $300mm. I looked at the annual report and it is not totally clear what the defendant shareholdings were as of March 31, 2021. Chen’s B shares, Softbank’s A+B shares are clear, but Chen’s A ownership is mentioned twice, inconsistently.

      Finally, there are other expenses besides the lawyer proceeds and the 950K of expenses. So worst case is somewhat lower.

      1. snowball

        I think the True Up is there to protect against such abuse, making sure that the settlement is at least $38.69 per ADS. More (fake) shareholders eligible for the settlement will not affect our interests.

  9. blades

    DT has suggested that we communicate with regard to making objections in the comments if practical. Here is my thought, I have spent some time doing some research, and thought about the content of an objection I plan to write up soon. I’ll post a draft for comments, and maybe makes someone else’s objection easier to prepare.

    One interesting thing I don’t think has been mentioned thus far is that the named plaintiffs did not own any stock in the company at the time of the improper transfer of assets. I think that makes their support of 33% much less powerful because it’s pretty clear that they are joint venturerers withthe law firms. As recent speculators, they have made a lot of money by buying up shares through the litigation, you can check the company’s annual filings to see the data, and they should not be thought to speak for the “Absent shareholders”. I’m really speaking about oasis in this regard, the other named plaintiffs do not show up in the companies filings.

    2
    1. Joshua

      That is no how shareholder derivate cases work. The case was brought on behalf of all stockholders of the corporation as a derivative action. In securities class actions you have to been an owner of the shares at the time of the action as individual plaintiff, in a shareholder derivative case, the nominal plaintiff is the corporation (who is refusing to bring the case against themselves) so shareholders step in and bring action on behalf of the corporation.

  10. Joshua

    In terms of fee awards. I would not make underwrite an investment based on a substantial reduction down to the low 20s percentage wise. The standard applied for fee recovery is heavily weighted toward comparable private contingency fee arrangements, which Reid Collins could have used its time and efforts pursuing. The hours x rate x multiplier method, commonly referred to as a Lodestar analysis (believed to have been coined during Lindy Bros. Builders, Inc. v. Am. Radiator & Stnd. Sanitary Corp., 487 F.2d 161 (3d Cir. 1973)). As the fee application motion points out Judge Borrok has awarded 33% in cases in less complex involving issues. I would assume he will approve the 33% barring a very well argued objection, and even then, I would not see the fee award being below 30%.

    2
  11. blades

    1. I do understand how derivative actions work. The investment idea is not a bet that the fee recovery will be in the low 20’s. It is a more or less free option that it could be less than 33%. A maximum fee award (33%) should result in value equal to about $25.84 plus the stub, should be close to the current value. An award less than 33% is gravy. So heads I win, tails I don’t lose

    2. Thank you for your close reading of the fee application; I don’t mind being challenged. However, the two cases cited for the 33 1/3% awards by Judge Borrok were for far lower settlement amounts, $21 million in one case ($7M fee) and $4,750,000 in the other ($1,588,333 fee). That’s more than an order of magnitude difference from the RENN $300 million amount. Stands to reason the lawyers don’t need to be getting close to $100 million, and there is scholarly legal support that the percentage should decrease for very large settlement amounts.

    3. I will soon send along a draft objection; will appreciate all value added input. I will encourage all holders to make an objection. Objections matter; better chance of cutting the 33%. If anyone is a longtime RENN holder, in any amount, I think your objection could have some extra moral weight.

    1
    1. Joshua

      The plaintiffs’ counsel is arguing the award is equivalent to over $900mm were it to be paid to the corporation and taxed first at the corporate level. That is a major driver of their justification that they delivered exceptional value and should receive the compensation a standard contingency case would pay out, which is between 30-40% now a days as contingency lawyers have been jacking up fees in recent years. If you can show that the $900mm pretax equivalent is not accurate, you may have a chance of getting the fee reduced. But several large shareholders beyond the named plaintiffs have filed affidavits in support of the fee application. I would advise having an attorney file the objection and not going pro se. An objection without supporting case authorities will not carry much weight.

  12. Joshua

    One final note on fees, is that if you read the Reid Collins motion in support of the settlement and fees, this is a novel structure where the shareholders are being paid directly. This is not a class action, this is a shareholder derivative suit where the injured party is the Company [Renren], and shareholders have derivative standing. In a typical derivative case the injured party, the company is the beneficiary of the damages award, not the individual shareholders. In that case the award would first be a taxable award to the Renren, then a taxable award if distributed as a dividend to shareholders. In that case, as pointed out in the motion, the direct payout is equivalent to $930mm damage award at trial, which would be one of the largest shareholder derivative awards in history. In this case the settlement is structured to avoid passing through the company, which could have led to a lot more money business and the corporate tax. On whether that is taxable to shareholders directly it appears not to be since it being considered part of the original spin-off , which others have addressed on this post and I am not a tax expert. But based on those factors, the $100mm fee is not unreasonable.

  13. blades

    I believe that whole $930M argument is a bunch of legal BS. Reid Collins is saying that they could have gotten a fee on the value clawed back from the bad guys and then paid to the bad guys?? This “novel” solution of only paying out to those who weren’t involved in the misappropriation of assets is an obvious answer. Hopefully the judge is not swayed by that kind of argument and achieves a fair result. Payment of a 33% fee would be an extreme outlier in cases involving large awards, according to a number of empirical studies that I will refer to in my objection.

  14. Joshua

    That is a bit of an oversimplification. Had this gone to judgment, not settlement, then the judgment would have been rendered in favor of the corporation and been subject to corporate taxation, regardless of whether the bad actors were precluded from receiving any distribution from the settlement. I would suggest finding precedents in New York State Supreme Court, or the 2nd Circuit, as those will receive the most weight from Judge Borrok. Also, if you can find any of his own cases to cite.

    1
  15. blades

    Thanks, dt

    Renren holders,

    1. I have filed the final version of this objection and asked to be heard.

    2. Objections are due November 24, not December 9. Note, they must be received by (!) November 24.

    3. I have copied below the required elements of an objection and the procedure for filing.

    4. The electronic filing method is not as easy as claimed. I ended up filing by expedited mail because of this.

    5. Honestly, on reflection I’m not sure that there is a ton of value in having another objection, although I don’t think it hurts. There is not a lot of time left and it’s a more than a bit of a pain. If you decide to object you can use mine as a model for the required elements. You don’t need to include all my arguments and probably shouldn’t; brief is probably better.

    Here are the requirements, which are included in the first link in the write-up.

    The easiest way to file your objection(s) with the Court and notify all counsel is by using the New York State Courts Electronic Filing system (https://iapps.courts.state.ny.us/nyscef/Login). You can create an account without an attorney. By electronically filing your objection(s) the court and all attorneys will receive the objection(s) at the same time. Choose to “File Documents” in the “Supreme Court” then choose to “File to an Existing Case.” In the “Case Number” field type “653594/2018” and for the Court select “New York County Supreme Court.” You are filing “Documents relating to an existing Motion/Cross-Motion/Petition/OSC” and should check “I am filing as a non-party to this case.” After you enter your name and address, you should upload your objection(s) and relate it to Plaintiffs’ Motion for Final Settlement Approval or Defendants’ filing, if any, seeking a Requested Renren Shareholder Release. Alternatively, you can mail your objection(s) so that such objection(s) is/are received no later than November 24, 2021 by the Clerk of the Court, 60 Centre Street, Room 119A, New York, NY 10007 with a copy to the Administrator, P.O Box 6569, Portland, OR 97228-6569, [email protected]. NOTE: I MAILED TO THESE ADDRESSES WITH PDF COPIES TO THE EMAIL ADDRESS

    An objector is not required to attend the Settlement Hearing. However, any objector wishing to be heard orally, either individually or through counsel of their own choice, is required to indicate in their written objection(s) their intention to appear at the Settlement Hearing and to include in their written objection(s) the identity of any witnesses they may call to testify and copies of any exhibits they intend to introduce into evidence at the Settlement Hearing. Login instructions for how to attend the hearing will be posted on the Settlement website at http://www.RenrenSettlement.com.

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  16. blades

    Guys, I want to alert you to a recent court filing in this matter that I find extremely troubling for this recommendation. Altimeo on November 24 filed an objection to the settlement itself, based on the fact that all of the benefits after attorneys fees and expenses go to existing shareholders of RENN (other than the wrongdoers), and not to the shareholders at the time of the wrongdoing.

    I don’t know enough about Cayman Islands law or the leeway allow the judge in a derivative action to direct proceeds to make a good call on this. However, it seems to me that in equity they have an excellent argument, and if they are right, then that is devastating to this recommendation.

    And I think that on the facts, the lead plaintiff, oasis, has been pretty piggy in buying up shares as the litigation proceeded, something emphasized by Altimeo, not a good fact.

    I am no longer comfortable with this recommendation, and have liquidated my (very substantial for me) position.

    6
    1. Mike Cricenti

      This was a concern of mine the whole time on the case, and was pretty shocked when the settlement came out only addressing current shareholders. Anyway, thanks for being intellectually honest and updating the rec accordingly!

      2
  17. Joshua

    Altimeo has no valid legal argument whatsoever. This is not a class action securities lawsuit and they have no standing to bring a claim. This is a breach of fiduciary duty suit brought against the BoD (and those who aided and abetted them) on behalf of the company (Renren), that was harmed by their actions. As such, Altimeo has no standing, nor does the judge have any legal authority to direct the settlement proceeds to former shareholders. If Altimeo wanted to assert a claim, it should have brought suit against the company itself, filed a class action as a lead shareholder plaintiff, or tried to enjoin the spin. Instead they did nothing and sold their shares. Now they want a free ride on those who saw the value in litigating and took the risk of pursuing the litigation and are trying to assert an interest in the settlement that they have no legal standing to do. Judge Borrok is well versed in corporate law and understands how derivative suits work, and knows he has no authority to redirect the settlement to non-parities. Even if he did (which he way too smart to do) it would be overturned on appeal. But I am 100% certain that he will not and cannot legally redirect the settlement proceeds.

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    1. tony

      Josh hi,
      Can you sum it up for me at this stage?
      What is the worst case, base and best and how do they translate in equity values?
      We can discuss weights later on….
      Thanks

      1. Joshua

        Best case scenario is Judge Borrok approves the settlement and declines to issue a stay pending an appeal, which is unlikely to be granted and sanctions Pomerantz for filing a frivolous claim in bad faith (unlikely to be sanctioned). At the point Altimeo and counsel can seek an injunction/TRO on distributing the settlement proceeds from the court of appeals , which is an extraordinarily high burden. Altimeo’s objection and right to appeal is fatally flawed because they failed to object to Judge Borrok’s order that only granted shareholders the right to object. While I sympathize with the desire for lower fees, Bill is an extraordinary litigator and the work required on this case to assert personal jurisdiction and the Cayman foreign law issues in the NY court was instrumental in surviving the MTD and having the ability to leverage a settlement. Those who work with him on an ongoing basis are going to be supportive of his fees. The Barnes fee objection was well done for someone going pro se, but there is sufficient precedent for the 33%.

    2. Vincent

      Joshua,

      Thanks for your comments. I find them very helpful!

      It’s funny that from Altimeo’s objection, it seems they sold shares before the 2018 dividend. So they argued that the beneficiary should be shareholders as of 4/30/2018, not the dividend date when the illegal steal from shareholders actually happened.

      However, does the second argument, that this settlement will prevent parties like Altimeo seeking recovery from Defendants, have any merit in itself? I’m asking since I’m not a lawyer and don’t understand how these derivative suit works.

      1. Joshua

        They are not barred from seeking a recovery for their own direct claims against the BoD or the company for specific harms if they can show such harm has occurred, have standing to pursue them and the statue of limitation has not expired. The only claims being released are the claims of Renren against itself (nominally) and the BoD, by Renren via the derivative action. Altimeo is not being denied any legal rights. They chose to sell their shares and forfeit their standing as shareholders to bring a derivative suit or a class action.

    3. Writser

      Good post. One thing I would like to add (and I’m not berating anyone because this holds for me as well) is that if a stranger on the internet has to explain the intricacies of a lawsuit to you you should size accordingly (or have no position in the first place). Because if this drops to $16 tomorrow and Joshua is on holiday, well, be honest, do you have a clue what you should do?

      4
      1. Writser

        I have a tiny position and am sitting on my hands. 4% up or down doesn’t make this situation much more or less attractive as far as I am concerned.

      2. Joshua

        I was traveling until this week. So good point Wrister, that was why my replies were delayed.

        1
  18. blades

    Not disagreeing, and only current shareholders were given a right to object in the Notice. Appreciate the experience you are bringing to your comments. I did not want to take even the small risk of Altimeo upsetting the applecart because downside was so large, and I had an outsized position that was in the black.

    Might jump back in after December 9; I no longer have the right to object to the fee award.

  19. blades

    I’m solidly back in this one. Two developments:

    1. The stock price has fallen to $25.35. That’s less than the $25.84 that the shareholders will receive assuming approval of settlement and the full 33% fee request. The stub piece of equity is free. Maybe will trade for a couple of bucks at least after cash payout (see write-up, above). And there is a free shot at the judge approving less than 33%. (Just a modest haircut down to 30% increases the payout to $27.00 cash plus the stub.)

    2. Plaintiffs’ attorneys have filed a memorandum of law that very strongly rebuts the Altimeo objection to the settlement, which I had been concerned about. Reading this with the Altimeo objection, I have to agree with Joshua, there is no chance that the settlement will be restructured in favor of shareholders at the time of the fraud.

    There were two objections filed to the level of attorneys fees (one of which may not have been validly filed), so the judge will have to consider the appropriate fee award. Plaintiffs’ attorneys also do a good job arguing for the 33%, but I think there is a puncher’s chance of doing a bit better.

  20. blades

    A few months, I think. Hearing is December 9. Then a Record Date has to be established and announced for the cash distribution. I think it could happen pretty quickly as plaintiffs’ counsel will be highly motivated to get their fee. What if judge reduces fee and plaintiffs’ counsel appeals? I think that’s unlikely and not necessarily a bad thing, but only thing I can think of.

    1
  21. blades

    I was just speaking with a RENN shareholder who has filed a very good objection to the level of attorneys fees, and is going to be able to speak at the hearing on approval of the settlement and award of attorneys fees, which is taking place this Thursday, December 9 at 9:30 AM. He had two requests, which I am passing on:

    1. If you tried to file an objection, but ran into difficulties with the electronic filing method prescribed, he would like to hear your story. (This method was essentially a joke and led to a dead end at the clerks office.)

    2. He would like to have as many shareholders on the line as possible. You won’t be able to speak, but your presence on the line, and your interest in the matter may have an influence.

    Below are the Microsoft Teams details for joining the hearing with Judge Borrok on Thursday at 9:30 AM EST:

    https://renrensettlement.com/Home/Hearing

    1
  22. Joshua

    In order for the funds deposited in the settlement account to be distributed, Judge Borrok has to refuse to grant a stay pending appeal, which he should do legally given Altimeo had no right to object in the first place and failed to raise that in its initial objeciton, but may not. If a stay pending appeal is issued, then Altimeo has 30 days to file an appeal and it could be several months before the appeal is heard. If no stay is granted and Altimeo fails to enjoin a distribution, then Reren must file with NASADQ a notice that is making a special dividend/distribution and set a record date. From there it is generally 10 days until the funds may be distributed. So if Borrok signed an order approving the settlement and denying a stay, on the 9th and Reren files notice with NASDAQ on the 10th, the distribution could be made by December 20th. I am hoping that is the case, and given that Altimeo has counsel who should have known better and could be sanctioned for their actions, it is still possible he lets the appeal play out. The other question is whether the fee objectors with standing will appeal, that is more likely to be given a stay pending appeal and they would have 30 days to appeal. I am sure if the fee is reduced materially, Plaintiffs’ counsel will appeal, so that puts the distribution at the mercy of the court of appeals schedule.

  23. blades

    Helpful, Joshua. Just noting that if Plaintiffs’ counsel appeals that’s bad news for delay, but I would happily take the good news of the fee reduction and wait.

  24. blades

    Also, repeating my request if anyone can join tomorrow at 9:30, you can do so by phone or Teams app (link for either is above.). My conversation with one of the objectors is the more participants, even in listening mode, the better. Looking forward to the call.

  25. Joshua

    Our “friends” at Duff & Phelps are also the advisor to the special committee in 51Job Inc, where there has been a lot of volatility and is trading well below deal price. I think D&P has limited flexibility in supporting a price reduction given its role in Renren. I am guessing 10-12% reduction, which still leaves 35% upside to current price. Also, if D&P does support more, we will be seeking discovery of the docs from RENN that D&P wanted sealed and settled shortly after they were going to become public. Also have appraisal rights opportunity in 51Job which gives you optionality even if the price is reduced significantly.

  26. Joshua

    Judge Borrok has gone totally lawless in attempting to set record date to April of 2018. Stock is going to collapse. I think Bill Reid wins on appeal, but that will now take several months

    2
    1. sacredbiotech

      it’s the structure of the settlement, they can restrike it so that it pays out common shareholders that’s an easier way than going through appeals

      1. Joshua

        A settlement that pays the company directly will still have to go before Borrok for approval, but that would box him in to his fatally flawed position that since this is a direct pay it should go to former shareholders. In the case of a settlement with the company which is how typical derivative cases are settled, Borrok would be hard pressed to find a legal basis to deny the settlement just because he did not like who got it. The other options is to use the $64mm in fees that would have gone to Plaintiffs’ counsel, to go to former shareholders.

      2. Vincent

        Who do you negotiate with if you want to pay formal shareholders?

  27. blades

    Trading was stopped, now renewed. FWIW judge was pissed about the structure of the settlement, which he said was a trick. He was also pissed about the level of fees requested.

    I have no confidence in Oasis’s attorney winning the appeal or the amount of time that will take, and have sold out at these prices, which hurt but worse case scenario is worse.

    1
      1. blades

        Counsel styled case as a derivative action to give his clients the advantage of a recovery that was in equity due to the shareholders at the time of the wrongdoing. He literally used the word “trick”.

        I don’t think the judge’s attitude was helped by counsel’s patting himself on the back to say, if you consider the settlement like the result in a conventional derivative suit, the value of the case was more like $900 million. Probably Oasis’s doubling and tripling down during the litigation stuck in his craw also.

        Judge was also scathing about the 33% fee request, and indicated he thought something in the low teens would have been more appropriate. He did the math on the hourly average and commented sarcastically on it.

        I doubt this firm will get the benefit of the doubt from this judge in the future.

        2
      2. Vincent

        How do we define “the time” of wrong doing? It seems Judge Borrok took Altimeo’s objection at face value and put the record data at 4/30/2018. While the transaction was announced on 4/30/2018, it didn’t happen until 6/21/2018. Will be interesting to see how this develop.

  28. Joshua

    Best case now is settlement is restructured to go to company and is distributed as a special dividend. They need these claims released and are facing emboldened former shareholders, SoftBank, SoFi and OPI can fight for years and they have the $1.5bn bn or so of assets they stole to bleed down while they litigate. Just to be clear, there has never in the history of a derivative action, a record date set 3 years prior. This will upend all corporate agency and derivative litigation. THis may have to go the Court of Appeals, which is the highest court in NY State. This never would have happened in federal court, but commercial litigation at federal level can take years and is biased towards corporate defendants in general.

    3
  29. Joshua

    I would estimate 3-6 months for the First Department and another 6-9 months for Court of Appeals. So figure 9-18 months probably.

  30. Joshua

    I underestimated Judge Borrok’s desire for higher office and to make a name for himself as an activist. While he is no doubt qualified intellectually as a judge, he is also an uber wealthy leftist who bought his judgeship and now wants to use it as his personal stepping stone. IF he is so upset over Renrens misdeed’s he should pay the former shareholders a $100mm out of his pocket his is rich enough to do so. He can always demand all the SoFI stock be returned to the company as well as the other VC assets stripped by OPI/Chen/Chow and SoftBank

    From 2014: “Andrew Borrok — an eccentric Hamptons socialite straight out of “The Great Gatsby” — is set to be elected as a Brooklyn judge. He has so much cash on hand that he has already scared off the field of all other candidates.
    “Essentially, this guy is buying a judgeship,” sniffed one Brooklyn Democratic source. “Everybody is afraid to run against him because he has unlimited resources.”

    https://nypost.com/2014/06/30/real-estate-millionaire-spending-wealth-to-become-judge/

    1. Amy

      Thank you, Joshua. Always enjoyed your insights. What happens now? What are the chances of overturning the decision in an appeal?

  31. g4734g

    isn’t the value of Renn negligible without the payment?…..$.12 seems like a big number just betting on a litigation appeal reversal??

  32. Joshua

    RENN owns 33.8% of KXIN, which assuming 27.7mm total RENN shares and the current 209mm market cap equates to $2.55 per RENN share. I assume that RENN would trade a 25-30% discount to KXIN initially at least, which implies $1.90 for RENN if there were no settlement. Not very attractive vs the current price.

    On the appeal, only the settlement was denied approval. The underlying case will still ultimately proceed if there is no settlement and there is no settlement of the derivative case that gives all the money to non-plaintiff former shareholders. Any lawyer that agreed to that would be disbarred. The damages if this would go to trial would be $1bn+, and I believe well north of that. The value of the 15% of SoFi alone is $1.9bn and the other OPI assets are worth $500mm-$1bn. Of the potentially $2.5-$3bn total, minority shareholders would receive the 30% of that value since Chen/Chow/SB own 70%, but that is still $600-$900mm for the plaintiffs in that scenario.

    If the case goes to verdict, plaintiffs would seek damages with equitable remedies such as rescission that would restore the value to the company that it would have had if the assets had not been stripped and fraudulently transferred to the insiders, not the value at the time of transfer. I think the lawyers today underplayed that damages theory to press for the settlement, but that would be sought for a judgment at trial. Plus prejudgment interest is accruing at 9% a year in NY so on $1bn that is an additional $90mm per year. Appeal to First Department should be no more than 3-6 months and Court of Appeals another 6-9 months. A trial would have taken 12-18 months as well, plus appeals, so if you held this prior to October, you had to be prepared for the long haul if it went to trial, plus appeals. 90% of cases settle prior to trial, so that is part of what made this so interesting, but there is always that chance. Some case in federal court go on for a decade, look at AMBAC and other 2008 bank and mortgage related litigation. State court is generally much faster.

    1. maximin3

      I would add at current prices the implied probability of some resolution to this mess, whether through a restructured settlement that is acceptable to the judge or appeal, is about 35% (12/32, where 32 is the payout at 15% fees). Seems low.

      Alternatively, they proceed to trial, get just the 300mm, and minorities get a third of that, which basically is the existing market cap at 12.

      The time delay is most certainly a bitch. But I doubt the stock will trade much lower.

      Do say if you think I am am missing something.

  33. Joshua

    At trial the damages are far in excess of $300mm. One, at trial the company would be the beneficiary of the judgement, that is why Bill argued the settlement was akin to $900mm+ company wide recovery. The damages at trial would potentially be much larger, SoFi stock alone is worth $1.9bn. However, that requires defeating SoftBank’s appeal of the denial of MTD against them in the 2nd Amended Complaint.

    Borrok has boxed himself in because by taking a progressive activist stand that old shareholders were harmed and should get the recovery, he is effectively conceded the facts of the case. He would be hard pressed to dismiss this later at summary judgment out of spite, and the standard for summary judgment in NY is high:
    “A court will grant summary judgment if, upon review of the record, the moving party sufficiently establishes the cause of action or defense at issue to warrant judgment in its favor as a matter of law. The court will deny summary judgment if any party shows “facts sufficient to require a trial on any issue of fact” unless the case qualifies for immediate trial.”

    This is a fact intensive case that would ultimately have to go to trial absent a settlement. 90% of cases are settled because of the cost and risk of trials is so great. I think the settlement will be recut that either grosses up the payout and roundtrips the defendants’ portion, or they stipulate not to participate.

    1. maximin3

      Yes, I agree that the damages would be a lot higher. I just used the 300mm as a floor, and illustrated that the stock market cap is trading at that floor.

      Had the same thought on gross-up / roundtrip. Was going to email Bill Reid but presumably he will have thought of this already. Did not think of the other alternative, which is that the defendants stipulate not to participate in the receipt of the special distribution. If this was/ possible, why come up with this funky direct pay structure to begin with….

  34. Joshua

    Borrok’ s order is out. He will not approve any settlement that does not go to the former shareholders. Only option now is an appeal., nothing can be restructured that will please Borrok if any proceeds go to current shareholders. Shareholders who purchased RENN and took the litigation risk were assuming that the rule of law relating to derivative suits would be followed and are now having their rights trampled on by a left wing activist judge who bought his judgeship and lives like the Great Gatsby out in the Hamptons. He knows better and is using this as a steeping stone to higher office. Hopefully the appeals court is not infected with this lawless judicial activism.

    1. nindobe

      A quote from a news article from Benzinga.
      Subsequently, on December 10, 2021, the Court issued a written order formally denying the motion to approve the Stipulation (the “Order”), and set a subsequent hearing on the motion of the Stipulation for January 30, 2022.

      Technically the judge is right. Current shareholders weren’t wronged by what happened in 2018 so why should they get the settlement? I think he is doing his job and even if you don’t agree there is no need to hurl accusations at him.

      1. Joshua

        Technically the judge is not correct. No offense, but you do not seem to understand the law with respect to a derivative suit. The corporation and its shareholders, not former shareholders are the only ones with a legal standing and a claim. Two, none of the former shareholders bothered to exercise their legal rights for 3 years and they are not being denied their rights to bring their own direct actions or a class action against the company or its BoD. Under your theory the judge could just as well award the money to Uighurs or someone else more aggrieved in the world than former shareholders. There is no settlement or proceeds to give to the former shareholders, and Borrok knows this. Since neither the company, nor the current shareholders are going to give the money away, and Borrok cannot make them give $300mm to them. The former shareholders knew there was litigation going on for 3 years and never bothered to file a claim themselves, now they want to throw a tantrum and steal money from the current shareholders. How is that fair or legal?

        Sorry to put it this way, but you truly have no idea what you are talking about on the law. Is it fair that people who relied on the rule of law and purchased shares based on the value to the corporation should now have Borrok deprive them of their legal rights because he likes someone else better??? That is not how our legal system works, this is not Venezuela or Russia, we have a rule of law for a reason and Borrok certainly knows better. He is posturing because he wants higher office and he needs to bolster his progressive bon fides. He has unlawfully destroyed hundreds of millions of dollars of value in the interim, and he will be smacked down and put in his place on appeal.

        The case law is clear in NY. No judge has the power to reallocate settlement proceeds, particularly to parties with NO STANDING, and two, a judge can only deny approving a settlement if there is fraud or material misrepresentations. There was neither.

        1
  35. nostradamus

    So.. what are the different outcomes at this point? If I understand things correctly, there’s zero chance of the settlement happening the way Judge Borrok wants as the ones paying for the lawsuit would get nothing, correct?
    So, the plaintiffs will file an appeal against Borrok’s decision and get it overturned, that’s one outcome. If appeal is denied, this goes to trial (and presumably, the company would then be the beneficiary, correct?), that’s another outcome. But is there any other possible outcome at this point?

    For someone not so familiar with the US legal system, I’m fascinated but also feel like I have no idea what the different outs are here.

  36. Joshua

    Both of those are potential outcomes. There are others. A motion for reconsideration can be filed based on legal principles that Borrok failed to take into account. Also, the appeal will not be denied, the appeal will be heard, it is a question of whether they will uphold Borrok’s lawless ruling. I highly doubt it. There is no automatic right of appeal to Court of Appeals. This is not legal under Cayman’s law which governs. There is no direct action rights under Cayman law, only a derivative right.

  37. Joshua

    Cayman Law is nearly impossible to bring a direct action, and it must be against members of BoD personally for a breach of duty to the shareholder personally (very high bar, almost all Cayman actions must be derivative) . See: https://www.loebsmith.com/legal/legal-insight-minority-shareholder-rights-under-cayman-islands-law/151/

    Right to bring Personal Action
    A shareholder in a company may be able to bring an action directly against the company’s directors if the shareholder can show that the directors have breached a duty owed to the shareholder personally (instead of a duty owed to the company). However actions against directors for breach of their duties, are typically brought to enforce a right belonging to the company rather than to one or more shareholders and accordingly such actions brought to enforce a right belonging to the company, as a general rule of law, have to brought by the company itself (i.e. the right will lie with the Board of Directors of the company for and on behalf of the company).

    Derivative Actions
    As stated above, the general principle is that an action seeking to enforce a right belonging to a company has to be brought by the company itself. This rule derives from the English common law case of Foss v. Harbottle [1843] 2 Hare 461. The Cayman Islands Court of Appeal has affirmed this principle in two cases: Schultz v Reynolds [1992-93] CILR 59; and Svanstrom v Jonasson [1997] CLLR 192.

    Since the right to bring an action to enforce a right belonging to the company belongs to the company, the litigation has to be brought by the company itself. Normally, a company’s Articles will state that the right to commence litigation will lie with the company’s Board of Directors. The shareholder(s) will therefore need to persuade the directors to bring an action on behalf of the company. If the directors decline to take this action, the shareholder(s) would then typically want to consider whether they can replace the directors with a newly constituted Board, who can then initiate the action against the former directors. The procedure for removal and replacement of directors will be set out in the Articles.

    There will be instances when a shareholder, who is in the minority on a vote at a general meeting, will wish to object to the result. Generally speaking, a shareholder will object to the result of a vote in circumstances where (X) in the shareholder’s view, harm will result to the company (and consequently the value of the shareholder’s shareholding), or (Y) the shareholder’s personal rights as shareholder have been infringed.

    The English common law case of Foss v. Harbottle mentioned above, has also been extended to cover the principle that “an individual shareholder cannot bring an action in the courts to complain of an irregularity (as distinct from an illegality) in the conduct of the Company’s internal affairs if the irregularity is one which can be cured by a vote of the Company in general meeting” (Prudential Assurance Co. Ltd. v Newman Industries (No. 2) [1982] Ch. 204, C. A,). This is often referred to as the second limb of the rule in Foss v Harbottle. The reason behind what is known as the second limb of the rule in Foss v Harbottle was the courts desire to avoid futile litigation. If the thing complained of was an action which in substance was something the majority of the company’s shareholders were entitled to do, or if something has been done irregularly which the majority of the company’s shareholders are entitled to do regularly, there was no point in having litigation about it as the ultimate result of the litigation would be that a general meeting of the company’s shareholders has to be called and ultimately the majority gets its way (per Mellish LJ in MacDougall v. Gardiner).

    The result of these combined principles is that a minority shareholder can seldom bring an action in his own name against those in control of the company where the action is in respect of a wrong done to the company. The minority shareholder will simply not have locus standii to do so. Furthermore, it will be difficult for a minority shareholder to use the name of the company to bring an action (i.e. a derivative action).

  38. Joshua

    The exception to achieve derivative standing under Cayman law is predicated on a fraud on the minority in instances where the perpetrators control the majority of the company as in RENN.

    However, based upon established English case law authorities, if the shareholder can bring himself within one of the exceptions to the rule in Foss v Harbottle, the shareholder may be able to bring a derivative action, whereby he or she may bring an action in his or her own name but on behalf of the company. The exceptions are as follows:

    where the alleged wrong is ultra vires (i.e. beyond the capacity of) the company or illegal;
    where the action complained of is an irregularity in the passing of a resolution which could only have been validly done or sanctioned by a special resolution or special majority of shareholders (i.e. a majority which is more than a simple majority of over 50%);
    where what has been done amounts to a “fraud on the minority” and the wrongdoers are themselves in control of the company, so that they will not cause the company to bring an action; and
    where the act complained of infringes a personal right of the shareholder seeking to bring the action.
    Where the Acts amount to a Fraud on the Minority and the Wrongdoers are themselves in control of the Company
    The reason for this exception is that if minority shareholders were denied the right to bring an action on behalf of themselves and all others in such circumstances, their grievance would never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue. In order for this exception to apply, first it must be shown that there has been a fraud within the meaning of that word in the English case law authorities on this area and second, it must be shown that the wrongdoers are in control so that the minority shareholder is being improperly prevented from bringing a legal action in the name of the company. In this context, fraud is thought to comprise “fraud in the wider equitable sense of that term, as in the equitable concept of a fraud on a power”. Fraud does not include pure negligence, however gross. The traditional approach that appears to have been followed by English courts in the circumstances is to examine the nature of the act complained of to determine whether it is ratifiable by the majority and if it is not, then it will amount to a fraud on the minority. Based on English case law authorities (which are persuasive authority in the Cayman Islands), the following points can be made:

    The misappropriation of the company’s property or assets by the majority for their benefit, at the expense of the minority, is an act which can be interfered with by the Court at the suit of the minority, since it is not ratifiable by the majority.

    Many breaches of directors’ duties are ratifiable by the majority shareholders in general meeting, and in these circumstances the minority will have no remedy. Therefore, for example, in the case of Pavlides v. Jensen where it was alleged that the directors were grossly negligent, but not fraudulent, in selling property of the company at an under-value, this was ratifiable by the majority.

    There may be circumstances in which the majority shareholders do not exercise their powers bona fide for the benefit of the company as a whole which could amount to a fraud on the minority.

    As stated above, an individual shareholder will only be permitted to bring an action in respect of a fraud on the minority if he shows that the company is controlled by the wrongdoers. The meaning of control in this context is not clear although it covers voting control, even where shares are held by nominees.

    The question of whether or not there has been a fraud in the sense discussed above and whether or not the wrongdoers are in control of the company must be determined before the minority shareholder’s action is allowed to proceed.

    1. WeagleWeagle123

      Not being involved in this situation, nor having much experience going over court proceedings and transcripts, I find it surprising that a judge would take a high horse cocky tone/approach in a courtroom.

      1
  39. Joshua

    With the case stayed pending appeal I do not believe Borrok has jurisdiction to grant an MTD. Two, both Borrok and the appeals court already ruled in that that Oasis had derivative standing, so this issue has already been litigated at the trial and appellate levels . He continues to play “sleight of hand” to use his terms against him by imputing the settlement structure into the standing to bring a derivative claim. Finally, he has turned objectors into plaintiffs, despite the fact that they actually do not have standing and are not even current plaintiffs in any action. Nor could the bring a case under Cayman’s law since there is no right to direct action. Borrok appears to be trying to substitute former shareholders into the place of current shareholders who are pursuing derivative claims (the only ones allowed under Cayman law), which Skadden will demolish. That would be truly Kafkaesque that because he does not like Bill and wants to right a wrong done 3 years ago to former shareholders, that he wants to go down a path that were he to succeed would mean that no one is ever be able to recover. Borrok created his own made up law on derivative actions, that it goes to standing only, not to who has a claim. That is absurd on its face, since to have standing, which he ruled there was, you have to have a claim to bring in the first place.

    On a positive note, he has made a finding that a breach of fiduciary duty occurred, which de jure means harm was done to the corporation, so once the issue of standing is sorted out by the appeals court, he cannot change his finding that a breach of fiduciary duty occurred.

    1. dt

      This is just cheap advertising by the law firm – plenty of those for every company on every corporate action. No impact on RENN case whatsoever.

      1
    2. tony

      here is your short, borrow is just 1.6% from IB with a decent locate.
      p.s. I am long with a big size and am not selling here.

  40. Joshua

    Borrok’s proposal to pay former shareholders with company assets is not permitted under Cayman law and if it was done would create a new breach of fiduciary duty suit. There are no rights to direct actions for breach of fiduciary duty in the Caymans (except in very limited examples for personal breaches, not in their corporate capacity), nor are class actions permitted in the Caymans. Pomerantz does not have the legal acumen to win this on appeal, and while Olshan is a credible firm, this is now a lottery ticket for former shareholders and lawyers representing them. Bear in mind, Borrok and the first department already ruled that Oasis had standing, so Borrok is seeking to overturn his own ruling (which is now the law of the case) and the 1st departments. Borrok is flat out LYING, since he knows better, that there is no distinction between derivative standing for standing purposes and for claim purposes. You cannot have standing, without a claim (“injury”) the two are inexorably linked, it is black letter law. NY is an important jurisdiction for commercial cases, like Delaware, and they appeals courts guard this. They do not want to look like a banana republic. If Borrok’s decision were to stand, enterprising trial lawyers could bring claims against every public company listed on NYSE and NASDAQ since that provides a jurisdictional nexus to NY. It would be a complete embarrassment to NY as place where the rule of law applies and the legal industry in NY which relies on it.

    Borrok is going to be reversed based on existing precedent. 1st Dept will be hard pressed to support him even if they agree with his agenda unless they want to be embarrassed at the Court of Appeals. The precedents he cited are actually in our favor if you read them in full and are directly on point with regards to settlement reallocation in Benedict v Whitman Breed and in Zerkle v. Cleveland-Cliffs with respect to derivative standing being the company /shareholders as well as there being no basis for a judge to refuse approving a settlement unless there is fraud or material misrepresentations.

    In Benedict v. Whitman Breed the 2nd Department ruled that a judge has no legal authority to reallocate settlement proceeds and that the beneficiaries of a derivative suit are the corporation and its shareholders (not former shareholders). The 2nd dept directly ordered the settlement approved, they didn’t remand with instructions, and issued court costs. We need to ask for the same, because even with instructions Borrok is dangerous. Needs to be taken out of his hands.

    Relevant Findings:

    However, the court may not modify the terms of the settlement ( see State of New York v Philip Morris Inc., 308 AD2d 57, 65; see also Evans v Jeff D., 475 US 717, 726 [“the power to approve or reject a settlement negotiated by the parties before trial does not authorize the court to require the parties to accept a settlement to which they have not agreed”]). The court must determine whether a proposed settlement of a shareholder derivative claim is fair and reasonable to the corporation and its shareholders, then “either approve or disapprove the settlement” ( Klurfeld v Equity Enters., 79 AD2d 124, 126). “`[T]he only question. . . is whether the settlement, taken as a whole, is so unfair on its face as to preclude judicial approval `”( Zerkle v Cleveland-Cliffs Iron Co., 52 FRD 151, 159 [SD NY 1971], quoting Glicken v Bradford, 35 FRD 144, 151 [SD NY 1964]; see Mathes v Roberts, 85 FRD 710, 713 [SD NY 1980]; Trainor v Berner, 334 F Supp 1143, 1149).

    2
    1. BTeamStarter

      Joshua,

      In your opinion what happens if the judge dismissed against the two Plaintiffs who bought shares after April 2018. Seems like this what the judge is trying to do.

  41. Joshua

    Assuming not everyone has read Chris’s post on Seeking Alpha. Borrok has now realized that he was going to be seriously rebuked by the appellate court for his lawlessness and now is asking to reallocate Reid Collins fee reduction (approx $50mm) to former shareholders on a consensual basis. He has indicated he is willing to overrule any objections if we are able to come to agreement.

    The outline of the mechanics would allocate $50mm to former shareholders to cover their legal fees, notice and administration costs and distributions to former shareholders who opt-in to the settlement and release all potential claims (they truly have no claims for reasons discussed previously) but this is a way of providing finality to the defendants that another Pommerantz will not show up and try and resurrect the case. Importantly, former shareholders could not recover more than current shareholders in the initial distribution and if there is excess, which there likely will be, with the remainder being reallocated to the current shareholders. Assuming $10mm in fees to pommerantz (overly generous) $1mm in admin and notice costs would leave $39mm potentially to former shareholders. Pommerantz purports to represent former holders of 1.315mm shares, which would leave $6mm or approximately 77 cents additional funds for shareholders. Any shareholders in Pommerantz group that fail or elect to not opt-in would mean more proceeds return to current shareholders. Given that the post trading liquidity of RENN will be terrible, we are likely going to see if the company will distribute pro rata to the minority their shares in KXIN as well as any excess cash. At that point, RENN could delist in the US if they so chose and save on public company filing fees and be private cayman company. This process could occur relatively quickly if an agreement is reached in the next 60 days before Borrok’s stay expires. Once Borrok approves a settlement funds could be distributed within 30 days probably with a holdback retained to cover any objectors. Objectors risk getting nothing if the settlement is approved and their appeals fail, so it is a high risk/low reward option.

    3
    1. hem

      Helpful color, thank you. What is the biggest hurdle now to reaching a settlement? I would imagine the defendants do not care since the $300mm was already funded / agreed upon. Is Pommerantz ok with the economics that have been proposed? Are there (large) current shareholders that are not supportive of these new terms and instead wish to take this through an appeals process? Trying to figure out what the new risk reward looks like (it sounds like that deep downside $5 outcome has been most likely eliminated).

    2. blades

      Joshua, the whole discussion seems like sausage making, something we’re not supposed to see. How confident are you that a settlement on these lines wraps up the absent former holders?

  42. blades

    Joshua,

    First, thank you for all the insight you have brought to this discussion. You helped me get back into this with a significant personal position.

    Did you hear the call with Judge Borrok yesterday? Just listened. It was strange. It sounded like the Judge is essentially telling Reid to use his $100M fee amount to give a meaningful number to the prior holders, and the rest of the deal can stand.

    That would mean there is no upside to getting fees reduced and the upside to a settlement based on the judge’s suggestion is $25/share plus the value of the stub. Still a very nice return from here if the lawyers pull it together.

    Risks:

    1. The lawyers decide that this doesn’t work because they can’t bind the absent prior holders.

    2. Part of the solution involves less money to the current holders.

    1. blades

      Correction: I should have said $25.92 plus the stub assuming the settlement is adopted.

      1. hem

        Do you know how we can listen in to the hearing tomorrow? Doesn’t look like an unrepresented party can register on court solutions, is there another way?

  43. brettrush1

    It feels like there is a reasonable chance that appellate court upholds Borrok’s decision given that plaintiff attorneys are asking to have their cake and eat it too. Even if they uphold derivative action they may force settlement to go through corporation in which case taxation puts a big dent in the upside.

    Hopefully Reid can be reasonable and convince his clients to be the same so they can just strike a deal and get this over with. IMHO things get dicey if this goes to appeal.

    1
  44. blades

    The appeals were adjourned to the May 2022 Term pursuant to a stipulation of all parties entered 2/16, with related extensions of time for filing briefs. Perhaps indicates the parties are busy discussing a settlement?

    1
  45. blades

    Note that a show cause order signed by Judge Borrok filed yesterday, and today Judge’s order giving the plaintiffs until tomorrow to file response to the defendants’ motion to dismiss. Is it, he’s really pissed at the plaintiffs? Trying to hurry the settlement along? Positioning the case for appellate review? Given today’s filing, I’m surprised stock is up.

  46. JESQ

    The case is so procedurally FUBAR, I’ve never seen anything quite like it. The judge “invites” the defendants to file the OSC dismissing the plaintiffs — a motion the Ds don’t even believe in, obviously — then the Ds file it anyway, but the first thing it asks for is to stay further proceedings so the COA can sort through the judge’s nonsense. The judge crosses out that request, SIGNS the OSC dismissing the plaintiffs, and then the NEXT DAY asks for someone — anyone, Bueller? Bueller? — to actually file an opposition AFTER he has granted the OSC?? I mean, what the what? And no one has even bothered to filed an opposition, maybe because the judge is dumb and crazy and best to just take it up with the COA??

    The biggest problem for plaintiffs in trying to strike a new deal is (1) the money for long-gone shareholders is presumably to come out of counsel’s pocket (i.e., the fee request), and counsel won’t like that (2) I think plaintiff’s counsel has serious ethical issues even trying to “represent” the old shareholders and fashion a new deal, even if the $$$ just comes from them and (3) Ps and Ps counsel may prefer to wait for COA to sort everything out.

    By the way, Blades, I don’t see any stip adjourning the appeal to the May session on the 2021-04695 docket. Where’d you see it? Oppo brief due today IF still on the April calendar.

  47. JESQ

    Also, is there any explanation for the run-up in RENN shares in the last six weeks OTHER THAN anticipation of a revived settlement? Any underlying business reasons?

  48. blades

    JESQ, appreciate your comments; sounds like you have applicable background knowledge. My understanding is that the legacy businesses have only $2-3/share of value, and so primary return comes from a settlement or successful litigation.

    I didn’t actually say anything about the appeal, and I have not followed that.

    A couple of things from looking again at the recent filings:

    1. I want to add to your consternation with the way the judge is handling things. It appears that he is being deceitful w/r to the record. He states in today’s order that “The order to show cause to dismiss the claims of shareholders who purchased their shares after the Record Date was served on January 14, 2022. The time that the court ordered for opposition has come and past (sic) 1.28.22)”—you’d think he could at least spell correctly.

    What was filed on January 14 was a proposed order drafted by the defendants, the primary purpose of which was to seek to stay all proceedings until the appeal was decided. Borrok has the nerve to say that the plaintiffs didn’t respond to the proposed order, which Borrok didn’t sign until yesterday. Since he didn’t sign it until then, it is pure deceit to say that “The time that the court ordered for opposition aha come and [passed].”

    Then he takes the proposed order, strikes out the stay paragraph, signs it and gives the plaintiffs one day to file an opposition: “That said, the parties shall have one final opportunity to put in opposition to the motion by March 3, 2022, at 5pm.”

    My hope is that he is doing this crazy stuff because he wants to get a quick settlement and avoid an appeal, but I don’t know.

    2. Reading the argument of the defendants in their Jan. 14 Memorandum in support of the proposed order, they raise a worrisome issue with regard to New York Law: “Under BCL § 626(b), only shareholders who were also shareholders at the time of the challenged conduct can properly maintain a derivative shareholder action.” Do you have any thoughts on whether this is correctly applied or does Cayman law control this issue?

  49. JESQ

    The conference today was such a shitshow, with the judge basically saying “propose to me a new settlement that disperses money to those shareholders who can prove BOTH (1) they WERE holders as of the June 2018 record date AND (2) are holders today, to satisfy the continuous ownership prong for derivative standing… BUT ALSO folks please cut a “business deal” settlement with every other shareholder group (who are not entitled to anything, per the same judge) so we can all go home…and by the way I can mediate this thing! He has tied himself into such knots because of this gibberish.

    I am starting to wonder how the current price can support any such settlement, if the judge expects $200M to go only to those shareholders who satisfy (1) and (2) above, and everyone else (including current shareholders) will only get whatever crumbs the plaintiffs lawyers deign to peel off their originally-claimed $100M fee.

    Blades am I missing something?

  50. blades

    JESQ, I am very optimistic after listening in on the phone call. I now think the way is clear for investment in RENN to be something that is very skewed to a nice return, and small risk on the downside.

    I hope that they’re going to put up a transcript of the call, but for now all that I’m saying below is from memory. Also, although I feel good about what I’m saying about the game theory of the case, this is just my opinion, and involves a good amount of speculation.

    You are right that it was an incredibly screwed up conversation on the face of it, but I think reading between the lines what’s going on is very good for RENN holders. It’s now clear Borrok recognizes that under the law applicable to the case, there is a continuous holding requirement for recovery. In other words if you’re not holding now, you’re not entitled to anything. The reason for all of the confusion that he was creating in this hearing is that he’s trying to cover up his tracks with regard to his prior statements that you had to be a shareholder on June 2018 in order to participate in the recovery (previously he had an April 2018 date for his screwed up theory). Again, I hope that they’re going to put up a transcript of the call, but what I heard clearly was him now acknowledging that current shareholders are eligible to receive proceeds. That’s incredibly important to me because I had a lingering fear of any chance, however small, that current holders could not recover anything. Of course, that is simply the common law with regard to derivative actions, but the judge messed things up by confusing part of the standing requirement for bringing a case, ownership at the time of the injury complained of, with eligibility to share in the recovery of settlement proceeds.

    Did you notice how comfortable Bill Reid, plaintiffs’ counsel, was with the conversation? He knows where the judge is, and the judge knows that Reid knows what the situation is. That’s why Reid was comfortable talking about calling from the Masters, and making a joke at the judge’s expense about prior rulings, which the judge thought was hilarious! That’s why Reid is so comfortable with having the judge mediate a settlement.

    What will the settlement be? Reid will carve out of the attorneys fees something to go to shareholders who held stock in June 2018, but subsequently sold. From his point of view this is not a major give up, because he knows there are very few scenarios in which he would get a $100 million fee out of this case. He might as well take something out of that $100 million, and give it to the June 2018 non-continuing holders, however undeserving, if that gets the case settled, and avoids appeal. Counsel for those holders, although bitching about getting the full amount of their losses, knows that absent a settlement, after an appeal he’d get nothing.

    I’ve seen the appellate court’s order rescheduling the appeal to September, but I don’t have a link.

  51. JESQ

    Appreciate the detailed thoughts, and I don’t disagree the judge is itching to drive a settlement. The question is what $$$ goes into which different pots of shareholder recovery? There are essentially three groups of shareholders:

    (1) Shareholders who held at the 2018 record date and have held continuously ever since — and still hold today.

    (2) Former SHs who held at the 2018 record date, but have since sold and do not currently own any shares.

    (3) Current SHs who bought shares at some later date post-injury — 2019 or today or yesterday or whenever.

    The (1) group is golden — they were injured, and therefore should recover per the judge, and they also satisfy basic derivative suit standing. This group includes the named plaintiffs that Reid represents, unless I am missing something obvious. The judge seems to want the bulk of the formal settlement to go to these holders, given his understanding of the law. But group (1) is what percentage of the current float? 1%? 10%?

    (2) is I believe folks like CRCM and whoever Rakauer (sic?) represents. The judge has tied himself into knots because these shareholders were ‘injured” per the judge and thus deserve something….but whoops! They also lack standing to prosecute an action, cause they got out years ago. The judge seems to be essentially saying “come on, pay (2) off! Do a business deal! Use some of that $100M in requested attorney fees that I’m not giving you to make them go away. In the federal courts, we pay off people who lack standing all the time!” It’s fucking stupid, but it is what it is with this judge, because he keeps creating nonsensical contradictory rulings that contravene the law of derivative actions.

    (3) is the only group that matters for us here, today, on SSI, as a potential actionable investment. This was the group — i.e., all current RENN SH — who per the original settlement were due $200M. It is also the “group” that has recovered in every other derivative suit ever filed through time immemorial since Moses wore short pants. (Well, technically the company recovers, but each current SHs obviously has a pro rata claim on the company’s cash).

    But because this judge doesn’t understand efficient markets or how claims work or how derivative suits work, he hates this class and thinks they deserve nothing.

    Now, as someone prosecuting a derivative action, Reid *should be* working for the benefit of (3)…but his named plaintiffs are part of (1), so I can see how he just wants a deal and if the judge has all these crazy ideas, hey, that just means more for his named plaintiff clients in (1).

    Will (3) also get paid off in a “business deal” settlement, even though the judge thinks (3) deserves nothing? Maybe! But how much? And to whom? And who is representing the interests of (3) now?

    My main questions for blades or anyone else is therefore: Given what I set out above, WHAT EVIDENCE IS THERE THAT (3) WILL GET A MEANINGFUL RECOVERY IN ANY SETTLEMENT? What evidence is there that such recovery will be anything close to the original $200M?

    1
  52. blades

    JESQ, Nahh, that’s not the way to look at this. I’m not going to match very lawyer with a client, but I don’t think you need to to get a very good idea of what’s going on.

    The primary thing to remember is that if you’re not a current holder, in a derivative action you have no rights. On appeal this will be established in 5 minutes. And Borrok now realizes this. He even alludes to getting tipped on appeal and says, he’s not afraid of that. But he doesn’t want this to be appealed because he knows he will look stupid for confusing standing with a right to recover (and thereby screwing things up for months now).

    Also, remember that Reid’s primary client is Oasis. They are precisely in our shoes, not holders back in June of 2018. Take a look at its recent 13D; they own an absolute boatload of stock, 17.68%, which I believe is more than half of the stock owned by the minority! Reid has one named plaintiff who has standing and still holds, but she owns a tiny bit of the outstanding.

    Based on these two facts, Borrok has no power to allocate money where he might personally like, and Reid is not going to able to sell Oasis (us) down the river, even if he wanted, which I doubt he would. And Borrok doesn’t care at this point. He just wants a facesaving allocation of something to stockholders who held in June of 2018 but subsequently sold. Reid doesn’t represent them, and doesn’t pretend to. They have their own counsel.

    Borrok was very explicit, paraphrasing, “Bill, throw those guys a bone out of your attorneys fees and we can settle this.” Notice he doesn’t ask Oasis (us) to give up anything out of the settlement; he asks Reid. And he asks Reid because Reid isn’t getting his full fee anyway; Borrok had made that clear. And that’s something well within Borrok’s discretion.

    Just an aside, but did you notice how Borrok was bending over backward to be nice to Reid, complimenting him on his acumen and skill in his management of the case, and also on the quality of his legal briefs! For gosh sake, he even laughed and laughed at Reid’s joke at his expense. And note the short shrift Borrok gave the other lawyers, he wouldn’t let them finish their statements, I think because he didn’t want them to ask him to repeat his stupid rulings for the record.

    So, I think the current minority shareholders are getting all of the $200 million. And we have a pretty good chance of Reid making a settlement happen with some of his excess fees; note that Reid wants to mediate. If he doesn’t, we’re on to the court of appeals and we’ll get it then, I believe.

    2
  53. g4734g

    Blades thanks for the analysis of the call, well done…….To a certain extent one could argue the payment to the non holders does come from us, as the judge had already said the fees were to high and one could argue those should be due us and not the pre 2018 holders who have sold……If you see the transcript of the call if you could advise, would be most appreciative. If current holders receive all $200 million will the final resolution be the cash payout and a remaining stub that continues to trade? Do you have an estimate of the cash payout and the stub under this assumption? I’m trying to make sense of the OCT 30 calls at $2….seems high….thank you

  54. blades

    Crazy action in RENN since my last post. RENN stock closed at $28.32. Cash portion of the settlement rejected by Borrok is 25.92 plus the stub. Fair enough, but the price action seems meme-y. A new settlement should be achievable, and but there’s no certainty some bite won’t come out of the current holders. Also, the option pricing seems nuts. Look at the July 35’s. Last trade was at $1.00!! A scenario in which current holders gets $36 by July, I can’t imagine.

    1. dt

      Blades, I think it makes sense to close the idea here? The thesis and timeline have changed quite a bit since the initial write-up, so I think using this opportunity to exit the case makes sense.

      Initial thesis, when RENN was trading at $25/share: RENN shareholders will receive $25+ of settlement amount + stub (probably around $2/share) + amount from reduced lawyer fees (around $5/share). Timeline – 5 months.

      Current thesis (if I am following this correctly): RENN shareholders will receive $25+ of settlement amount + stub (probably around $2/share), but the amount from the reduced lawyers’ fees might end up in the pockets of previous RENN shareholders. Timeline: limited visibility on how long this might drag on.

      At the current price of $28, RENN is already trading above the expected baseline recovery.

      Let me know if you see this differently.

    2. dt

      Closing RENN case for tracking portfolio purposes. A really wild ride, but in the end only 12% return in 6 for months from the write-up prices.

      Thank you blades and all others for sharing, for insightful discussion and for regular follow-ups.

      Also, congrats to all who had understanding and balls to purchase this below $10/share – resulting in 3x in 4 months.

  55. blades

    Dt, I can’t say I see it very differently. I would add two things: It’s quite possible this could settle soon given the back and forth in the last session with the judge; just a guess but I think the recent run up is based on this. Also, there might be an opportunity in shorting the calls given their (unrealistic, I believe) run up; best to own stock to hedge that idea.

    But I agree, closing here makes sense with respect to the original idea.

    1. dt

      I guess large premium on $35 calls is due to the risks of a further squeeze on RENN as well as very low options liquidity. Hedged trade (long equity + short call) might also work out worse than the current market price of $28+.

      1
  56. Terence

    Certainly a wild ride. This SSI idea can also be divided into two: pre and post 12-9-21 court hearing. E.g. for those who held since the idea was posted on 10-21-21, assuming sold on 12-9-21 (one idea) and bought on 12-9-21 (2nd idea).

    “…congrats to all who had understanding and balls to purchase this below $10/share – resulting in 3x in 4 months.”
    Chris DeMuth did, and published it as his best idea for 2022 on 1-10-22. See Tony’s post above on 1-12-22.

    1. tony

      yes, he’s done well with this one – more luck than skill if you read his thoughts.

      Is Joshua still here?

      1
    2. Chris DeMuth Jr

      Thanks, Terence. My wife has found precisely two of my investment ideas convincing enough to buy in her PA and this was one of them. It is my second biggest position and one I still quite like here.

      Thanks, Tony. I think I’ll steal “more luck than skill if you read his thoughts” as an epitaph for my gravestone, but I’m keeping the “more luck than skill” money.

      7
  57. Joshua

    Tony, I am still here but was refraining from comment due to involvement in settlement discussions. I am glad to see many people hung in there and to the doubters with 0 understanding of litigation process and thought Borrok could do whatever he wanted and sold, your loss. It is time to be realistic on the value of RENN post settlement and how poorly it will trade once the distribution is made (assume end of June timing). Post distribution RENN will face constant selling pressure as funds such as Oasis that own 5mm of the 8mm minority dump as well as the 2mm shares in the hands of funds in the intervenor group who also will be dumping shares. The technicals will be horrible for a long time. Selling out of the money calls and dumping your shares and taking the tax loss is probably best strategy.

    KXIN is trading at 90 cents and is now worth approx $1.73 per RENN share and falling, compared to when I first got involved in the litigation KXIN traded around $10 per share an RENN owned about 70% of it. So I would ascribe very little value to the stub value via KXIN and apply at least a 30% haircut to value to RENN. Second, Chen is not a tech founder and I put 0 value on their trucking SaaS business. Chen is an “operator” in the negative sense of the word and made some lucky bets on fintech in the 2011-2015 time frame. Finally, the $70mm of unrestricted cash will NEVER be distributed for the benefit of all holders, including minority. It is Chen’s personal expense account while he reinvents himself in Arizona as a tech entrepreneur. There is 0 reason for him to dividend it and pay taxes when he and his cronies can use it as there piggy bank.

    1
  58. blades

    There are good reasons for Chris to “still like it here.“

    The legal situation has clarified tremendously over the past week or so. Judge Borrok is now fully on board with recognizing that the law with respect to derivative cases requires that all the proceeds be paid to current holders. Also, he is on record as saying that his upper limit for approval of legal fees is 17 1/2% versus the 33% originally requested by plaintiffs’ counsel. If you do that math, that means an upcoming CASH distribution to shareholders of $31.92, probably a few cents less to take into account legal expenses of about $1 million.

    I think there is a chance that plaintiffs counsel will ask for a little more than 17 1/2%, because, hey, it doesn’t hurt to ask, and if you’re a litigator, that’s what you do. IMO plaintiffs counsel vaguely signaled that he was going to ask for $10 million more when this was being discussed in court. Even if you assume that he gets it, which I sincerely doubt given the judge’s remarks on the fee, that’s still $30.31 in cash to the current holders of RENN.

    And on top of that, you get to keep the stub for free! Joshua has pointed out a number of factors that could minimize the value of the stub, but the stub can’t have negative value! It will trade for something. Even a buck or two is a nice kicker. Could it be that Joshua’s comments on the stub this morning were the reason for the crazy short-lived volatility jump/price crash? Some readers might have misinterpreted his comments perhaps?

    Last point. I and other observers have castigated Judge Borrok for his unprofessional manner and deep misunderstanding of the law in this case. But I’m going to give him a bit of thanks and credit here. He pushed back hard on the legal fee. I bet most judges would’ve rolled over and allowed plaintiffs counsel to get 33%. He might’ve caused a lot of confusion, but at the end of the day, the shareholders will be receiving a nice benefit because he appropriately limited the fee to an amount though still rich, is far less than the absurd $100 million that would otherwise have been paid.

    Actually one further point, there will likely be an appeal of the settlement. It has zero chance of success, but could delay, but not endanger, the distribution of cash.

  59. Terence

    Chris DeMuth, great to find out today that you’re here in SSI, welcome aboard!

    1
  60. Joshua

    My understanding it was a fat finger that caused the chaos earlier, I wish I had that kind of market moving ability. Reid Collins is asking for $67.5mm in fess vs Borrok’s $52mm. They realize they will not get the full ask, but are likely hoping Borrok splits the difference, which would be $1 per share decrease to recovery. I tend to think it will be in the $52-$55mm. Expenses will be higher than the $1mm initially submitted in December and also need to account for the cost of notices in WSJ and other publications, fees to Epic as administrator etc, those could be 25-50 cents per share. In addition, intervenors will be filing a motion to have our fees covered so that could be another 15-20cents per share if approved.

    On the Stub, it is likely de minimis value relative to current trading price. If you can sell it for $1 and sell some out of the money calls (options liquidity will collapse after distribution, not that its deep now) you will have maxed out the value in RENN.

    1. tony

      Am out at $29. What a ride this has been!

      Chris: no offense intended, but I guess you don’t need to be reminded of that as you must have a thick crocodile skin by now how public your profile is.

      Joshua: Any other situation peeking your interest at this time?

  61. blades

    Thanks for the color on expenses. I think you’re right $52-55M is the range, which would be a very good outcome.

    1. g4734g

      Joshua, Renn seems to be trading in a narrow range now more or less with the market sentiment of the day. Might you have info on the status and timing of the distribution? Thanks for your info to date. This has been a good one.

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