How Was It Possible for Bitmain to Oust Its Largest Shareholder Overnight?

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A filing of the Cayman Islands–incorporated company , submitted Dec. 10, reveals Zhan’s role as a board director was “ceased” on Oct. 30. That was at some point after rival co-founder Jihan Wu returned to the company’s Beijing office and announced the seeming conclusion to a long-running power struggle.

The takeover may have lasting effects on the world’s largest bitcoin miner maker, which is reportedly filing for an initial public offering within the U.S.

What was known at the time was that Wu took over Zhan’s roles at the Beijing operating subsidiary as a director and personal representative as of Oct. 28. Wu later appeared on stage at a customer event as Bitmain’s CEO and chairman.

A second corporate filing, submitted Dec. 19, indicates the company still had four directors as of Oct. 29 – including Zhan. But the cessation of Zhan’s role on Oct. 30 would go away the Holding firm’s board with three members: Jihan Wu, Yuesheng Ge (head of Bitmain-tied Matrixport) and Luyao Liu (Bitmain’s CFO).

In fact, Liu is now the Holding firm’s Company Secretary and took over the role from Wu as a personal representative of the Beijing subsidiary on Jan. 2, consistent with the documents. And it appears this might not be a nominal move: an individual on the brink of the corporate told CoinDesk Liu has indeed taken on a much bigger role recently.

Many questions remain about the sudden removal of Bitmain’s largest shareholder. But a 3rd document CoinDesk reviewed – the Holding firm’s Fifth Amended and Restated Memorandum and Articles of Association (AoA) – sheds some light on the role within the affair of internal rules governing voting dynamics and board meetings.

The AoA also reveals Bitmain’s commitment to external investors to realize a “Qualified IPO” at designated stock exchanges with an ambitious valuation and offering target.

Director removal
According to Bitmain’s AoA, the corporate can “appoint and take away a director or directors” via what’s called a standard Resolution – one among the 2 sorts of resolutions board meetings can plan to act on. the opposite type is named a Special Resolution.

By the AoA’s definition, a standard Resolution may be a resolution “passed by an easy majority of not but half the votes cast by such Members as, being entitled to try to to so, choose person or by proxy.”

A Special Resolution – while functioning during a similar fashion – should be gone by a majority of not but two-thirds of the votes cast by those voting, “of which notice specifying the intention to propose the resolution as a special resolution has been duly given,” the AoA said.

The AoA stated that every share of Bitmain – whether it’s ordinary or preferred – gives a holder “the right to receive notice of, attend at and vote” at any general meeting, and “at least five clear days’ notice shall tend .”

More importantly, the Fifth Amended AoA said each Class A ordinary share is entitled to at least one vote at general meetings while each Class B ordinary share is entitled to 10 votes.

The Holding firm’s (ultimately unsuccessful) Hong Kong IPO filing in 2018 showed only Wu and Zhan hold Class B common stock , with 2.24 billion and three .98 billion shares, respectively. Other founding members’ ownership was converted to Class A after a 2017 restructuring.

From 2017 to 2018, Bitmain issued Preferred A, B and B+ shares to boost in total quite $700 million from external investors including big-name risk capital firms Sequoia, IDG and Sinovation. The chart below shows Bitmain’s share and voting hierarchy – a minimum of as of October 2019.

Sixth amendment?
But a serious twist allegedly unfolded in November 2019.

Zhan initiated a legal case on Dec. 13 within the Grand Court of the Cayman Islands , asking the court to void a choice passed at a unprecedented general meeting (EGM) in November.

The decision allegedly reduced Class B ordinary shares’ voting rights from 10 votes per share to only one vote per share, effectively curtailing the co-founders’ voting power. The case was first reported by Bloomberg earlier this month.

But what wasn’t mentioned within the Bloomberg article may be a nuance within the originating summons Zhan filed via his controlling company, Great Simplicity Investment Corporation. CoinDesk obtained a replica of the document.

The November meeting passed a special resolution to amend parts of the Fifth Amended AoA to decrease Class B ordinary shares’ voting power, Zhan’s claim said.

That would mean the alleged extraordinary general meeting had to get two-thirds of the votes cast by those that were voting to start with, so as to pass the alleged special resolution.

The Fifth Amended AoA stated the firm “may from time to time by Special Resolution alter or amend the Memorandum or these Articles in whole or part; as long as no such amendment shall affect the special rights attaching to any class of Share without the consent or sanction provided for in these Articles.”

But there’s a catch about the concept of quorum – generally, a minimum number of members are required to be present by person or proxy at a gathering before it can proceed.

While any Bitmain director can convene a general meeting, “No business shall be transacted at any general meeting unless a quorum of Members is present,” the AoA stated, and defined a quorum as follows:

“Save as otherwise provided in these Articles, one or more Members holding within the aggregate not but one third of the issued Class B common stock present face to face or by proxy and entitled to vote shall be a quorum.”

As shown within the chart above, Wu’s 2.2 billion class B shares already counts for 36 percent of the entire – just over the “one third” threshold. So albeit Zhan’s 3.98 billion shares gave him the opposite 64 percent of the entire issued class B, only Wu needed to point out up to possess a quorum, provided Zhan was a minimum of given notice.

When asked if Zhan was notified, conscious of or attended to vote at the alleged EGM, Conyers Dill & Pearman, the firm representing Zhan, said its client “was not conscious of the EGM.”

The firm added that the shareholding is confidential but its client “remains a serious shareholder.”

The Cayman Islands court has not yet selected a date for hearing the case but the “hearing might potentially happen after Easter,” Conyers Dill & Pearman said.

Bitmain said it’s no discuss this story.

‘Qualified IPO’
Late last year, it had been reported Bitmain filed an IPO application within the U.S., months after its first plan to list within the Hong Kong stock market fell through.

The continued effort to travel public is unsurprising as long as Bitmain’s AoA contains what’s called Redemption Rights for external shareholders.

The Redemption Rights stated that external investors within the Series A, B and B+ rounds have the proper to need Bitmain to “redeem or repurchase all or any a part of the well-liked Shares” upon either one among two events.

The first is that a “Qualified IPO” doesn’t occur within five years after the issuance of the B+ preferred stock , which was around August 2018.

The AoA further defines a “Qualified IPO” together that, during a nutshell, would give Bitmain a pre-offering market capitalisation of not but $18 billion with proceeds of a minimum of $500 million. and therefore the listing venue should be either the Shanghai stock market , Shenzhen stock market , Hong Kong stock market , ny stock market or NASDAQ.

That said, the wants about the offering size, listing venues and market cap are often revised with consent from “Majority Shareholders and therefore the Majority Preferred Holders,” consistent with the AoA’s terms.

To put that into perspective, Bitmain’s major rival Canaan Creative, which claims to possess about 20 percent of the crypto miner market, successfully listed on the NASDAQ exchange in November. It raised $90 million at a market capitalisation of over $1 billion.

The second event listed within the AoA is what’s called a “Material Adverse Effect” resulting from “the occurrence of a breach by any group Company or Founder Parties.” The document defines Founder Parties as, collectively, Wu, Zhan and two corporations that are fully owned by each.

It also sets out the definition of “Material Adverse Effect” as “any event, occurrence, fact, condition, change or development that has had, has or might be reasonably expected to possess , a cloth adverse effect on the business, properties assets, operations, results of operations, economic condition , or liabilities of the group company taken as an entire .”

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