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Law and Disorder: Chinese Tech Star’s Troubles Go From Bad to Worse
U.S. lawsuit claims China’s LeEco used failed 2 billion dollars acquisition as a ruse to boost buyer’s financial standing
By Dan Strumpf
July 12, 2017 5:10 a.m. ET
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HONG KONG—The troubles roiling China’s once-soaring technology company LeEco Holdings deepened after U.S. television maker Vizio Inc. sued the Chinese firm over a failed 2 billion dollars acquisition, arguing that the deal was a ruse to boost the buyer’s financial standing.
LeEco’s plan to acquire Vizio, potentially seeking a foothold in the U.S. for its electronics, fell through earlier this year, but as recently as April the two sides expressed hope that they would find ways to work together.
Since then, LeEco has faced a cash crunch and other woes. Last week, a Shanghai court froze more than 2.3 billion dollars worth of shares in the company and 181 million dollars in assets owned by founder Jia Yueting. Mr. Jia subsequently resigned as chairman from the listed unit of LeEco, Leshi Internet Information & Technology Corp.
Twin lawsuits filed in both California federal and state court seek 60 million dollars in unpaid deal-termination fees from LeEco. They also leveled a series of allegations about LeEco’s behavior surrounding the deal, alleging that the Chinese firm misled Vizio about its financial well-being and sought to use the acquisition to bolster its financial credibility.
Moreover, the lawsuit argued that LeEco sought to use the deal as a way to obtain access to confidential information about Vizio’s customers. According to the suit, during negotiations, LeEco had access to Vizio customer details such as their contact information, account history and contract terms, and the Chinese company used that information “strictly for its own purposes.” Representatives for LeEco didn’t respond to requests for comment.
Mr. Jia quickly built LeEco into an empire with holdings in video content, smartphones, home electronics and electric cars, but the company’s recent troubles suggest it is headed for one of the highest-profile flameouts in China’s superheated technology sector. The entrepreneur is one of China’s most outspoken tech bosses and had overseas ambitions, backing the U.S. electric-car venture Faraday Future Inc., a bet that earned the company comparisons to Tesla Inc.
But it has stumbled with those plans too. Nevada had promised 200 million dollars in incentives to Faraday to build a 1 billion dollars electric-car plant in the state. This week Faraday said it is pulling the plug on its Nevada factory, citing a shift in business strategy, according to the Associated Press.
Undermining LeEco’s ambitions, Irvine, Calif.-based Vizio’s lawsuit offered a picture of a company scrambling amid deepening financial pressures.
According to the lawsuit, LeEco officials repeatedly represented the company as “financially healthy” and able to complete the 2 billion dollars acquisition. In fact, LeEco was experiencing “severe cash flow and financial problems,” according to the lawsuit, and the acquisition was a way to “to create a widespread and dramatic public impression of their own financial health and well-being.”
LeEco’s proposal to acquire Vizio contained a 100 million dollars deal-termination fee. As problems with the acquisition set in, LeEco offered to set up a joint venture to distribute Vizio electronics through LeEco sales channels in China in lieu of half the termination fee, according to the lawsuit.
Both sides agreed to the joint venture, though Vizio said LeEco never followed through with the deal. Ultimately, LeEco paid Vizio only 40 million dollars of the 100 million dollars termination fee, the suit stated.
Vizio later sent payment requests for the deal-termination fees that went unanswered by LeEco, according to the lawsuit. The U.S. firm said the joint-venture offer was merely a tactic by LeEco to avoid paying the termination fees.
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