(Yicai Global) Oct. 9 -- Real estate titan China Evergrande Group and Jia Yueting, a controversial entrepreneur who fled China last year with billions of debt over his head, are locking horns in a battle for control over Jia's American electric carmaker Faraday Future.
California-based Faraday, founded and led by Jia, filed for arbitration in Hong Kong last week as it believes that Evergrande's listed healthcare unit, Evergrande Health Industry Group, bailed on a USD700 million payment it should have paid in July.
Evergrande Health said in June it had agreed to splurge USD2 billion on a 45 percent stake in Faraday's parent Smart King, and would pay USD800 million this year, USD600 million next year and USD600 million in 2020. It had paid the initial tranche in May, and in July signed a supplementary agreement to make an advance payment on the later installments provided certain requirements were met. At this point, Faraday had already burned through the initial payment.
It is this supplementary deal that the pair are coming to blows over, one insider told Yicai Global. Faraday Future believes it has met the conditions for the advance payment, whereas Evergrande thinks otherwise -- so there is little alternative but to seek arbitration. Neither party can disclose what those conditions were because of a confidentiality clause in the contract, a source close to Evergrande told Yicai Global.
When Evergrande Health said in a filing to the Hong Kong Stock Exchange on Oct. 7 that Faraday was seeking arbitration over the investment deal, it accused Jia of manipulating the Faraday board into pressing for the early money even though the company had not met the requirements it needed.
But Faraday has disputed those claims. In its own statement yesterday it accused Evergrande of trying to take ownership of Faraday's China unit and the entire firm's intellectual property. It also asserted that the investor is preventing Faraday from obtaining alternative funding.
"Evergrande group will have some real concerns if Faraday finds a new investor," the source close to Evergrande said. "One issue is that if the new investor acts in concert with Jia, Evergrande could lose its position as the largest shareholder.
"Another problem is the valuation for the new backer. Evergrande valued Faraday at more than USD4 billion, but that will be higher after it pumped USD800 million into the company. It wouldn't be fair if Faraday brought in a new investor at the original price," he added.
Faraday and Evergrande have had a rocky relationship over the past month or so. Trouble began in September when the investor dove into the carmaker's financials and forced Faraday Future China employees to move to Guangzhou from Beijing, telling workers that they could quit if they were not prepared to do so, an insider close to LeEco, Jia's failed Chinese conglomerate, told Yicai Global. Evergrande also releases Faraday news before the company itself, he added.
The main question at stake is which party actually controls Faraday Future.
Evergrande believes that, as Faraday's biggest shareholder, it grants Jia additional power at shareholders meetings so he can make major decisions for the company. Jia holds 33 percent of the firm and gets 10 votes for each of his shares. He has five directors on the seven-seat board, whereas Evergrande does not play a major role in Faraday's daily administration.
But Jia's voting rights will be transferred to Evergrande if Faraday is unable to begin mass production of its first car, the FF91, by the end of this year, or the investor believes that he is unable to perform his duties, per an agreement signed by both parties.
Without the USD700 million payment Jia was hoping for, getting mass production underway that soon will prove difficult. A sample car caught fire after a display for company employees and their families last month due to issues with the battery, a source close to the carmaker told Yicai Global. He also said the firm is refusing to pay suppliers and has been letting staff go.
The Cookie Jia
Before he turned his focus to Faraday Future, and possibly still now, Jia was best known as being the man behind the rise and fall of LeEco. He began building the empire in 2011 and was unable to resist trying his hand at almost every new sector he laid eyes on.
Within a few years he had a complex web of companies spanning a diverse range of industries, from smartphones to electric cars and even sports streaming, with many units cross-owning holdings in their affiliates.
His overstretching the company ultimately wound up as its downfall, after he borrowed and borrowed to expand, plunging the firm into a whirlwind of debt and fleeing to the United States, where he had kept Faraday Future a completely separate entity from the conglomerate back home.
The beleaguered entrepreneur has been summoned back to China to pay off the debts, which LeEco's listed arm Leshi -- now under the control of white knight investor Sunac China Holdings -- clocks at CNY7.5 billion (USD1.1 billion), including Jia's personal liability and money owed by non-listed LeEco arms.
Jia has not returned and Beijing has since added him to a blacklist of debt defaulters, which prevents him from taking out loans, leaving the country or even buying train tickets -- if he ever returns to China.
He resigned from his post as Leshi chairman last July, handing over the reins to Sunac Chairman Sun Hongbin, who quit six months later after describing Sunac's USD2.2 billion investment in Leshi as his only regret in life. Sunac executive Liu Shuqing took over as interim chairwoman after Sun's exit, and signed up to the role full time in April this year.
Editor: James Boynton