What happened
Shares of Renren (RENN) gained roughly 80.2% in October, according to data from S&P Global Market Intelligence. The Cayman Islands-based company's stock skyrocketed after terms were announced for the settlement of lawsuits alleging fraud and breaches of financial duties to investors.
Renren issued a press release on Oct. 8 announcing that it had agreed to pay investors at least $300 million to settle suits alleging that the company had breached its duties to shareholders by spinning off its investment holdings at prices that significantly undervalued the assets. The deal did not require the company to admit any fault in its dealings, and the stock soared following news of the settlement.
Image source: Getty Images.
So what
When Renren had its initial public offering back in 2011, the company appeared to have a thriving social media network and was sometimes referred to as "the Facebook of China." However, user engagement quickly began declining, and its sales and earnings deteriorated.
Renren's core business was struggling, but the company turned its assets toward buying stakes in start-ups, building a valuable investment portfolio in the process. Most notably, Renren previously held a 13% stake in SoFi Technologies, an online lending and fintech services company that is now valued at roughly $18 billion.
However, Renren sold off most of its valuable investments in 2018, and investors weren't happy with the move or the prices that the company got in the deal. The claimants alleged that Renren CEO Joseph Chen spun the company's investment assets into a new private company he controlled and did so based on insider knowledge that the investment stakes were undervalued. With shareholders seemingly on track to receive a substantial payout, investors have poured into Renren stock.
Now what
Renren stock has continued to make gains early in November's trading. The company's share price is up roughly 5.8% in the month so far.
As per the settlement, the sum paid will be the greater of $300 million or roughly $38.69 per American depositary share to shareholders of record on a yet-to-be-stipulated date. The record date will be set by Renren's board of directors after the approval of the settlement has been finalized.
With Renren stock currently trading at roughly $26.50 per share, that would seemingly imply upside of roughly 46% based on current prices. However, as pointed out by Fool.com contributor Leo Sun, the settlement amount realized by investors could fall to between $20 and $30 per share after legal fees are taken into account, so the stock probably doesn't offer such attractive upside even with the settlement likely to be finalized in the near future.
