Royole's Bankruptcy: How Did It Come to This?-Part Two
Sophia Huang
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The Struggles
Among both former and current employees of Royole, many believe the company’s downfall could have been avoided. From March 2024, when bankruptcy proceedings were initiated, to November 18, when the company was declared bankrupt, various stakeholders—including Royole’s former CTO Yu Xiaojun, founder Liu Zihong, investors, and local governments—engaged in numerous rounds of negotiations over Royole’s "mess."
Within the company, three factions emerged. First, former employees who had not been paid wages hoped to recover their salaries through legal channels and had no expectations for Royole’s future. Second, current technical staff, led by former CTO Yu Xiaojun, sought to restructure the company by introducing new investors. Finally, there was founder Liu Zihong.
On March 31, 2024, Royole issued a statement via its official WeChat account: “The company has not voluntarily applied for bankruptcy or entered bankruptcy proceedings. The recent rumors stem from personal actions taken by former employees related to stock option disputes.”
Despite efforts to push for restructuring, including reports submitted to the court, the process did not succeed.
As of November, court decisions, stakeholder conflicts, and limited investor interest ultimately led to liquidation rather than restructuring, marking the end of Royole as it had been known.
In 2023, under the coordination of local government and the efforts of Dr. Yu Xiaojun to engage multiple parties, numerous experts evaluated the situation and confirmed that the company's direction was still viable. Initially, we applied for bankruptcy reorganization, but the court proceeded with bankruptcy liquidation instead. We were against liquidation because it would mean the end of Royole, whereas reorganization would allow us to bring in new investors,” He Ke said to reporters in August this year.
An investor familiar with Royole also told reporters that the bankruptcy reorganization process for Royole has been "stalled," preventing new investors from entering. In August 2024, nearly 400 former and current employees, led by He Ke, jointly submitted an urgent letter titled Request for Converting Royole's Bankruptcy Liquidation to Reorganization Procedure to the Shenzhen Intermediate People's Court, hoping the court would shift Royole's bankruptcy liquidation to reorganization.
However, the effort did not yield the desired results. Former employees participating in the appeal believe that the person "blocking" the conversion from liquidation to reorganization is Liu Zihong.
Can Liu Zihong truly "block" this procedural change? According to Royole’s prospectus, Liu, as the actual controller of the company, directly holds 38.61% of shares and controls 71.56% of the voting rights.
In this regard, Wang Yongping, a senior partner at Grandall Law Firm and director of Grandall (Hefei) Law Firm, explained that in deciding on bankruptcy procedures, the opinion of the actual controller is undoubtedly an important consideration for administrators and courts.
Zhang Weiping, director and attorney at Guangdong Pingwei Law Firm, shared a similar perspective. He emphasized that the choice of bankruptcy procedure is heavily influenced by the actual controller. Zhang noted that under the law, since reorganization plans can be proposed by multiple parties, including creditors, debtors, or shareholders holding at least 10% of the debtor's registered capital, reorganization is a private right rather than a public law entitlement.
He further stated that once a company and its subsidiaries enter bankruptcy liquidation, it indicates that negotiations between creditors and debtors have failed, and reorganization is either unfeasible or unsuccessful. Once a company is in liquidation, the process cannot be reversed to reorganization.
Zhang explained that whether a reorganization plan can be approved and executed by the court depends on various factors. While the plan binds the debtor and all creditors once approved, uncertainties remain. If creditors or debtors fail to propose the plan, or if the involved parties do not consent, the court is unlikely to approve it. The employees’ collective appeal for reorganization ultimately requires the court's decision, and employees must negotiate with creditors or debtors.
Wang Yongping also analyzed that according to the Enterprise Bankruptcy Law of the People’s Republic of China, during the period between the court accepting a bankruptcy application and declaring bankruptcy, debtors or shareholders holding at least 10% of the debtor's capital can apply for reorganization. In practice, courts sometimes accept creditor-filed applications for reorganization during this stage.
Courts also assess whether the enterprise has reorganization value. Wang noted that factors like asset condition and operational status are critical. Companies with significant fixed assets or good operations and sufficient orders are more likely to be reorganized. Conversely, light-asset companies with mainly intangible assets, insufficient orders, and minimal operational value are often deemed unworthy of reorganization.
From the perspective of investors, if investors with strong intent and capability support reorganization, courts will prioritize it. However, if the management and shareholders of the enterprise lack the will or ability to continue operations or attract new investors, bankruptcy liquidation becomes inevitable.
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The Role of Management
Since Royole encountered its crisis, former CTO Dr. Yu Xiaojun has been viewed by employees as the last responsible leader genuinely committed to reviving the company.
Dr. Yu’s background is similar to Liu Zihong’s. As Liu’s senior at Tsinghua University, Dr. Yu was admitted to the materials engineering program in 1994. In 2000, he pursued master’s and doctoral degrees in electronics engineering and materials science at Stanford University, graduating in 2005. He then worked at IBM and Micron before co-founding Royole in 2012 with Liu, who convinced the eight-year-older Yu to leave his job and return to China.
According to Royole's prospectus, Dr. Yu, as a co-founder, held only 4.47% of shares, while another co-founder, Wei Peng, owned 4.97%.
After the bankruptcy proceedings were initiated, Royole’s operations largely ceased. Against this backdrop, Dr. Yu managed communications with the Shenzhen government’s task force assigned to Royole and reassured employees. “After the review began, Dr. Yu essentially led the efforts, but many of his decisions needed to be submitted to Huashang Law Firm, which was responsible for the bankruptcy review, before being forwarded to the court,” He Ke told reporters.
While Dr. Yu and the remaining employees continued pushing for reorganization, what was Liu Zihong doing?
At 10 a.m. on August 31, He Ke claimed to have spotted Liu in the audience during a televised broadcast of the U.S. Open women’s singles match.
On September 13, Royole’s first creditors’ meeting was held. Guangdong Huashang Law Firm, appointed by the court as the company’s administrator, revealed in the meeting that Royole and its three subsidiaries owed over 35 million RMB in unpaid wages.
On November 18, the Shenzhen Intermediate People’s Court declared that Royole and its two wholly-owned subsidiaries lacked sufficient assets to repay all debts, officially declaring bankruptcy. This marked the end of hopes for Dr. Yu and the employees striving for Royole’s revival.
Did Liu Zihong intentionally hinder reorganization? One investor speculated that for Liu, promoting bankruptcy reorganization was not just about saving the company but would also involve facing potential shareholder restructuring and asset reorganization. “Bankruptcy liquidation is undoubtedly the most advantageous outcome for him,” the investor said.
On November 25, Wang Yongping elaborated: “Royole’s situation involves high intangible assets and massive liabilities. The proceeds from asset disposal are negligible in covering debts, making revival unlikely. It’s more feasible to auction intangible assets to a new company or willing investors while leaving the debts with the original entity for liquidation. The valuable assets could then be transferred to a new company for operations without the burden of debt.”
Outcome and Insights