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BFD Expert Voices - Private Credit

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Binance has barred former CEO Changpeng Zhao for life from running the company, but he will still have a powerful say in the company as its majority shareholder.

Why it matters: Binance's November plea agreement with the Department of Justice left plenty of room for interpretation when it said Zhao had been barred from "managing or operating" the company.

Driving the news: CEO Richard Teng confirmed to Axios it was indeed a lifetime ban, offering some more clarity on what Zhao, also known as CZ, is allowed to do when he completes his jail sentence on Sept. 29.

Some original reports of the plea deal, including ours, said he would be barred for three years due to language in a DOJ memo.

What they're saying: "CZ, of course, obviously being the largest shareholder, will retain all shareholder rights," says Teng.

"As a shareholder, he will be looking at the performance of the company, and if things are not up to what he expects, as an investor, it's always his right to replace, nominate a new board of directors, or a new CEO ... shareholders can also always table a resolution."

Zhao was previously the company's sole board member. Following the plea deal, the company has now seven members on its board.

Zhao is broadly barred from "day-to-day" activities, a spokesperson said.

Between the lines: His majority shareholder powers still leave significant questions as to what is considered "managing or operating." Could he act as a consultant to executives, for example?

Zhao appears to have maintained friendly ties with company insiders, including co-founder and romantic partner Yi He and Binance executive Tigran Gambaryan, who is currently held in Nigeria. The two were among the employees who penned letters in support of Zhao ahead of his sentencing.

That's where two external monitors, appointed via the plea deal to check for compliance, will probably play a role, says Vanderbilt University law professor Yesha Yadav. The monitors are expected to watch the company for the next three to five years.

"The monitor is going to have a big impact in that sense to act as a check and balance to support the board and will have discretion when it comes to CZ's role as a very important shareholder," she says.

The intrigue: The language of the DOJ's settlement with Binance doesn't appear to have made the ban a requirement of the plea agreement, notes former federal prosecutor and Columbia Law School professor Daniel Richman.

The ban was instead listed as a "consideration" of the agreement in the document.

That suggests that the agreement doesn't entirely shut the legal door on his return as CEO, and it would be harder for the DOJ to legally pursue should he do so.

"The bottom line is that a provision could indeed be written that would bar Binance from bringing him back, and that would allow the government to claim breach if the firm did so. That provision does not appear in the agreement," Richman says.

But Binance says in a statement he was "prohibited from any present or future involvement in operating or managing the business" under the terms of the agreement.

The DOJ did not respond to a request for comment.

What next: Following the plea deal, Zhao said he had no intention of being a CEO of any sort going forward and that he will focus on investing in blockchain, AI, and biotech companies.

"That life no longer exists for me," he wrote of leading Binance in an April letter to the court.

The bottom line: The next few years, while under intense scrutiny from U.S. officials, will probably be pivotal in shaping Binance's relationship with its majority shareholder.

"It's going to be very risky for Zhao to try and start to assert himself," says Yadav. "Notwithstanding the leeway that might be involved in the plea deal, it is a tripwire and gives them reason to look at you and [take it as a sign] you are falling back to behavior from the past."

Sorting out CZ's Binance influence

The former founder will still have the ability to replace the CEO and decide M&A deals.

Photo illustration of Changpeng Zhao surrounded by abstract lines, bars, and circles. 

Photo illustration: Aïda Amer/Axios. Photo: Antonio Masiello/Getty Images

Fintech

Binance has barred former CEO Changpeng Zhao for life from running the company, but he will still have a powerful say in the company as its majority shareholder.Why it matters: Binance&#x27;s November plea agreement with the Department of Justice left plenty of room for interpretation when it said Zhao had been barred from &quot;<a class="gtmContentClick" data-vars-link-text="managing or operating" data-vars-click-url="https://www.justice.gov/opa/gallery/binance-and-ceo-plead-guilty-federal-charges-4b-resolution#:~:text=On%20November%2021%2C%202023%20Binance,BSA)%2C%20failure%20to%20register%20as" data-vars-content-id="67c9ee0d-d1cf-40dc-ab2a-7e9a6dce8284" data-vars-headline="Sorting out CZ&#x27;s Binance influence" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.justice.gov/opa/gallery/binance-and-ceo-plead-guilty-federal-charges-4b-resolution#:~:text=On%20November%2021%2C%202023%20Binance,BSA)%2C%20failure%20to%20register%20as" target="_blank">managing or operating</a>&quot; the company.

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Sorting out CZ's Binance influence

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