Bubs Australia: How investors were dragged into the company’s boardroom fight

How did we get here?

Investors of the infant formula company do not face a straightforward task. They will have to navigate the differing claims made by the two parties, who are also at loggerheads about the manner in which key events unfolded.

The current Bubs board has vigorously defended its decision to remove Carr and Lin from their roles, arguing that long-running issues at the company made their leadership positions untenable.

In a letter to shareholders this week, the company said it made the move to oust the duo in light of “significant deterioration in Bubs’ recent financial performance, undisciplined expenditure and the long-term decline in shareholder value presided over by [Lin and Carr]” as the chair and chief executive of the company.

Bubs’ share price declined by more than 80 per cent between May 2020 and May 2023.

The company also denies that Carr was blindsided by her termination. “In Kristy’s case, there were legal negotiations with her lawyers for some weeks. A final offer was put to her via her lawyers with a clear communication that if it was not acceptable her employment would be terminated,” Rathie said.

At the centre of the bitter spat between the company and its founder is the group’s strategy in China – in particular, the underperformance of exclusive agreements that the company had inked with daigou distributor AZ Global. Daigou refers to the sale of overseas goods, including baby formula, to consumers in China.

AZ Global has been unable to shift all the product it was allocated under the distribution deal, resulting in excess inventory in the market and creating challenges for Bubs’ China sales targets.

The Bubs board has been quick to highlight that two of the shareholders who were part of the spill motion, Alice Trading and Willis Trading, are associated with AZ Global and owe Bubs Australia $2.9 million and $2.6 million respectively. “These entities have failed to repay the debts despite repeated demands from Bubs.”

Bubs’ current management has also questioned the appropriateness of Carr’s chief executive nominee, Peter Nathan, given his former employer A2 Milk is subject to shareholder class actions relating to statements made about A2’s sales performance in China.

“Mr Nathan previously worked for A2 Milk, which is currently a defendant in two shareholder class actions which relate to continuous disclosure obligations and making allegedly false and misleading statements in connection with the deterioration in A2’s sales in China, during the period when Mr Nathan was chief executive officer Asia Pacific,” the company said in a letter to shareholders.

“The board believes the ongoing class actions present significant reputational risks for Bubs at a critical time when it is seeking FDA [Food and Drug Administration] approvals in the US and reviewing its China strategy.”

Under Rathie’s direction, the company is undertaking a strategic review of the business and has promised shareholders will get more details about the board’s vision for the company before the extraordinary general meeting.

“We don’t want to pre-empt the outcome of the strategic review, but it will be much more focused on major initiatives, in China and the US particularly, that will deliver sustainable shareholder value,” Rathie said.

For a while, Bubs Australia was on a winning streak. Having won the approval of US President Joe Biden for its speedy assistance in patching the US infant formula crisis, the ambitious baby formula manufacturer turned a profit for the first time in 2022.

From the outside looking in, the first blow appeared to land in April this year when Dennis Lin was deposed. But for Carr, discord has been brewing in the boardroom since 2019 after C2 Capital, a Chinese private equity firm backed by e-commerce giant Alibaba, purchased a 15 per cent stake in the company and installed managing partner Steve Lin as a director.

“The misalignment had been well known to us and had been escalating over a long time, over around two years,” Carr said. “Steve from C2 Capital, other than being very geared towards Alibaba as a platform, actually never presented or proposed a China strategy – he just opposed and was very against our China strategy.”

She views the strategic review, which will be overseen by C2 Capital’s Jackie Lin, in a similar vein. “He’s an Alibaba, a C2 Capital employee. That is the biggest conflict of interest I have ever heard.”

In a statement through the Save Our Bubs group, supported by Chemist Warehouse chair Jack Gance, Carr has accused the board of taking control of the company “by stealth without consultation with shareholders”.

“The biggest concern for me, after this hostile takeover of the boardroom – which really feels like a hostile takeover of the company but without paying shareholders for the privilege of doing so – is that they just did not have a plan,” Carr said.

Rathie’s contention that lawyers provided Carr with a final offer, warning she would be fired if she didn’t accept, is also rejected by Carr. She is suing Bubs and its directors in an unfair dismissal case in the Federal Court in Victoria.

“The assertion is categorically refuted,” Carr said. “Federal Court proceedings have commenced against the current non-executive directors alleging, amongst other things, contraventions of the Fair Work Act. Given the matter is currently before the court, I would not propose to comment further.”

Bubs in investors’ hands

Most of Bubs Australia’s investor base has been left bewildered. One retail investor, who spoke under the condition of anonymity, believes Carr and Dennis Lin were not given enough time to execute their freshly restructured plans for the China market and wonders whether the company can recover.

“I’m really worried now as a shareholder about the team, the people on the ground that are doing the work every day,” they said. “I think it’s a real crossroads.”

The shareholder also has concerns about the independence of the strategic review led by Jackie Lin. “To get someone with Alibaba background is just a straight conflict of interest. I don’t buy that … That’s inappropriate from a shareholder point of view.”

The recruitment of agribusiness dealmaker David Williams to help conduct the strategic review has not inspired confidence. “[It] just tells me one thing: there’s no sector experience around the table at a board level to help them with making strategic decisions. So they were calling people outside to help them, and that’s really disappointing.”