An extraordinary row has broken out in the Alternative Investment Market (AIM) between two well-known consumer brands, Boohoo and Revolution Beauty.
On Wednesday the row reached a head at Revolution’s AGM, where events shone a harsh light on corporate governance at the lower end of the London market.
In case you missed it yesterday, we’ve rounded up the key developments.
What Happened?
Online fashion firm Boohoo (BOO) owns a near 27% stake in Revolution Beauty (REVB), which sells makeup and other beauty products.
Boohoo has been agitating for board change at Revolution and appeared to have succeeded on Wednesday when 75% of shareholders backed the removal of the chief executive, chairman and chief financial officer. But in a bizarre twist, one of Revolution’s remaining executives exercised his power to reinstate them, effectively going against investors’ wishes.
Both sides described the other’s behaviour as “self-serving” and the row looks to reverberate further with the LSE and FCA set to be dragged in by Boohoo to adjudicate.
What Did Boohoo Say?
Boohoo flagged “the serious concerns it has regarding the conduct of the board of Revolution Beauty at, and immediately following, the AGM, which it regards as self-serving and not in the best interests of shareholders.”
Revolution Beauty said it had worked “tirelessly for the last 10 months towards resolving the historical issues which have resulted in many detrimental outcomes for the company’s shareholders and other stakeholders”.
What’s the Background?
Revolution Beauty shares were suspended on 1 September last year after its auditor raised concerns about its accounts and it failed to publish 2022 results.
Shares were restored on 28 June 2023 when the shares soared. At that point its directors were handed share options worth £3 million.
Its shares floated in 2021 at £1.60 but are now £0.27.
Revolution argues Boohoo is effectively trying to take over the company without making a formal offer; under stock exchange rules, a company must make a formal takeover offer once its stake raises above a certain percentage.
Can Boohoo Have the Moral High Ground?
Not exactly.
In 2020, the company was the subject of a Sunday Times probe into working practices at factories that produced clothes for Boohoo. Standard Life Aberdeen, now known as Abrdn, sold the majority of its holding in the retailer, describing Boohoo’s response as inadequate.
That year, Boohoo accepted the findings of an independent report led by Alison Levitt QC into working practices in its supply chain; the report found that its oversight of factories was weakened by poor corporate governance. And Lord Leveson, who led an inquiry into media malpractice, was appointed two months later to oversee Boohoo’s ethics.
Boohoo shares were at £4.13 before this scandal broke and they are now at £0.33. Year to date the shares are off around 8%.
What Does it Mean for Governance?
The AIM market has lower regulatory scrutiny than what’s known as the “main market”, and that attracts many early-stage companies to float there to raise funds – and speculative investors wanting to find the next FeverTree or ASOS. Nearly 10 years ago, UK investors were able to add AIM shares to their ISA, a sign that the market had “come of age“.
But the junior market has struggled to shake off its “wild west” image after a number of scandals – and this latest spat will not help the optics for those trying to keep London’s reputation afloat.
“The fight between Boohoo and Revolution Beauty will once again leave investors wondering about governance standards at London’s AIM-listed companies, which have often failed to match those of companies listed on the Main Market,” says Morningstar’s director of stewardship research Lindsey Stewart.
“The allegations of self-dealing and significant accounting misstatements at Revolution are reminiscent of the failure of Patisserie Valerie almost five years ago.”
And the row is set to have wider ramifications, Stewart says.
“These issues have become all the more pertinent as the FCA is consulting to introduce changes to the London market’s listing rules that hand founders and directors more power at the expense of shareholder rights – a move deeply unpopular with the UK’s institutional investors,” he adds.
“Episodes like this mean the debate will continue to intensify over what balance should be struck in making London an attractive place for companies to list, while also upholding the high corporate governance standards and investor protections that the UK market is renowned for.”
Should Investors Gloss Over This?
Online fashion retail is a tough environment. After the pandemic, when stocks in this sector soared, shoppers have returned to bricks-and-mortar outlets.
Morningstar covers ASOS (ASC), which has had troubles of its own this year – as I explained in my recent Stock of the Week video. The company, a former member of AIM, has been ejected from the FTSE 250 after recent share price falls. But our analysts think the shares are now significantly undervalued.
As these share price moves show, AIM stocks can be volatile generally, and disputes tend to make investors nervous regardless of which side is in the right. Shareholders want stability and continuity without the drama. The longer this row goes on, the more damaging it is likely to be. To be sure, the cracks in fashion’s foundation are showing.
