Glenn K. Vanzura, co-head of Mayer Brown’s securities litigation and enforcement practice, was speaking to FoodNavigator-USA after Oatly was targeted in a proposed class action lawsuit* (see box below) on behalf of shareholders who claim they paid over the odds for Oatly American Depository Shares following its recent IPO.
The lawsuit was filed shortly after shares in Oatly dropped sharply in mid-July following a lengthy report from activist investor and short seller Spruce Point Capital Management alleging Oatly omitted and manipulated facts in its prospectus and in an investor presentation last month and “will never achieve profitability.”
‘The short-seller/shareholder class action plaintiff model that we have seen play out in other industries has now come to the food industry’
Oatly has denied the allegations in a blanket fashion and noted Spruce has a vested interest in lowering Oatly’s share price (it’s a short seller), but has not responded individually to the allegations in the report, and told us it is not commenting on this lawsuit.
Vanzura added: “The short-seller/shareholder class action plaintiff model that we have seen play out in other industries has now come to the food industry, so look for other such schemes launched against other publicly traded food industry companies.”
In federal cases such as this one, he said, the complaint must conform with the Private Securities Litigation Reform Act of 1995, a statute that sets heightened standards for shareholder class action plaintiffs to plead and prove their claims.
“Because the standards are so high for such complaints, it is quite common for the suit to be dismissed for failure to plead one or more of the elements of the claim. If the complaint is ultimately dismissed with prejudice, then the defendants will never have to ‘disprove’ the allegations against them in the case. This stage of the case can take a year, and sometimes much more than a year.”
Should the plaintiffs succeed in getting past the motion to dismiss stage, they will get access to discovery, ie, documents, information and witness testimony about their allegations, he said. “But even at this stage of the case, this information is not usually made public, and it may never be made public. Of course, the case could also settle at any time.”
Spruce Point: ‘We believe Oatly will sorely disappoint investors and will never achieve profitability’
In its 124-page report about Oatly issued on July 14, New York based Spruce Point Capital Management said: “While investors are enamored with Oatly’s sales growth in the plant-based food fad, and its commitment to ESG practices, we believe they should be focused on its loss of market share in Sweden and the US, minimal barriers to entry, lack of competitive advantages, rising commodity input costs, and supply challenges created partly through poorly planned production facilities. As such, we believe Oatly will sorely disappoint investors and will never achieve profitability.”
Spruce went on to call for Oatly’s Board to hire an independent forensic accountant to open an investigation to evaluate its claims relating to Oatly’s accounting practices. It also alleged that:
- Oatly ‘cherry-picked’ data to make its sustainability credentials look more favorable.
- “Oatly has not only located production facilities thousands of miles from its oat sources, but also massively overpaid and run wildly over budget in its capital planning. Now as a public company, we believe Oatly is asking investors to pour nearly $1bn into existing and expansionary capex to fix management’s blunders. We estimate cost per liter of new capacity will cost upwards of 77% more than Oatly’s historical cost and continue to make its business non-economical.”
- Oatly’s Utah’s “actual CapEx is running more than 100% over budget at $100m.”
- A footnote in Oatly’s June presentation “calls out that finished goods of oat base production volume are an estimate. We believe that if volumes of production are an estimate, then Oatly’s entire reported revenue stream should also be qualified.”
- Oatly’s “gross margins are overstated” by not including outbound shipping costs: “Based on our industry analysis, a majority of public peers report outbound shipping costs in COGS. Oatly, puts the cost in SG&A [see p60 of the report].“
- “Oat prices and rapeseed oil, as measured by futures contracts, are up sharply in 2021. Curiously, Oatly fails to say anything about the effect of these commodity prices on its business prospects.”
- “Oatly overstates the proprietary nature of its business, and that in the long-run, any such advantages will be competed away. At the core, oat milk is made from oats, water, enzymes and flavoring ingredients.”
Spruce Point: Oatly is losing market share to Chobani and Califia Farms
According to Spruce, “Oatly is losing market share to Chobani and well-capitalized peer Califia Farms. We have been tracking Oatly’s core oat milk product online at major food retailers such as Amazon, Walmart and Kroger and find evidence it is losing promotional prominence and even being price discounted. We also believe Oatly faces waning chances of success in yogurt and ice cream. We find evidence that Oatly’s yogurt is also being price discounted and losing shelf space.”
It added: “Per Euromonitor, the plant-based dairy market in its key regions is expected to reach $21bn by 2025. However, Oatly’s current valuation is almost 60% of the potential market. Based on our current observations of the competitive dynamics, it would seem unlikely to us that Oatly ever captures this percentage of the market. Oatly will likely never make money in a notoriously fickle and deflationary food industry.”
Oatly, in turn, said it “rejects all these false claims by the short seller and stands behind all activities and financial reporting.”
*The case is Kai Jochims et al v Oatly Group AB and a flurry of executives including Toni Petersson, Christian Hanke, Frederik Berg, Steven Chu, Ann Chung, Bernard Hours, Hannah Jones, Mattias Klintemar, Po Sing (Tomakin) Lai, Eric Melloul, Björn Öste, Frances Rathke, Yawen Wu, and Tim Zhang. Case 1:21-cv-06360 filed July 26, 2021, in the US district court in the southern district of New York
In the complaint – a securities class action on behalf of all purchasers of American Depositary Shares of Oatly between May 20, 2021 and July 15, 2021, the plaintiffs allege that Oatly “overinflated its gross margins, revenue, capital expenditure, and market share financial metrics; overstated its sustainability practices and impact; and exaggerated its growth in China.”
It thereby “deceived the investing public regarding Oatly’s prospects and business” and in so doing, “artificially inflated the prices of Oatly ADSs,” which then dropped 8.8% in value over two trading days following the release of Spruce Point’s report.
Oatly has declined to comment on the lawsuit, and said it “stands behind all activities and financial reporting.”