An Australian class action claim against infant formula company A2 Milk is expected to represent thousands of disgruntled shareholders.
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Law firm Slater and Gordon is funding the claim on behalf of investors who suffered major losses after buying shares in the company between August 2020 and May 2021.
During the period, the company downgraded its earnings guidance four times as closed borders and excess product supply disrupted sales to its biggest market China.
This saw its share price fall more than 70 percent from about $21 to $6 each - wiping $11 billion off the company's market capitalisation.
Slater and Gordon class action leader Kaitlin Ferris said the case was being brought on an open basis and she expects thousands of shareholders to join the claim.
The registration process was still ongoing and it would not be known how much money investors would be seeking in damages until it was completed, Ferris said.
Slater and Gordon allege that A2 caused the financial problems it encountered and failed to disclose this to the market.
"We allege that A2 boosted sales in FY20 by pushing what's called English-label [infant] formula tins through the cross-border e-commerce channel [into China] and as a result of that, the daigou channel, which is an important sales channel for A2 ... weren't able to achieve the margin on the product when it was sold to their end-consumers in China ... because there was a flood of stock in the market."
The daigou channel is an unofficial trade route whereby Chinese tourists and students in Australian snap up large amounts of products from company's like A2 and then resell them to friends and family back home on the mainland.
The aggressive marketing from resellers on social media platforms such as WeChat helps to promote A2's profile.
However, the loss of daigou sales and associated marketing further impeded sales of products sold through the e-commerce channels, Ferris said.
Ferris alleged that when the company made the four earnings downgrade over the nine month period it did not have a reasonable basis for the revenue and underlying profit guidance it provided to investors because it had not adequately assessed the market conditions it was operating in.
"It was unlikely that the company wouldn't have been aware of the issues at an earlier stage than what they revealed at the market," Ferris said.
A2 Milk released an updated statement to the stock exchange this morning, saying it always complied with its disclosure obligations. It also denied any liability and said it would vigourously defend the proceedings.