Avon directors taken to court by shareholders

By Katie Bird

- Last updated on GMT

Related tags: Stock

An Avon shareholder has filed a lawsuit against the company board of directors relating to its alleged corrupt business practices in China.

The lawsuit, filed in a New York court, accuses the direct-selling beauty giant of breaching its fiduciary duty, in connection with its failure to comply with the Foreign Corrupt Practices Act.

According to the lawsuit, brought by County of York Retirement Plan, a shareholder of Avon, the board of director’s failure to comply with the Foreign Corrupt Practices Act (FCPA) has caused considerable harm to the company and its financial results.

Failure to comply with the FCPA relates to the acquiring of a direct selling permit in China, according to the lawsuit.

Avon was the first company to obtain a license to direct sell in the country, in February 2006, a few months after the country officially lifted the ban.

Allegations of improper use of expenses

However in 2008, Avon announced that it was conducting an internal investigation into its China operations, after it received an allegation that ‘certain travel, entertainment and other expenses may have been improperly incurred in connection with the Company's China operations’.

Earlier this year, four executives were suspended for the duration of the investigation, which according to press reports included S.K Kao, general manager of Avon China; Jimmy Beh, the unit's former head of finance; C.Q Sun, head of corporate affairs in China; and Ian Rossetter, previous head of Avon's internal audit and most recently on special assignment as vice president of global finance.

In addition, the lawsuit alleges that Avon’s FCPA investigation is now looking at additional countries, not just China.

Cost of investigation

In April of this year, the company disclosed that the cost of the investigation would be somewhere between $85m and $95m.

According to the lawsuit, these significant costs, along with potential fines, shareholder litigation, adverse publicity and a weakened credit rating are faced by the company in the future, which will damage shareholders.

Current holders of Avon shares, which were purchased before October 2008, are advised they have ‘certain options’ and are invited to contact the Shareholder Foundation.

A spokesperson from Avon said the company does not comment on pending litigation.

Avon released its second quarter results today; more information can be found here​.

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