Estée Lauder Cos. Inc. was the one that stepped in after Deciem founder Brandon Truaxe announced – in a bizarre social media post last week – that the brand would shutter immediately. The New York-based beauty giant initiated (and landed a preliminary win in) proceedings with the Superior Court of Justice in Ontario, seeking to immediately oust Truaxe from the company’s board and from his role as chief executive officer, and to bar him from issuing any further statements or circulating media on any of Deciem’s social media accounts.
As a the holder of a 28 percent stake in the 5-year old Toronto-based Deciem, Estée Lauder asserted that it was within its rights to initiate court action on the basis that “Truaxe has not complied with the unanimous shareholders’ agreement … [by engaging in behavior] that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of Estée Lauder.”
The fall out this month at the hands of the company’s erratic founder underscores the potential risks of the strategic minority investments that are proving to be “all the rage in the beauty world” at the moment, according to WWD. Despite the fact that such deals “used to live mostly with private equity firms, strategic buyers have jumped on board in recent years.”
For instance, while private equity firms – such as L Catterton, which maintains minority stakes in the Honest Co., South Korea’s CLIO Cosmetics, and British anti-aging skincare brand Elemis, and 14 W, Index Ventures, and Thrive Capital, among others, which have stakes in Glossier – have been busy capitalizing on millennials’ and Gen-Zers’ well-documented obsession with skincare and beauty goods, brands and retailers have aimed to get in on the action in this ever-growing market segment, as well.
Just this month, for instance, Walgreens announced that it has taken a minority stake in digital makeup company Birchbox, while Estée Lauder Companies has taken stakes in numerous budding brands in recent years, including Smashbox Studios, Dr. Jart+, and Forest Essentials, among others. These “minority deals grant them access to fast-growing companies with disruptive, innovative business models for less money than waiting until the businesses are of traditional investment scale to buy them outright,” states WWD.
But such a position is not without notable risks, such as bad press (particularly when the investing party is a consumer-facing brand and/or retailer with a reputation to uphold) and revenue-affecting ramifications. More than that, though, there is the risk that Estée Lauder highlighted in its initial statement about Deciem following Truaxe’s shutdown post: the lack of control. Minority shareholders tend to have little say in the corporate decision-making process. As a spokesman for the company stated last week, “The Estée Lauder Companies is a minority investor in Deciem, and, as such, we do not control the company’s operations, social media, or personnel decisions.”
With this in mind, the recent drama at Deciem should serve as a cautionary tale for brand and minority investors, alike.