Settlement Does Not Change Herbalife’s Business
Model as a Direct Selling Company
Herbalife Board of Directors Frees Carl Icahn
to Acquire Up to 34.99% of the Company’s Outstanding Common
Shares
Global nutrition company Herbalife Ltd. (NYSE: HLF) (“Herbalife”
or “the Company”) announced it has reached a settlement agreement
with the Federal Trade Commission (“FTC” or the “Commission”)
resolving the FTC’s multi-year investigation of the Company. The
terms of the settlement do not change Herbalife’s business model as
a direct selling company and set new standards for the industry.
With the settlement agreement announced today, the FTC’s
investigation of Herbalife is complete.
Herbalife and the Illinois Attorney General also reached a
settlement, and the Company agreed to pay $3 million as part of
this separate agreement. With the conclusion of the Illinois
investigation, the Company is not aware of any active
investigations by any other state attorney general.
“The settlements are an acknowledgment that our business model
is sound and underscore our confidence in our ability to move
forward successfully, otherwise we would not have agreed to the
terms,” stated Michael O. Johnson, chairman and CEO, Herbalife.
While the Company believes that many of the allegations made by
the FTC are factually incorrect, the Company believes settlement is
in its best interest because the financial cost and distraction of
protracted litigation would have been significant, and after more
than two years of cooperating with the FTC’s investigation, the
Company simply wanted to move forward. Moreover, the Company’s
management can now focus all of its energies on continuing to build
the business and exploring strategic business opportunities.
The Company’s Board of Directors (“Board”) unanimously approved
the settlements and voluntarily established an Oversight Committee
of the Board (“Committee”) that will ensure full compliance with
the terms of the agreement. The Board also appointed Henry Wang,
presently Deputy General Counsel and Chief Compliance Officer, to
lead the Company’s implementation efforts, reporting directly to
the Committee on these matters. Additionally, Pamela Jones Harbour,
currently Senior Vice President of Global Member Practices and
Compliance and former FTC Commissioner, was appointed to oversee
implementation of new distributor compliance initiatives.
The Oversight Committee complements the Board’s ongoing
commitment to lead the industry while continuously improving
customer protections and satisfaction. During the past few years,
the Board has engaged experts in the field of consumer protection
to advise them on regulatory compliance and best practices leading
to many of the enhanced safeguards that were previously implemented
and are being expanded in today’s agreement.
The terms of the settlement apply only to the Company’s sales in
the U.S., which comprise approximately 20% of total net sales. As
part of the settlement, the Company agreed to new procedures and
enhancements to some policies that already exist. Many of the terms
agreed to were either already being contemplated by the Company or
are extensions of practices already in place and will be
implemented over the next 10 months. The two primary components of
the agreement are:
- Those who currently have a membership
with Herbalife, and those coming into the business, will be
categorized as either a preferred member (those who become a
preferred member to purchase products at a discount) or distributor
(those who choose to build a business and sell products through
direct sales). This will allow Herbalife to better track both
groups and provide a personalized experience for these
individuals.
- Distributors will be compensated based
upon retail sales and will provide receipts for their transactions.
Their compensation will also be based on purchase for personal
consumption within allowable limits. Herbalife’s independent
distributors are currently required to keep sales transaction
receipts. With advancements in mobile technology, tracking retail
sales is now even easier, and the Company has already developed
proprietary technological solutions including a mobile application
in the U.S. to make the process as efficient and easy as
possible.
Other terms agreed to include enhancing training provided to
distributors; requiring a business plan and a one-year waiting
period before opening a nutrition club; extending the amount of
time a distributor may return an initial membership pack; paying
for all shipping costs associated with any returned products;
prohibiting auto-shipment of products; auditing by an independent
third party; and extending the protections on income claims
including greater specificity around lifestyle claims.
Importantly, as was the case with the FTC’s Amway decision in
1979 (In the Matter of Amway Corporation Inc., et. al.), the
Company anticipates these agreed upon procedures will now provide
direction for the entire direct selling and multi-level marketing
industry. Therefore, the Company believes that while some of the
additional terms do not have significant impact on the Company,
these provisions will improve policies throughout the industry. For
example, the Company implemented stricter consumer protection rules
relating to auto-ship several years ago and the practice now
represents less than 1% of all Company sales. Similarly, only 0.02%
of all Herbalife products in the United States are returned to the
Company, so paying shipping costs associated with returned orders
is expected to have minimal impact. While the costs associated with
these respective changes are expected to be immaterial to
Herbalife, they will likely lead to significant changes across the
industry.
Furthermore, as previously referenced in the Company’s public
disclosure on May 5, 2016, Herbalife also agreed to make a $200
million payment to the FTC as part of the settlement.
The Company additionally announced that it has granted Carl C.
Icahn, Icahn Enterprises Holdings L.P. and certain related entities
(collectively the “Icahn Parties”) the right to increase the size
of their maximum ownership position in Herbalife to up to 34.99% of
the Company’s outstanding common shares from a previous maximum of
25%. The Icahn Parties currently own 17 million common shares of
Herbalife, representing approximately 18.3% of the Company’s
outstanding common shares. Herbalife’s 13-member Board of Directors
will continue to include five members designated by the Icahn
Parties.
“I have always believed in Herbalife’s strong fundamentals and
am pleased the Board has decided to increase my ownership limit
from 25% to 34.99% of the Company’s outstanding shares. A
significant part of my investment success is directly tied to our
in-depth investment research and understanding of often complex and
unique issues facing companies,” said Carl Icahn. “I have the
greatest confidence in Herbalife’s CEO, Michael Johnson, and the
entire management team, who have skillfully led the Company through
adversity, including holding firm against a high-profile PR
campaign against the Company by Bill Ackman where it was alleged
more than once that the Company would be shut down. Obviously, we
are still here.”
The American economy is full of people searching for
supplemental income and those who choose to sell Herbalife products
are no different. Companies like Uber, Airbnb and Etsy all offer
industrious people the opportunity to generate supplemental income
with low barriers to entry and the flexibility to work on their own
terms. In the United States alone, there are more than 18 million
direct sellers and more than 156 million consumers who purchase
products from these individuals. The very essence of the entire $35
billion American direct selling industry is to provide individuals
with the opportunity to be their own boss, to set their own
schedule and to make their own decisions. The Company believes this
settlement will strengthen and improve this important industry.
Consumer satisfaction with Herbalife’s nutrition products and
services is of paramount importance and like all good companies,
Herbalife has evolved some of its policies and practices over the
past decade to ensure that its customers and more than 4 million
preferred members and independent distributors have the best
experience possible. Herbalife remains committed to working with
all of its customers and independent distributors to ensure an
exceptional experience and to continuing its commitment to consumer
protections.
As the Company concludes this matter and looks to a promising
future, it hopes that those who have shorted the Company’s stock
will finally understand their thesis is misinformed and flawed, and
the Company will withstand any market-manipulation campaign, even
an unprecedented one that has lasted more than three years and cost
a billionaire short seller hundreds of millions of dollars in
addition to significant reputational damage and a loss of
credibility with investors.
For more information, visit
www.Herbalife.com/StrongerThanEver.
About Herbalife:
Herbalife is a global nutrition company that has been changing
people's lives with great products since 1980. Our nutrition,
weight-management, energy and fitness and personal care products
are available exclusively to and through dedicated independent
Herbalife distributors in more than 90 countries. We are committed
to fighting the worldwide problems of poor nutrition and obesity by
offering high-quality products, one-on-one coaching with an
Herbalife distributor and a community that inspires customers to
live a healthy, active life.
The company has over 8,000 employees worldwide, and its shares
are traded on the New York Stock Exchange (NYSE: HLF) with net
sales of $4.5 billion in 2015. To learn more, visit Herbalife.com
or IAmHerbalife.com.
FORWARD-LOOKING STATEMENTS
This release contains “forward-looking statements” within the
meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Although we believe that the
expectations reflected in any of our forward-looking statements are
reasonable, actual results could differ materially from those
projected or assumed in any of our forward-looking statements. Our
future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and to
inherent risks and uncertainties, such as those disclosed or
incorporated by reference in our filings with the Securities and
Exchange Commission. Important factors that could cause our actual
results, performance and achievements, or industry results to
differ materially from estimates or projections contained in our
forward-looking statements include, among others, the
following:
- our relationship with, and our ability
to influence the actions of, our distributors or preferred
members;
- improper action by our employees,
distributors or preferred members in violation of applicable
law;
- adverse publicity associated with our
products or network marketing organization, including our ability
to comfort the marketplace and regulators regarding our compliance
with applicable laws;
- changing consumer preferences and
demands;
- the competitive nature of our
business;
- regulatory matters governing our
products, including potential governmental or regulatory actions
concerning the safety or efficacy of our products and network
marketing program, including the direct selling market in which we
operate, as well as the impact of our settlement orders with the
FTC and Illinois Attorney General;
- legal challenges to our network
marketing program;
- risks associated with operating
internationally and the effect of economic factors, including
foreign exchange, inflation, disruptions or conflicts with our
third party importers, pricing and currency devaluation risks,
especially in countries such as Venezuela;
- uncertainties relating to
interpretation and enforcement of legislation in China governing
direct selling;
- our inability to obtain the necessary
licenses to expand our direct selling business in China;
- adverse changes in the Chinese
economy;
- our dependence on increased penetration
of existing markets;
- contractual limitations on our ability
to expand our business;
- our reliance on our information
technology infrastructure and outside manufacturers;
- the sufficiency of trademarks and other
intellectual property rights;
- product concentration;
- our reliance upon, or the loss or
departure of any member of, our senior management team which could
negatively impact our preferred member or distributor relations and
operating results;
- U.S. and foreign laws and regulations
applicable to our international operations;
- restrictions imposed by covenants in
our credit facility;
- uncertainties relating to the
application of transfer pricing, duties, value added taxes, and
other tax regulations, and changes thereto;
- changes in tax laws, treaties or
regulations, or their interpretation;
- taxation relating to our preferred
members or distributors;
- product liability claims;
- our incorporation under the laws of the
Cayman Islands;
- whether we will purchase any of our
shares in the open markets or otherwise; and
- share price volatility related to,
among other things, speculative trading and certain traders
shorting our common shares.
We do not undertake any obligation to update or release any
revisions to any forward-looking statement or to report any events
or circumstances after the date hereof or to reflect the occurrence
of unanticipated events, except as required by law.
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version on businesswire.com: http://www.businesswire.com/news/home/20160715005374/en/
Herbalife Ltd.Media:Alan Hoffman, Megan
Jordan213-745-2931Media@Herbalife.com
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