A Court of Appeals in Brussels, Belgium handed down their decision on the Herbalife-related Test-Ankoop case on December 2nd, and the ruling clearly validated Herbalife Ltd. (NYSE:HLF)’s business model as legal in Belgium. The decision completely vindicated the company as a legally run business according to many, and the plaintiff was ordered to pay Herbalife’s legal and court costs.

Herbalife

Herbalife background

Bill Ackman, activist investor and founder of Pershing Square Capital Management, established a large short position in Herbalife Ltd. (NYSE:HLF) just over a year ago, and has lost around $500 million to date as the stock has soared on improving fundamentals over the last 12 months.

Ackman claims that Herbalife Ltd. (NYSE:HLF)’s business model is a “pyramid scheme” and that huge amounts of unsold inventory are accumulating in the garages and closets of Herbalife reps around the world. He expects that government regulators will eventually intervene to shut down the company. There has been no government action against the company to date in the U.S., and court proceedings against the company internationally have been mixed with few major successes.

Pershing Square reduced its exposure to Herbalife Ltd. (NYSE:HLF) earlier this fall by restructuring their bet from a fully exposed pure short play to a more hedged put short position, but Ackman said he intends to pursue his short position “to the end of the earth” in an interview on November 22nd.

Details of the judgement

The judgement clearly and unequivocally ruled in favor of Herbalife Ltd. (NYSE:HLF). A recent report by Tim Ramey D.A. Davidson and Co. summarized the court decision:

“The Herbalife initial business pack delivers product value exactly equal to its cost, so it cannot be construed as a subscription fee for recruiting and it is not commissionable in any case for royalties and overrides. Subsequent purchases by a distributor are clearly value for money and in any case were returnable within 90 days with a 10% restocking fee, which was deemed reasonable. Now they can be returned, even within a full year for a 100% refund including return shipping. The judgment views claims of income potential by distributors (not Herbalife) as irrelevant.”

Herbalife

Potential impact of Belgian court decision

D.A. Davidson and Co. analyst Timothy S. Ramey suggests that this Belgian Court of Appeals decision may have broad ramifications. Ramey points out that although Belgian law does not set a precedent for U.S. law, “…the issues of Test-Aankoop are identical to the issues raised by those that allege a pyramid scheme here. The commonsense, if not common law, interpretation of this judgment clearly is relevant to our view that the Pyramid Scheme allegation is factually wrong and impossible to prove.”