Herbalife Ltd. (NYSE:HLF) announced a $200 million settlement with the FTC – shares are up 15 percent in pre-market on the news, although some shorts think the headline masks details which are negative for the company. However, the company did have some news which should excite investors – including the fact that Icahn is now able to acquire up to 35 percent of the company. The corporate raider likely has the money but will he take the bite? Only time will tell. Bill Ackman will likely respond shortly but below are statements from both Carl Icahn and Herbalife on the matter.
More than three years ago, Herbalife came under attack by an intransigent short seller hell bent on a misinformation campaign designed to destroy our Company. Undeterred by facts, he proceeded to engage in an “ends justify means” campaign to do whatever was necessary to win.
Throughout, we fought hard to protect and grow our business and serve our members and customers without distraction, knowing that if we could weather the storm, the truth would prevail: that our business model is sound and our products are enjoyed by millions of people around the world. We knew that our greater purpose – to help people lead healthier lives – would ultimately win the day.
That day has now arrived. As you have likely already seen, today we announced a settlement with the FTC that does not change our direct selling business model and will set new standards for the industry. We agreed to the terms and to pay $200 million because we simply wanted to move forward with our mission. Additionally, we announced that we settled with the Illinois Attorney General for $3 million and know of no active investigations by other state attorneys general. Furthermore, the Board of Directors voluntarily established an Oversight Committee of the Board that will ensure full compliance with the terms of the FTC settlement and appointed Jon Leibowitz, former Chairman of the Federal Trade Commission, as Senior Advisor to the Board responsible for advising on implementation and compliance matters.
We also proudly announced that Carl Icahn is free to acquire up to 34.99% of our outstanding common shares. He is already our largest shareholder and has 5 seats on our Board. With this latest announcement, he is free to acquire an even greater stake in our Company, which is a fantastic testament to his confidence in what we do and where we are heading. His statement can be read here.
And as for the short seller, I think we can all agree, as with his many other failed investments, it is time for him to show some of that “humility to recognize when you are wrong.” Throughout his campaign, we have not only survived, we have thrived. We are proud to be moving forward today, stronger than ever.
 Pershing Square Capital Management, L.P. 2015 Annual Investor Letter, January 26, 2016.
ERBALIFE AND THE FEDERAL TRADE COMMISSION REACH SETTLEMENT AGREEMENT
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
LOS ANGELES – July 15, 2016 — 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 Jonathan Leibowitz, partner in the law firm of Davis, Polk and Wardell, and former Chairman of the Federal Trade Commission, as a Senior Advisor to the Board. Mr. Leibowitz will be responsible for advising the Committee about implementation and compliance matters relating to the settlement. 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;