UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

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Herbalife Ltd.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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HERBALIFE LTD.

 

March 19, 2007

 

 

Dear Fellow Shareholder:

 

We are pleased to enclose information about the 2007 Annual General Meeting of Shareholders of Herbalife Ltd., or the Company, to be held on Thursday, April 26, 2007 at 9:00 a.m., Pacific Daylight Time, at 1800 Century Park East, Los Angeles, California 90067. As discussed in more detail in the enclosed Proxy Statement, at the meeting you will be asked to consider proposals to:

 

1. Elect three directors, each for a term of three years;

 

2. Ratify the appointment of the Company’s independent registered public accountants for fiscal 2007;

 

3. Approve the Company’s Employee Stock Purchase Plan; and

 

4. Act upon such other matters as may properly come before the meeting.

 

MY FELLOW DIRECTORS AND I HAVE UNANIMOUSLY APPROVED THE PROPOSALS INCLUDED HEREIN AND RECOMMEND YOU VOTE FOR THEIR APPROVAL.

 

Best Regards,

 

 

MICHAEL O. JOHNSON

Chief Executive Officer

 

 

 

 

 

HERBALIFE LTD.

 

 

NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS

To Be Held Thursday, April 26, 2007

 

 

 

To the Shareholders:

 

NOTICE IS HEREBY GIVEN that the 2007 Annual General Meeting of Shareholders of Herbalife Ltd., a Cayman Islands exempted limited liability company, or the Company, will be held on Thursday, April 26, 2007 at 9:00 a.m., Pacific Daylight Time, at 1800 Century Park East, Los Angeles, California 90067 for the following purposes:

 

1. To elect three directors, each for a term of three years;

 

2. To ratify the appointment of the Company’s independent registered public accountants for fiscal 2007;

 

3. To approve the Company’s Employee Stock Purchase Plan; and

 

4. To act upon such other matters as may properly come before the meeting.

 

Each of the above proposals will be proposed as Ordinary Resolutions as permitted by the Companies Law (2004 Revision).

 

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice. Only shareholders of record at the close of business on March 9, 2007, are entitled to notice of and to vote at the meeting and any subsequent adjournment(s) or postponement(s) of the meeting.

 

All shareholders are cordially invited to attend the meeting in person. However, to assure your representation at the meeting, you are urged to mark, sign, date and return the enclosed proxy card as promptly as possible. Shareholders attending the meeting may vote in person even if they have returned a proxy card.

 

Sincerely,

 

 

BRETT R. CHAPMAN

General Counsel and Corporate Secretary

 

Los Angeles, California

March 19, 2007

HERBALIFE LTD.

 

 

PROXY STATEMENT FOR 2007

ANNUAL GENERAL MEETING OF SHAREHOLDERS

 

 

 

Herbalife Ltd., also referred to as we, our, us, Herbalife or the Company, is calling its 2007 Annual General Meeting of Shareholders, or the Meeting, to be held on Thursday, April 26, 2007 at 9:00 a.m., Pacific Daylight Time, at 1800 Century Park East, Los Angeles, California 90067.

 

At the Meeting, our shareholders will be asked to consider proposals to:

 

1. Elect three directors, each for a term of three years;

 

2. Ratify the appointment of the Company’s independent registered public accountants for fiscal 2007;

 

3. Approve the Company’s Employee Stock Purchase Plan; and

 

4. Act upon such other matters as may properly come before the Meeting.

 

Our Board of Directors unanimously recommends that you vote in favor of the proposals outlined herein. YOUR VOTE IS VERY IMPORTANT.  Whether or not you plan to attend the Meeting, please take the time to vote by completing and returning the enclosed proxy card.

 

You should carefully read this Proxy Statement in its entirety prior to voting on the proposals listed above and outlined herein.  This Proxy Statement is dated March 19, 2007, and is first being mailed to shareholders of the Company on or about March 23, 2007.

 

Table of Contents

 

 

Place, Time and Date of Meeting.  This Proxy Statement is being furnished to the Company’s shareholders in connection with the solicitation of proxies on behalf of our Board of Directors for use at the Meeting to be held on Thursday, April 26, 2007, at 9:00 a.m., Pacific Daylight Time, and at any subsequent adjournment(s) or postponement(s) of the Meeting, for the purposes set forth herein and in the accompanying Notice of Annual General Meeting of Shareholders. The Meeting will be held at 1800 Century Park East, Los Angeles, California 90067. Our telephone number is c/o Herbalife International, Inc. at (310) 410-9600.

 

Record Date and Voting Securities.  Only shareholders of record at the close of business on March 9, 2007, or the Record Date, are entitled to notice of and to vote at the Meeting. The Company has one series of Common Shares outstanding. As of March 9, 2007, 71,719,964 Common Shares were issued and outstanding and held of record by 1,077 registered holders.

 

Voting.  Each shareholder is entitled to one vote for each Common Share held on the Record Date on all matters submitted for consideration at the Meeting. A quorum, representing the holders of not less than a majority of the issued and outstanding Common Shares entitled to vote at the Meeting, must be present in person or by proxy at the Meeting for the transaction of business. Common Shares that reflect abstentions are treated as Common Shares that are present and entitled to vote for the purposes of establishing a quorum and for purposes of determining the outcome of any matter submitted to the shareholders for a vote. However, abstentions do not constitute a vote “for” or “against” any matter and thus will be disregarded in the calculation of a plurality.

 

“Broker non-votes” are Common Shares held in “street name” through a broker or other nominee over which the broker or nominee lacks discretionary power to vote and for which your broker or nominee has not received specific voting instructions. Thus, if you do not give your broker or nominee specific instructions, your Common Shares may not be voted on certain matters. Common Shares that reflect “broker non-votes” are treated as Common Shares that are present and entitled to vote for the purposes of establishing a quorum. However, for the purposes of determining the outcome of any matter as to which the broker or nominee has indicated on the proxy that it does not have discretionary authority to vote, those Common Shares will be treated as not present and not entitled to vote with respect to that matter, even though those Common Shares are considered present and entitled to vote for the purposes of establishing a quorum and may be entitled to vote on other matters.

 

If you are a beneficial shareholder and your broker or nominee holds your Common Shares in its name, the broker or nominee is permitted to vote your Common Shares on matters such as the election of directors, even if the broker or nominee does not receive voting instructions from you.

 

Directors are elected by a plurality, and the three nominees who receive the most votes will be elected. Abstentions and “broker non-votes” will not affect the outcome of the election.

 

In respect of all other proposals, to be approved, any such proposal must receive the affirmative vote of a majority of the Common Shares present or represented by proxy and entitled to vote at the Meeting. In determining the outcome of such proposals, abstentions have the effect of a negative vote. “Broker non-votes” will not affect the outcome of any such proposals.

 

Revocability of Proxies.  Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its use by either (a) delivering to the Corporate Secretary of the Company a written notice of revocation or a duly executed proxy bearing a later date or (b) attending the Meeting and voting in person.

 

Solicitation Expenses.  This solicitation of proxies is made by the Board of Directors and all related costs will be borne by the Company. Proxies may be solicited by certain of our directors, officers and regular employees, without additional compensation, in person, by telephone, facsimile or electronic mail. Except as described above, we do not presently intend to solicit proxies other than by mail. We will, upon request, reimburse brokerage firms and others for their reasonable expenses in forwarding solicitation material to the beneficial owners of Common Shares.

 

This Proxy Statement contains summaries of certain documents, but you are urged to read the documents themselves for the complete information. The summaries are qualified in their entirety by reference to the complete text of the document. In the event that any of the terms, conditions or other provisions of any such document is inconsistent with or contrary to the description or terms in this Proxy Statement, such document will control. Each of these documents, as well as those documents referenced in this Proxy Statement as being available in print upon request, are available upon request to the Company by following the procedures described under “Additional Information — Annual Report, Financial and Additional Information.”

PROPOSAL 1:

 

Our Amended and Restated Memorandum and Articles of Association, or the Memorandum and Articles of Association, presently provide for not less than one nor more than fifteen directors. The Memorandum and Articles of Association divide the Board of Directors into three classes, with the terms of office of each class of directors ending in different years. We currently expect that over the course of approximately two years the number of our directors will decrease to nine. The current terms of office of Class III directors end at the Meeting. The current terms of office of Classes I and II directors end at the annual general meetings in 2008 and 2009, respectively. Currently Class I and III each have three directors and Class II has four directors.

 

The nominees for Class III directors are to be voted upon at the Meeting. The Board of Directors has nominated Leroy T. Barnes, Jr., Richard P. Bermingham and Peter Maslen for election as Class III directors to serve three-year terms expiring at the 2010 annual general meeting.

 

The Company did not receive any shareholder nominations for director.

 

The persons named as proxies on the accompanying proxy card intend to vote the Common Shares as to which they are granted authority to vote for the election of the nominees listed above. The form of proxy card does not permit shareholders to vote for a greater number of nominees than three. Although the Board of Directors does not know of any reason why any nominee will be unavailable for election, in the event any nominee should be unavailable at the time of the Meeting, the proxies may be voted for a substitute nominee as selected by the Board of Directors.

 

The table below sets forth information about the three nominees and the directors whose terms of office continue beyond the Meeting.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” MESSRS. LEROY T. BARNES, JR. RICHARD P. BERMINGHAM AND PETER MASLEN.

 

NOMINEES

 

 

CONTINUING DIRECTORS

 

 

Our Board of Directors has affirmatively determined that Messrs. Barnes, Bermingham, Maslen, Halbert and Mme. Rico and Nicholas are independent directors under section 303A.02 of the New York Stock Exchange, or the NYSE, Listed Company Manual and the Company’s Categorical Standards of Independence, which are attached hereto as Appendix A. The NYSE’s independence guidelines and the Company’s categorical standards include a series of objective tests, such as the director is not an employee of the Company and has not engaged in various types of business dealings involving the Company, which would prevent a director from being independent. The Board of Directors has affirmatively determined that none of the Company’s independent directors had any relationships with the Company.

 

The Board of Directors met ten times during fiscal 2006. All Board members attended at least 75% of the aggregate number of Board meetings and applicable committee meetings held while such individuals were serving on the Board of Directors, or such committees, with the exception of Jesse Rogers. Under the Company’s Principles of Corporate Governance, which is available on the Company’s website www.herbalife.com, by following the link

through “Investor Relations” to “Corporate Governance,” each director is expected to dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including attending meetings of the shareholders of the Company, the Board of Directors and committees of which he or she is a member. Ten directors and one nominee for director, Ms. Nicholas, attended the 2006 annual general meeting.

 

It is the policy of the Board of Directors to hold four regularly scheduled meetings, each of which include an executive session of non-management directors without the presence of management. Additional meetings of the Board of Directors and executive sessions of non-management directors may be held from time to time as required. Mr. Peter M. Castleman, the Chairman of the Board of Directors, serves as the presiding director at the executive sessions of non-management directors.

 

The table below summarizes the compensation paid by the Company to non-employee directors for the fiscal year ended December 31, 2006.

 

 

 

 

Effective April 27, 2006, each non-employee director receives $25,000 per year for services as a director, $5,000 for each board committee (an additional $20,000 per year for the Chair of the Audit Committee and Compensation Committee and an additional $10,000 for the Chair of the Nominating and Corporate Governance Committee). In addition, non-employee directors receive (1) $5,000 for each board meeting attended by the director in person or $1,000 per board meeting attended telephonically, (2) $3,500 for each Audit Committee meeting attended either in person or telephonically, and (3) $2,500 for each Compensation and Nominating and Corporate Governance Committee meeting attended either in person or telephonically. Independent directors also annually receive a $100,000 equivalent annual equity grant. Prior to April 27, 2006, each non-employee director annually received $25,000 per year for services as a director, except that the Chair of the Audit Committee received $40,000

and the Chair of all other committees received $30,000, as well as (1) $5,000 for each board meeting attended by the director in person or $1,000 per board meeting attended telephonically, and (2) $2,500 for each committee meeting attended either in person or telephonically. Independent directors also annually received a $100,000 equivalent equity grant. Employee directors do not receive any additional compensation in respect of their service on the Board of Directors or any committee thereof.

 

The table below summarizes the equity based awards held by the Company’s non-employee directors as of December 31, 2006.

 

 

 

 

Effective January 16, 2006, the Company established the Independent Directors Deferred Compensation and Stock Unit Plan, or the Independent Directors Plan, for the award of stock units to Directors and to allow for deferral of compensation realized in connection with such stock units and other director compensation, effective January 15, 2006. The purpose of the plan is to promote the long term financial interest and growth of the Company by attracting and retaining independent directors who can make a substantial contribution to the success of the Company, to motivate and to align the interests with those of the equity holders. The Independent Directors Plan is part of the Herbalife Ltd. 2005 Stock Incentive Plan.

 

The Company has adopted stock ownership guidelines applicable to each non-employee director. Specifically, each non-employee director is encouraged to acquire and hold a number of Common Shares equal to five times such director’s annual retainer within two years of such director’s appointment or election to the Board of Directors.

 

Shareholders and other parties interested in communicating directly with the Board of Directors, non-management directors as a group or individual directors, including Mr. Castleman in his capacity as the presiding director of executive sessions of non-management directors, may do so by writing to Herbalife Ltd., c/o Corporate Secretary, 1800 Century Park East, Los Angeles, CA 90067, or by email at corpsec@herbalife.com, indicating to whose attention the communication should be directed. Under a process approved by the Board of Directors for handling letters received by the Company and addressed to non-management directors, the Corporate Secretary of the Company reviews all such correspondence and forwards to members of the Audit Committee a summary and/or copies of any such correspondence that, in the opinion of the Corporate Secretary, deal with the functions of the Board of Directors or committees thereof, or that he otherwise determines requires their attention. Directors may at any time review a log of all correspondence received by the Company and addressed to members of the Board of Directors and request copies of any such correspondence. Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of the Company’s internal audit department and handled in accordance with procedures established by the audit committee with respect to such matters.

 

Our Board of Directors has a standing audit committee, nominating and corporate governance committee, and compensation committee.

 

Audit Committee

 

Our audit committee consists of Messrs. Barnes, Bermingham and Maslen, each of whom are independent as discussed above under “— Director Independence.” As required by Rule 303A.07 of the NYSE Listed Company Manual, the Board of Directors has affirmatively determined that each of Messrs. Barnes, Bermingham and Maslen are financially literate, and that Mr. Bermingham is an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K. Mr. Barnes currently serves on the audit committee of three public companies in addition to that of the Company. As required by Rule 303A.07 of the NYSE Listed Company Manual, the Board of Directors has affirmatively determined that such simultaneous service would not impair his ability to effectively serve on the Company’s audit committee.

 

The principal duties of the audit committee are as follows:

 

 

Our Board of Directors has adopted a written charter for the audit committee which is available on the Company’s website at www.herbalife.com by following the links through “Investor Relations” to “Corporate Governance,” and in print to any shareholder who requests it as set forth under “Additional Information — Annual Report, Financial and Additional Information.” In fiscal 2006, the audit committee met eleven times.

 

Nominating and Corporate Governance Committee

 

From January 1, 2006 to March 16, 2006 the nominating and corporate governance committee consisted of Messrs. Castleman, Barnes, Diekroger and Johnson, of whom Mr. Barnes was independent as discussed above under “— Director Independence.” The nominating and corporate governance committee currently consists of Mr. Barnes, Ms. Rico and Ms. Nicholas, each of whom is independent as discussed above under “— Director Independence.” The composition of the nominating and corporate governance committee was changed to comply with the NYSE’s independence rules following the loss of our status as a controlled company, as defined in the NYSE Listed Company Manual.

 

The principal duties of the nominating and corporate governance committee are as follows:

 

 

Working closely with the full Board of Directors, the nominating and corporate governance committee develops criteria for open board positions, taking into account such factors as it deems appropriate, including, among others, the current composition of the Board of Directors, the range of talents, experiences and skills that would best complement those already represented on the Board of Directors, the balance of management and

independent directors and the need for financial or other specialized expertise. Applying these criteria, the nominating and corporate governance committee considers candidates for director suggested by its members and other directors, as well by management and shareholders. The nominating and corporate governance committee also retains a third-party executive search firm on an ad-hoc basis to identify and review candidates upon request of the committee from time to time.

 

Once the nominating and corporate governance committee has identified a prospective nominee, whether the prospective nominee is recommended by a shareholder or otherwise, it makes an initial determination as to whether to conduct a full evaluation. In making this determination, the nominating and corporate governance committee considers the information provided to the committee with the recommendation of the candidate as well as the nominating and corporate governance committee’s own knowledge, supplemented as appropriate by inquiries to third parties. The preliminary determination is based primarily on the need for additional directors and the likelihood that the prospective nominee can satisfy the criteria that the nominating and corporate governance committee has established. If the committee determines, in consultation with the Chairman of the Board of Directors and other directors as appropriate, that additional consideration is warranted, it may request the third-party search firm to gather additional information about the prospective nominee’s background and experience and to report its findings to the nominating and corporate governance committee. The committee then evaluates the prospective nominee against the specific criteria that it has established for the position, as well as the standards and qualifications set out in the Company’s Principles of Corporate Governance, including:

 

 

If the nominating and corporate governance committee decides, on the basis of its preliminary review, to proceed with further consideration, the committee members, as well as other directors as appropriate, interview the nominee. After completing this evaluation and interview, the nominating and corporate governance committee makes a recommendation to the full Board of Directors, which makes the final determination whether to nominate the candidate after considering the nominating and corporate governance committee’s report.

 

A shareholder who wishes to recommend a prospective nominee for the Board of Directors pursuant to the provisions of the Memorandum and Articles of Association should notify the Corporate Secretary in writing with the appropriate supporting materials, as more fully described under “Additional Information — Shareholder Nominations.”

 

Our Board of Directors has adopted a written charter for the nominating and corporate governance committee, which is available on the Company’s website at www.herbalife.com by following the links through “Investor Relations” to “Corporate Governance” or in print to any shareholder who requests it as set forth under “Additional Information — Annual Report, Financial and Additional Information.” In fiscal 2006, the nominating and corporate governance committee met four times.

 

Compensation Committee

 

From January 1, 2006, to March 16, 2006, the compensation committee consisted of Messrs. Rogers, Bermingham, Fordyce and Maslen, of whom Messrs. Bermingham and Maslen were independent as discussed above under “— Director Independence.” The compensation committee currently consists of Messrs. Maslen,

Bermingham and Halbert, each of whom is independent as discussed above under “— Director Independence.” The composition of the compensation committee was changed to comply with the NYSE’s rules with respect to the loss of our status as a controlled company, as defined in the NYSE Listed Company Manual.

 

The principal duties of the compensation committee are as follows:

 

 

Our Board of Directors has adopted a written charter for the compensation committee which is available on the Company’s website at www.herbalife.com by following the links through “Investor Relations” to “Corporate Governance” or in print to any shareholder who requests it as set forth under “Additional Information — Annual Report, Financial and Additional Information.” In fiscal 2006, the compensation committee met eight times.

 

From January 1, 2006 to March 16, 2006, the compensation committee consisted of Messrs. James Fordyce, Jesse Rogers, Richard Bermingham, and Peter Maslen. As of March 17, 2006, the compensation committee consisted of Messrs. Richard Bermingham, Peter Maslen and David Halbert. The composition of the committee was changed to comply with the NYSE corporate governance listing standards that became applicable to the Company in connection with the Company’s loss of its status as a “controlled company.”

 

Mr. James Fordyce, a member of Board of Directors until March 16, 2006, is a managing director of Whitney & Co. LLC, or Whitney. Entities affiliated with Whitney are the general partners of the Whitney-related investment partnerships set forth in the beneficial ownership table included in this proxy statement. These partnerships beneficially own approximately 24.8% of the Company’s Common Shares. The Company has entered into several transactions with entities in which Whitney has an interest, as follows:

 

 

 

PROPOSAL 2:

 

The audit committee has selected KPMG LLP as the Company’s independent registered public accountants for the fiscal year ending December 31, 2007. Services provided to the Company and its subsidiaries by KPMG LLP in fiscal 2005 and 2006 are described under “— Fees to Independent Registered Public Accountants for Fiscal 2005 and 2006” below. Additional information regarding the audit committee is provided in the Report of the Audit Committee below.

 

The Company has been advised that representatives of KPMG LLP will be present at the Meeting where they will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.

 

In the event shareholders do not ratify the appointment of KPMG LLP, the appointment will be reconsidered by the audit committee and the Board of Directors.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FOR FISCAL 2007.

 

The audit committee is responsible for monitoring our financial auditing, accounting and financial reporting processes and our system of internal controls, and selecting the independent public accounting firm on behalf of the Board of Directors. Our management has primary responsibility for our internal controls and reporting process. Our independent registered public accounting firm, KPMG LLP, is responsible for performing an independent audit of our consolidated financial statements, management’s assessment of the effectiveness of our internal control over financial reporting and the effectiveness of our internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States) and issuing an opinion thereon. In this context, the audit committee met regularly and held discussions with management and KPMG LLP. Management represented to the audit committee that the consolidated financial statements for the fiscal year 2006 were prepared in accordance with U.S. generally accepted accounting principles.

 

The audit committee hereby reports as follows:

 

 

 

Based on the reviews and discussions referred to above, the audit committee has recommended to the Board of Directors that the audited consolidated financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2006, for filing with the Securities and Exchange Commission, or the SEC. The audit committee also selected, subject to shareholder ratification, KPMG LLP to serve as our independent registered public accounting firm for the year ending December 31, 2007.

 

AUDIT COMMITTEE OF

THE BOARD OF DIRECTORS

 

Richard P. Bermingham, Chairman

Leroy T. Barnes, Jr.

Peter Maslen

 

The following services were provided by KPMG LLP during fiscal 2005 and 2006:

 

 

 

 

The audit committee adopted pre-approval policies and procedures for certain audit and non-audit services which the Company’s independent auditors have historically provided. Pursuant to those policies and procedures, the Company’s external auditor cannot be engaged to provide any audit or non-audit services to the Company unless the engagement is pre-approved by the audit committee in compliance with the Sarbanes-Oxley Act of 2002. All audit, audit related, tax and other fees and services described above were pre-approved pursuant to this policy.

PROPOSAL NUMBER 3

 

Introduction

 

This section provides a summary of the principal terms of the Herbalife Ltd. Employee Stock Purchase Plan, or the ESPP. The complete ESPP is annexed to this proxy statement as Appendix B. For a complete description of the terms of the ESPP, you should read the ESPP.

 

Reasons for the Employee Stock Purchase Plan

 

Herbalife’s shareholders are being asked to approve the Herbalife Ltd. Employee Stock Purchase Plan. The ESPP is intended to provide eligible employees of Herbalife with an opportunity to participate in Herbalife’s success by permitting them to acquire a stock ownership interest in Herbalife through periodic payroll deductions that will be applied towards the purchase of Herbalife Common Shares at a discount from the market price. The Board of Directors adopted the ESPP on March 15, 2007, subject to shareholder approval.

 

The following is a summary of the principal features of the ESPP. This summary, however, does not purport to be a complete description of all the provisions of the ESPP.

 

Summary

 

The following is a summary of key ESPP provisions:

 

 

Other Material Features of the ESPP

 

Eligibility.  All regular employees of Herbalife who work more than twenty hours per week and more than five months in any calendar year, and who have completed at least sixty (60) days of continuous employment with Herbalife on or before the first day of the applicable Offering Period will be eligible to participate in the ESPP. However, an employee will not be eligible to participate if, as a result of participating, that employee would hold

five percent (5%) or more of the total combined voting power or value of all classes of stock of Herbalife or of any subsidiary. As of the beginning of March, 2007, approximately 3,700 employees, including 14 executive officers, would be eligible to participate in the ESPP.

 

Administration.  The administration of the ESPP is overseen by the compensation committee of the Board. The compensation committee shall have full power and authority to adopt rules and regulations to administer the plan, to interpret the provisions of the ESPP, and subject to the express terms of the ESPP, to establish the terms of offerings under the ESPP. The decisions of the compensation committee are final and binding on all participants. All costs and expenses incurred in plan administration will be paid by Herbalife without charge to participants.

 

Payroll Deductions and Stock Purchases.  Eligible employees of Herbalife may elect to participate in the ESPP by giving notice to Herbalife, which notice shall instruct Herbalife to withhold a specified percentage of the employee’s base salary (in any multiple of 1% up to a maximum of 10%) on each pay period during the Offering Period. On the last business day of an Offering Period, the withheld salary will be used to purchase Common Shares at the Purchase Price. For purposes of the ESPP, fair market value per share as of a particular date shall mean the closing price of a Common Share as reported on the NYSE on that date (or if there were no reported prices on such date, on the last preceding date on which the prices were reported). If, on the last day of an Offering Period, the number of Common Shares to be purchased by all participants exceeds the number of shares then available for purchase under the ESPP, the compensation committee will make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. The closing price of a Common Share on the NYSE on March 9, 2007 was $37.75.

 

Termination of Participation.  A participant may stop contributions to the ESPP at any time and his or her accumulated payroll deductions will, at the participant’s election, either be promptly refunded if notice was received by the compensation committee at least thirty (30) days before the end of an Option Period, or applied to the purchase of Common Shares on the next scheduled purchase date. The participant’s purchase right will immediately terminate upon his or her cessation of employment for any reason. Any payroll deductions that the participant may have made for the purchase period in which such cessation of employment occurs will be refunded and will not be applied to the purchase of Common Shares.

 

Transferability.  No purchase rights will be assignable or transferable by the participant, except by will or the laws of inheritance following a participant’s death.

 

Sub-Plans.  The compensation committee may adopt rules, procedures or sub-plans applicable to particular subsidiaries or employees in particular locations that allow for participation in the ESPP in a manner that may not comply with the requirements of Section 423 of the Internal Revenue Code, or the Code.

 

U.S. Federal Income Tax Consequences.  The following is a brief description of Herbalife’s understanding of the federal income tax consequences to Herbalife and participants subject to U.S. taxation with respect to participation in the ESPP. This description may be inapplicable if such laws and regulations are changed. This summary is not intended to be exhaustive or constitute tax advice and does not address any state, local or foreign tax consequences.

 

The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. Under such an arrangement, no taxable income will be recognized by a participant, and no deductions will be allowable to Herbalife, upon either the grant or the exercise of the purchase rights. Taxable income will not be recognized until either there is a sale or other disposition of the shares acquired under the ESPP or in the event the participant should die while still owning the purchased shares.

 

If a participant sells or otherwise disposes of the purchased shares within two (2) years after his or her entry date into the purchase period in which such shares were acquired or within one (1) year after the actual purchase date of those shares, then the participant will recognize ordinary income in the year of sale or disposition equal to the amount by which the closing selling price of the shares on the purchase date exceeded the purchase price paid for those shares, and Herbalife will be entitled to an income tax deduction, for the taxable year in which such

disposition occurs, equal in amount to such excess. The participant also will recognize a capital gain to the extent the amount realized upon the sale of the shares exceeds the sum of the aggregate purchase price for those shares and the ordinary income recognized in connection with their acquisition.

 

If a participant sells or disposes of the purchased shares more than two (2) years after his or her entry date into the purchase period in which the shares were acquired and more than one (1) year after the actual purchase date of those shares, the participant will recognize ordinary income in the year of sale or disposition equal to the lesser of (i) the amount by which the closing sales price of the shares on the sale or disposition date exceeded the purchase price paid for those shares or (ii) fifteen percent (15%) (or such lesser discount as established by the compensation committee for the purpose period) of the closing selling price of the shares on the participants entry date into the purchase period in which those shares were acquired. Any additional gain upon the sale or disposition of the purchased shares will be taxed as a long-term capital gain. Herbalife will not be entitled to an income tax deduction with respect to such disposition.

 

If a participant still owns the purchased shares at the time of death, his or her estate will recognize ordinary income in the year of death equal to the lesser of (i) the amount by which the closing selling price of the shares on the date of death exceeds the purchase price or (ii) fifteen percent (15%) (or such lesser discount as established by the compensation committee for the purpose period) of the closing selling price of the shares on the participant’s entry date into the purchase period in which those shares were acquired.

 

New Plan Benefits.  Because benefits under the ESPP will depend on employees’ elections to participate and the fair market value of Herbalife’s Common Shares at various future dates, it is not possible to determine the benefits that will be received by executive officers and other employees if the ESPP is approved by the shareholders. Non-employee directors are not eligible to participate in the ESPP.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE ESPP.

 

The following Compensation Discussion and Analysis describes the material elements of the compensation and benefit programs for our executive officers identified in the Summary Compensation Table, or the Named Executive Officers. The compensation committee of the Board of Directors has responsibility for establishing, developing and implementing such programs. Compensation and employment agreements for our Chief Executive Officer, Michael O. Johnson, are recommended by the compensation committee and approved by the independent members of our Board of Directors.

 

How Compensation is Established

 

The compensation committee approves the compensation and benefits programs for our Named Executive Officers with input from management and the compensation committee’s compensation consultant. With respect to Mr. Johnson’s compensation, the compensation committee develops its recommendations with the assistance of its compensation consultant. Mr. Johnson makes recommendations to the compensation committee regarding the pay of the other Named Executives Officers. Recommendations regarding Mr. Johnson’s compensation are developed by the compensation committee and presented to the independent members of the Board of Directors for final approval. Our intent is to design and operate compensation and benefits programs, which will successfully attract, motivate and retain our key employees. To achieve this intent, we will periodically modify these programs to ensure that our ability to attract, motivate and retain our executive talent remains competitive. We do monitor the status of our long term incentive plans for Named Executive Officers to enhance our ability to retain this talent. The compensation committee believes that if these programs are not effective in retaining our talent it could have an adverse effect on our business.

 

Independent Compensation Consultant

 

The compensation committee has retained Frederic W. Cook & Co., a nationally recognized compensation consulting firm, to assist the compensation committee in evaluating executive compensation programs and in setting executive officers’ compensation. The use of an independent consultant provides additional assurance that our executive compensation programs are reasonable and consistent with our objectives (as described in more detail below). The consultant reports directly to the compensation committee. The consultant regularly participates in compensation committee meetings and advises the compensation committee with respect to compensation trends and best practices, plan design, and the reasonableness of individual compensation awards by providing competitive comparison data.

 

Overall Objectives of Executive Compensation Program

 

The purpose of our compensation programs for the Named Executive Officers is to attract, motivate and retain highly qualified individuals with the necessary skills to achieve our strategic goals and objectives. To do so, we provide a mix of cash and equity-based compensation (as further described below) that the compensation committee believes is appropriate to motivate our Named Executive Officers and align their interests with those of our shareholders.

 

Since our initial public offering in December 2004, the compensation committee’s focus has been on continuing the assembly of a highly qualified management team to further the achievement of our growth and profitability goals. As such, our compensation programs have been influenced by labor market demands for recruiting experienced executives, frequently from outside our industry, with an appropriate balance between recognizing performance and risks. Our compensation program design and the resulting financial performance of our company has generally resulted in “total direct compensation” (which is comprised of base salary, annual bonus

and long-term equity-based compensation) levels for the Named Executive Officers in the top quartile of competitive practice for similar corporations.

 

It is the compensation committee’s intent to emphasize performance-based compensation, which should vary based on corporate and individual performance. The compensation committee also emphasizes equity-based compensation in order to better align the interests of the Named Executive Officers with the interests of shareholders.

 

Our executive compensation program is based on the following underlying principles:

 

 

Competitive Benchmarking

 

The compensation committee targets total direct compensation for the Named Executive Officers at the 75^th percentile as compared to the Herbalife Peer Group (described in more detail below), with the opportunity to earn top-quartile pay for superior performance and with commensurate downside risk for underachievement. The actual target total direct compensation for each Named Executive Officer selected by the compensation committee may be above or below the 75^th percentile reflecting the executive’s level in the organization, overall individual contribution, scope of responsibilities and level of experience. These factors are described in more detail below.

 

Each year the compensation committee assesses the competitiveness of each Named Executive Officer’s target total direct compensation. For 2006 our study was prepared by Frederic W. Cook & Co. The analysis contains competitive comparisons with respect to compensation program design and pay levels as compared to a direct peer group (the Herbalife Peer Group) as well as general-industry pay surveys (the Hewitt survey size-adjusted based upon revenue of $2 billion and the Towers Perrin survey for corporations with revenue between $1 billion and $3 billion). For 2006, the Herbalife Peer Group was comprised of 19 corporations, which are either business competitors or corporations with which we compete for employees at the Named Executive Officer level, and which are similar in size to Herbalife, as measured by revenue and market capitalization. At the time of the study, revenue for the corporations in the Herbalife Peer Group ranged from $955 million to $8.4 billion and market capitalization for such corporations ranged from $462 million to $16.2 billion.

 

The compensation committee reviews and makes adjustments to the corporations that comprise the Herbalife Peer Group annually. During 2006, the compensation committee authorized a change in the composition of our peer group. The change was intended to ensure that the Herbalife Peer Group adequately represents companies that compete within the same industry as Herbalife with comparative compensation philosophies and practices, and companies of similar size that are located in geographic regions similar to Herbalife.

 

The table presents the former Herbalife Peer Group list and the amended Herbalife Peer Group list that was adopted and implemented in August 2006:

 

 

Internal Equity

 

In addition to data relating to our compensation peer group, the compensation committee uses internal pay equity to establish pay levels for the Named Executive Officers. We believe that internal pay equity fosters a one-team approach that contributes to corporate success. To achieve this, the compensation committee has developed an executive grading structure. Each executive is assigned to a particular grade based on their relative responsibilities within Herbalife. This structure is then used as a guideline by the compensation committee for making pay decisions based on the premise that executives with similar responsibilities should have similar compensation opportunities. For 2006, Mr. Johnson was placed in salary grade 1, Mr. Probert was placed in salary grade 2 and the other Named Executive Officers were placed in salary grade 3.

 

Pay Elements

 

The primary purpose of the compensation and benefits programs for our Named Executive Officers is to attract, retain and motivate the highly qualified individuals who will demonstrate the behaviors necessary to enable Herbalife to succeed in its mission:

 

 

 

 

 

 

 

Mix of Compensation Elements

 

Our compensation program for Named Executive Officers is designed to be weighted toward variable (at-risk) rewards and long term equity incentive compensation to drive our Named Executive Officers towards achieving our long-term strategic and financial performance objectives. However, the compensation committee does not target a specified mix of compensation elements. Consistent with our strategic direction, in 2006, we implemented a more aggressive performance incentive compensation program for all management employees, including the Named Executive Officers. Financial performance goals for the Named Executive Officers are developed at the beginning of each year (as discussed in more detail below).

 

Base Salaries

 

Named Executive Officer base salaries are a guaranteed element of the executive’s annual compensation. Base salaries are determined through the competitive benchmarking review described above. Base salaries for Named Executive Officers are reviewed each November in preparation for the upcoming fiscal year. Following the review period, our Chief Executive Officer is provided the opportunity to propose to the compensation committee changes in the base salaries for each of the other Named Executive Officers. During this review, the compensation committee, separately and without the involvement of the Chief Executive Officer, reviews and, to the extent it determines appropriate, proposes changes to the Chief Executive Officer’s base salary to the independent members of the Board of Directors.

 

For 2006, the compensation committee targeted base salaries for each Named Executive Officer in the top-quartile of the Herbalife Peer Group as compared to base salaries for executives in comparable positions to attract and retain experienced and seasoned executives. The following table summarizes adjustments (if any) made to base salaries for the Named Executive Officers during 2006 to achieve this target:

 

As noted above, Mr. Noack’s base salary was increased twice during 2006. The first increase was based upon the compensation committee’s annual review of Named Executive Officer base salaries. The second increase was made at the time of and with respect to the changes in Mr. Noack’s duties and responsibilities in April 2006.

 

Annual Incentive Awards

 

General

 

All annual cash-based incentive compensation for our Named Executive Officers is paid under our shareholder-approved Executive Incentive Plan. Under this plan, the compensation committee approves performance criteria for each of our Named Executive Officers for each year no later than March 31 of each such year. Following the end of each year, the compensation committee evaluates corporate and, if applicable, individual performance with respect to the performance criteria and determines and certifies the annual bonus payable to each Named Executive Officer based on this performance; provided, however, with respect to Mr. Noack, but not the other Named Executive Officers, the compensation committee retains the discretion to reduce the actual bonus payout based upon the Chief Executive Officer’s overall qualitative review with the compensation committee of Mr. Noack’s performance during the year. Pursuant to the employment agreements between Herbalife and the Named Executive Officers other than Mr. Noack, the annual bonus payable to each executive must be the full amount certified as earned by the compensation committee based upon actual performance as compared to relevant performance criteria.

 

Targets and Determination

 

For 2006, annual target incentive bonus opportunities for the Named Executive Officers were based upon job responsibilities, and the study of comparable positions and award levels within the Herbalife Peer Group. The compensation committee intended for annual incentive compensation payable upon achievement at the “target” level to result in total direct compensation at the 75th percentile as compared to the Herbalife Peer Group and for achievement at the “stretch” and “aspirational” levels to result in upper quartile payouts at year end as compared to the Herbalife Peer Group.

 

For 2006, the compensation committee approved significant changes in the potential annual incentive awards payable to our Named Executive Officers. These changes that were implemented further motivate our Named Executive Officers to sustain Herbalife’s high performance with respect to annual financial goals and reward the Named Executive Officers for achieving higher levels of performance. Prior to 2006, potential payouts under our annual incentive compensation programs provided for payouts beginning at 80% of target performance and increasing to 100% target and beyond. For 2006, the compensation committee eliminated for the Named Executive Officers, other than Mr. Johnson, bonus payouts at performance levels below 100% of target.

 

For 2006, the compensation committee established a performance goal for each of our Named Executive Officers that was based upon our earnings per share, or EPS. The compensation committee believes that EPS is the most appropriate composite financial measure of overall corporate performance and further aligns the interests of our Named Executive Officers’ interests with those of our shareholders. Achievement of the 100% target level for the EPS goal for 2006 would equal our budgeted earnings per share for the year. Budgeted EPS is built from the “bottom up” based on input from the regions and individual markets as to actual business trends, expected growth trends for the industry in that region, trends of specific distributor methods of operation within that country and the risks and opportunities of achieving the forecasted revenue and expense levels. Historically, since our initial public offering, budgeted EPS for each year has represented a substantial increase over the prior year EPS, presenting a significant challenge to the senior management team to continue improving the Company’s revenue and earnings on a year-over-year basis to achieve the budgeted target. The budgeted EPS target for 2006 was $1.81 per share, which amount represented a 19.1% increase over our EPS for the preceding fiscal year (adjusted for certain one-time items), and exceeds the expected EPS growth rates for our industry and our business and financial competitors.

 

The following table describes the potential annual incentive bonus awards for our Named Executive Officers based upon specified levels of performance:

 

 

 

 

Pursuant to his employment agreement, Mr. Johnson’s annual incentive award is composed of two annual incentive programs, although the goals under both the regular and the alternative performance targets have been identical to each other and to the goals established for each of the other Named Executive Officers in order to foster a one team ideal and to ensure that all of our Named Executive Officers are driving towards the same objectives. Each year the compensation committee has the opportunity to recommend to the independent members of the Board of Directors changes to the alternative performance criteria to reflect additional and alternative goals and objectives for the then current fiscal year.

 

We do not currently have a policy requiring a fixed course of action with respect to compensation adjustments following later restatements of financial performance targets. Under those circumstances, the compensation committee would evaluate whether such adjustments are appropriate based upon the facts and circumstances surrounding the restatement and the existing laws.

 

Additional Discretionary Bonuses Paid in 2006

 

In addition to the performance-based bonuses paid to Messrs. Probert, Goudis and Chapman in 2006, each executive also received a lump-sum discretionary cash bonus in connection with the execution of their amended employment agreements. This one-time payment was intended to compensate the executives for the difference between their actual rate of pay and the increased rates of pay that had been verbally communicated to each executive in August 2005 (which rates, for Mr. Goudis and Mr. Chapman, were then increased again effective January 1, 2006). The amount of this one-time payment was $43,077 for Mr. Probert, $15,385 for Mr. Goudis, and $24,625 for Mr. Chapman. The compensation committee authorized this supplementary compensation to the executives in the spirit of fairness and as an inducement to finalize their amended employment agreements.

 

Long Term Incentive Awards

 

Long-term equity-based awards were provided to Named Executive Officers in 2006 under our 2005 Stock Incentive Plan. Award levels are based on current job responsibilities, potential for their long term contribution to Herbalife, and prior award history, as well as the competitive benchmarking process described above. The

compensation committee believes these incentives foster the long-term perspective necessary for continued growth and success. Our long-term incentives are designed to ensure our Named Executive Officers are dedicated to and focused on growing shareholder value and to better align their interests with the interests of our shareholders.

 

During 2006, we awarded two forms of long term incentives — stock-settled stock appreciation rights (SARs) and time-vested restricted stock units (RSUs). SARs represented 70% of the total long-term incentive opportunity and RSUs represented 30%. SARs provide an opportunity for Named Executive Officers to earn additional compensation if our share price increases and the Named Executive Officers remain employed by Herbalife during the period required for the options to vest. RSUs align the interests of Named Executive Officers with the interests of shareholders through stock ownership, increase the reward to the Named Executive Officers when our share price increases, and serve as a retention tool for the Named Executive Officers. These awards were also selected in part because their value is fixed at the date of grant under FAS 123R.

 

Our approach toward establishing long-term equity-based incentive compensation grant levels was to first establish a target dollar amount for the equity-based compensation awards to be made to each Named Executive Officer based upon competitive grant levels (as determined by reference to the Herbalife Peer Group study), the scope of each executive’s responsibility, each executive’s individual contribution to Herbalife’s success, and the level of prior awards granted to the executive. Using this target value, the compensation committee, with the assistance of its consultant, used a Black-Scholes pricing model to translate the dollar valuation into a blend of 70% SARs and 30% RSUs. In determining the actual number of shares subject to each award in 2006, a premium was placed on RSUs given the relative value of an RSU compared to an SAR, which resulted in one RSU equaling the value of four SARs.

 

The base price for the SARs equaled 100% of the per share fair market value (closing sales price) of our common shares on the grant dates. The SARs have a ten-year term and vest based upon continued employment in quarterly installments over five years from the vesting commencement date. The RSUs awarded to the Named Executive Officers vest over a three-year period based upon continued employment, one-third per year on each anniversary of the vesting commencement date. Dividend equivalents are paid with respect to vested and unvested RSUs, however, Herbalife does not currently pay a regular dividend to shareholders.

 

Supplemental Equity Grants

 

Supplemental equity awards were also made during 2006 to three of our Named Executive Officers as an additional retention incentive, and these awards were contingent upon finalization of amended employment agreements during 2006. These executives received RSU awards in the following amounts: Mr. Probert (21,000); Mr. Goudis (15,000) and Mr. Chapman (3,000). The awards vest over three years, however, the compensation committee determined, as part of the negotiation of the amended employment agreements, to give the executives vesting credit for the period of time during which the employment agreements were negotiated and thus the three-year vesting schedule was measured assuming a vesting commencement date in June of 2005.

 

In addition, during 2006, the compensation committee upon recommendation of our Chief Executive Officer approved a special award of SARs (130,000) and RSUs (20,000) to Mr. Noack, our Chief Strategic Officer, as an additional retention incentive and recognition of his increased duties and responsibilities that commenced in 2006.

 

Summary of Mix of Compensation Elements for 2006

 

As a result the specific compensation information and decisions described above and consistent with the compensation committee’s guiding principles as described above, the resulting mix of compensation elements provided to our Named Executive Officers for 2006 evidenced a balance between annual and long-term compensation elements and a weighting towards more variable (rather than fixed) compensation elements. The compensation committee views the annual vs. long term mix of compensation as appropriate in balancing the short and long term decision making focus of our Named Executives. The compensation committee views the mix of fixed vs. variable compensation as consistent with managing a high growth company. The following table sets forth the actual mix of compensation elements provided to each of our Named Executive Officers in 2006:

 

 

 

 

Equity Award Grant Policy

 

In 2006, the annual grant of SARs and RSUs to the Named Executive Officers and other executives was made in March 2006 at a meeting of the compensation committee. The Company generally conducts its annual grant award process during the same time frame each year. The Company is reviewing the feasibility of setting a defined date for the purpose of authorizing stock awards for the annual award process. We currently operate a monthly grant approval process where awards are authorized for new hires, certain selected retention situations, and to newly promoted executives. All equity compensation awards to our Named Executive Officers and other executives are granted based on our equity grant policy, which was approved by the compensation committee. The policy provides that the exercise price of all stock options or stock appreciation rights granted to executives will be established as the closing stock price on the date the awards are granted.

 

Hedging

 

The Company currently has a policy that prohibits executives from entering into hedging transactions that would operate to lock-in the value of their equity compensation awards at specified levels.

 

Stock Ownership Guidelines

 

Aligning interests between officers and shareholders is a major component of our compensation philosophy. A significant portion of each Named Executive Officer’s compensation is paid in form of equity-based incentive compensation awards. The compensation committee believes this is an appropriate and beneficial condition for alignment purposes and is an incentive for long term achievement and individual retention.

 

In addition to our existing equity programs as described above, the compensation committee is considering the adoption of guidelines that will require Named Executive Officers to own and hold our common shares in an amount representing a yet-to-be-determined multiple of the executive’s base salary.

 

Benefits and Perquisites

 

U.S.-based employees, including the Named Executive Officers participate in a variety of savings, health and welfare, and paid time-off benefits designed to enable Herbalife to attract and retain its workforce in a competitive marketplace. Health and welfare and paid time-off benefits help ensure that Herbalife has a productive and focused workforce through reliable and competitive health and other benefits. Savings plans help employees, especially long-service employees, save and prepare financially for retirement.

 

In addition, our Named Executive Officers are eligible to participate in welfare benefit programs we offer in general to our executive officers. These benefits are as follows:

 

 

 

A policy was adopted by the compensation committee in 2007 to formalize the procedures for approvals of the use of private aircraft.

 

 

Employment Agreements

 

The current employment agreement between Herbalife and Mr. Johnson was entered into prior to our initial public offering in December 2004. During 2006, each of our Named Executive Officers was party to employment agreements with Herbalife. Those agreements establish the terms and conditions for the employment relationship each executive has with Herbalife and specifies compensation, executive benefits, severance provisions, change in control provisions, preservation of confidential and proprietary information, non-solicitation, non-disparagement, and other conditions. The compensation committee periodically reviews the competitiveness of its severance and change in control arrangements as and when the employment agreements with our Named Executive Officers near the end of their stated terms. In 2005, the compensation committee’s compensation consultant engaged in an in-depth competitive analysis of the employment agreements between Herbalife and Messrs. Probert, Goudis and Chapman, which formed the basis of the amended employment agreements entered into with those executives in 2006.

 

Severance Arrangements

 

Separation benefits described below provide benefits to ease a Named Executive Officers’ transition due to an unexpected employment termination by Herbalife due to on-going changes in our employment needs.

 

The Named Executive Officers are eligible for the benefits and payments if their employment terminates for various reasons or as a result of a change in control of Herbalife. Separation benefits include cash payments and other benefits in an amount Herbalife believes is appropriate, taking into account the time it is expected to take a separated executive to find another job. Separation benefits are intended to ease the consequences to the executive of an unexpected termination of employment. We benefit by requiring a general release, non-compete and non-solicitation provisions in connection with the individual separation agreements.

 

We consider it likely that it will take more time for higher-level employees to find new employment commensurate with their prior experience, and therefore senior management generally are paid severance for a longer period. Additional payments may be approved by the compensation committee in some circumstances as a result of negotiation with executives, especially where Herbalife desires particular non-disparagement, cooperation with litigation, non-competition and non-solicitation terms.

 

The employment agreements for each executive specifically details various provisions for benefits and cash payments in the event of a separation. Generally, these agreements specify conditions and benefits within the

following categories: death, disability, termination by Herbalife for cause; termination by executive without good reason; termination by the executive with good reason and termination by Herbalife without cause.

 

Other Change in Control Arrangements

 

We also have change in control provisions in the equity compensation awards granted to four of our Named Executive Officers, Messrs. Johnson, Probert, Goudis and Chapman. In general, these arrangements provide for benefits upon a termination of the Named Executive Officer’s employment in connection with a change in control, although a portion of the benefits are triggered solely upon the occurrence of a change in control of Herbalife. These arrangements are intended to preserve morale and productivity and encourage retention in the face of the disruptive impact of a change in control of Herbalife. In addition, change in control benefits encourage our Named Executive Officers to remain focused on our business and the interests of our shareholders when considering strategic alternatives. Based on a competitive analysis of the change in control arrangements maintained by the corporations in the Herbalife Peer Group, the compensation committee believes that these benefits are customary among the Herbalife Peer Group for executives in similar positions as the Named Executive Officers.

 

Please refer to the discussion on page 31 under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards” for a more detailed discussion of our severance and change in control arrangements.

 

Tax Implications

 

Section 162(m) of the Internal Revenue Code of 1986

 

Section 162(m) of the Code limits deductions for certain executive compensation in excess of $1,000,000 in any fiscal year. Certain types of compensation are deductible only if performance criteria are specified in detail and payments are contingent on stockholder approval of the compensation arrangement. We attempt to structure our compensation arrangements to achieve deductibility under Section 162(m), unless the benefit of such deductibility is outweighed by the need for flexibility or the attainment of other corporate objectives. The compensation committee will continue to monitor issues concerning the deductibility of executive compensation and will take appropriate action if and when it is warranted. Since corporate objectives may not always be consistent with the requirements for full deductibility, the compensation committee is prepared, if it deems appropriate, to enter into compensation arrangements under which payments may not be deductible under Section 162(m). Thus, deductibility will not be the sole factor used by the compensation committee in ascertaining appropriate levels or modes of compensation.

 

In 2006, all annual incentive plan payments and SAR awards qualified as performance-based compensation under Section 162(m).

 

Section 280G of the Internal Revenue Code of 1986

 

Section 280G of the Code disallows a company’s tax deduction for what are defined as ’excess parachute payments’ and Section 4999 of the Code imposes a 20% excise tax on any person who receives excess parachute payments in connection with a change in control. Our Named Executive Officers (other than Mr. Noack) as part of their employment agreements will be provided with tax gross-up payments in the event their change in control payments become subject to this excise tax. The compensation committee believes that the provision of tax gross-up protection is appropriate and necessary for executive retention and consistent with the current practices of our market competitors. Please refer to the discussion on page 37 under “— Potential Payments upon Termination or Change in Control” for more detail on the potential gross-up payments and lost tax deductions.

 

Compensation Committee Report

 

We have reviewed and discussed with management certain Compensation Discussion and Analysis provisions to be included in this proxy statement. Based on the reviews and discussions referred to above, we recommend to the Board of Directors that the Compensation Discussion and Analysis referred to above be included in this proxy statement.

COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS

 

Peter Maslen, Chairman

Richard Bermingham

David Halbert

 

 

The following table sets forth the annual and long-term compensation for the fiscal year ended December 31, 2006, of the Company’s Chief Executive Officer and Chief Financial Officer and each of the three other most highly compensated executive officers. These individuals, including the Chief Executive Officer and Chief Financial Officer are collectively referred to in this proxy statement as the Named Executive Officers.

 

 

 

 

 

 

 

 

2006 Grants of Plan-Based Awards

 

The following table sets forth all grant of plan-based awards made to the Named Executive Officers during the fiscal year ended December 31, 2006. For further discussion regarding the grants see above under “— Compensation Discussion and Analysis — Annual Incentive Awards — Long Term Incentive Awards.”

 

 

 

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards

 

We have entered into employment agreements with each of the Named Executive Officers, certain terms of which are summarized below.

 

Michael O. Johnson.  Our subsidiaries, Herbalife International, Inc., or Herbalife International, and Herbalife International of America, Inc., or Herbalife America, entered into an executive employment agreement with Mr. Johnson effective as of April 3, 2003, as amended, or the Johnson Employment Agreement, pursuant to which he serves as the Company’s Chief Executive Officer. Under the terms of the Johnson Employment Agreement, Mr. Johnson’s employment will continue until it is terminated for any of a variety of reasons including death, disability, termination by Herbalife International and Herbalife America with or without Cause, termination by Mr. Johnson with or without Good Reason and termination in connection with certain organic transactions.

 

Pursuant to the Johnson Employment Agreement, Mr. Johnson currently receives an annual salary of $1,100,000. Mr. Johnson is also eligible to receive an annual cash bonus in an amount based on targets, that are established annually by the Board of Directors. Mr. Johnson’s annual bonus for the fiscal year ending December 31, 2006, was $2,200,000 and was dependent on the Company’s 2006 earnings per share. In addition to his salary and bonus, Mr. Johnson is also entitled to participate in or receive benefits under each benefit plan or arrangement made available to the Company’s senior executives on terms no less favorable than those generally applicable to senior executives of Herbalife International and Herbalife America. In 2006 Mr. Johnson also received an option to purchase 140,000 stock appreciation rights and was granted 15,000 stock units, as more fully described above under “— Grants of Plan Based Awards.”

 

In the event of any Change of Control, 50% of the stock options and stock units granted to Mr. Johnson will become immediately vested and exercisable. As of December 31, 2006 the market value of 50% of the stock options and stock units granted but not yet vested was $11.4 million. If, following any Change of Control, all or any portion of the options remain outstanding and Mr. Johnson’s employment is terminated (other than by reason of Mr. Johnson’s resignation without Good Reason or termination by the Company for Cause at any time following such Change of Control, 100% of any such outstanding options will immediately vest and become exercisable. In the event Mr. Johnson’s employment is terminated by reason of Mr. Johnson’s death or disability or during the 90 day period before a Change of Control, 100% of the options will vest and become exercisable. As of December 31, 2006 the market value of all unvested options and stock units was $34.2 million.

 

Upon termination of Mr. Johnson’s employment by Herbalife International and Herbalife America for Cause, or by Mr. Johnson without Good Reason, Mr. Johnson would be entitled to his then current accrued and unpaid base salary through the effective date of termination as well as 100% of any accrued and unpaid bonus for any years preceding the year of termination, however not for the year of termination. Mr. Johnson would also be entitled to any rights that may exist in his favor to payment of any amount under any employee benefit plan or arrangement of Herbalife International or Herbalife America, other than those set forth in the Johnson Employment Agreement, in accordance with the terms and conditions of any such employee benefit plan or arrangement.

 

Upon termination of Mr. Johnson’s employment by Herbalife International and Herbalife America without Cause, or by Mr. Johnson for Good Reason, in addition to the benefits described in the preceding paragraph, Mr. Johnson would also be entitled to an additional amount equal to two years’ base salary and bonus for the year of termination, which in total would be currently equal to $4,400,000, payable in twenty four equal monthly installments.

 

In the event that Mr. Johnson’s employment with Herbalife International and Herbalife America is terminated by Herbalife International and Herbalife America without Cause, or by Mr. Johnson for Good Reason, during the period beginning 90 days prior to and ending 90 days following a Sale Event and such Sale Event results in the cancellation or termination of Mr. Johnson’s stock options, or in the event that Mr. Johnson delivers written notice of his resignation upon the consummation of or within 90 days following such a Sale Event, in addition to the benefits described in the preceding two paragraphs, Mr. Johnson would also be entitled to an additional amount based on his then current base salary and the current option holdings, if any.

 

Gregory Probert.  We have also entered into an executive employment agreement, or the Probert Employment Agreement, effective on October 10, 2006, with Mr. Probert through our subsidiary Herbalife America. Pursuant to the Probert Employment Agreement, Mr. Probert serves as Herbalife America’s President and Chief Operating Officer. The base salary for Mr. Probert, effective January 1, 2005, is $750,000. If the Company’s Chief Executive Officer’s salary is increased, then Mr. Probert’s salary set forth above shall be increased by the same percentage. However, if in any given year Mr. Probert accepts an increase in base salary of a greater percentage than that received by the Chief Executive Officer, then Mr. Probert’s salary shall no longer be tied to any increases in the Chief Executive Officer’s salary. Should the Company adopt an across-the-board reduction in salaries for senior executives and its Chief Executive Officer, then Mr. Probert’s salary shall be reduced by a percentage equal to the smallest percentage reduction imposed on any senior executive or the Chief Executive Officer, but in no case shall such reduction exceed ten percent.

 

Mr. Probert is entitled to participate in the Company’s employee benefit plans and arrangements made available to the Company’s most senior executives, as well as the Company’s long-term incentive plan for senior executives. Pursuant to the Probert Employment Agreement, should the Company achieve certain targets established by the compensation committee Mr. Probert shall be entitled to a target bonus of no less than 100% of his annual salary for the year in question. Mr. Probert received an annual cash bonus of $1,275,000 for the fiscal year ended December 31, 2006 as well as an option to purchase 102,900 stock appreciation rights and was granted 32,025 stock units, as more fully described above under “— Grants of Plan Based Awards.”

 

If Mr. Probert is terminated by the Company without Cause or resigns for Good Reason, he is entitled to be paid a lump sum amount equal to two times the then-current annual salary, currently equal to $1,500,000, in addition to all other accrued but unpaid entitlements. However, Mr. Probert shall not be entitled to such lump sum payment of salary should his employment terminate subsequent to his 65^th birthday. The Company will also provide Mr. Probert with outplacement services for up to six months by a provider selected and paid for by the Company in an amount not to exceed $20,000. If Mr. Probert is terminated by the Company without Cause, resigns for Good Reason, or retires, dies, or resigns as a result of a disability, he will be entitled to receive a pro rata bonus payment, at such time bonuses are paid to the Company’s other senior executives, based on the number of months worked in the applicable year. As a precondition to the Company’s obligation to pay the amounts described above, Mr. Probert must execute a general release of claims. If the effective date of such termination without Cause or resignation for Good Reason occurs during a “trading blackout” or “quiet period” with respect to Common Shares or if the Company determines, upon the advice of legal counsel, that Mr. Probert may not trade in Common Shares on the effective date of such termination due to his possession of material non-public information, and in each case the restriction or prohibition continues for a period of at least twenty consecutive calendar days, Mr. Probert will be paid an additional lump sum amount equal to $250,000.

 

Upon the occurrence of a Change of Control, 50% of all unvested stock options and stock units granted to Mr. Probert shall immediately vest; however, the Compensation Committee of the Board of Directors may, in its sole discretion, accelerate the vesting of additional stock options stock units upon the occurrence of a Change of Control. As of December 31, 2006 the market value of 50% of all unvested options and stock units were $8.9 million. Should Mr. Probert’s employment be terminated for any reason other than for Cause or resignation without Good Reason within the 90-day period preceding a Change of Control or at any time after a Change of Control, then all of his unvested stock options and stock units shall vest as of the effective date of the termination. Except as set forth in the immediately preceding sentence, should Mr. Probert’s employment be terminated for any reason other than for Cause or resignation without Good Reason and at the time of such termination Mr. Michael O. Johnson is no longer serving as the Company’s Chief Executive Officer, then 50% of such Executive’s unvested stock options and stock units shall vest immediately prior to such termination. If Mr. Probert’s employment is terminated as a result of his death or disability, all unvested stock options and stock units will vest as of the date of such termination. Except as set forth above, all unvested stock options and stock units shall be forfeited upon the termination of Mr. Probert’s employment with the Company. As of December 31, 2006 the market value of all unvested options and stock units was $17.7 million.

 

Brett R. Chapman.  We have also entered into an executive employment agreement, or the Chapman Employment Agreement, effective on October 10, 2006, with Mr. Chapman through our subsidiary Herbalife

America. Pursuant to the Chapman Employment Agreement, Mr. Chapman serves as Herbalife America’s General Counsel and Corporate Secretary. The base salary for Mr. Chapman, effective January 1, 2006, is $500,000. If the Company’s Chief Executive Officer’s salary is increased, then Mr. Chapman’s salary set forth above shall be increased by the same percentage. However, if in any given year Mr. Chapman accepts an increase in base salary of a greater percentage than that received by the Chief Executive Officer, then Mr. Chapman’s salary shall no longer be tied to any increases in the Chief Executive Officer’s salary. Should the Company adopt an across-the-board reduction in salaries for senior executives and its Chief Executive Officer, then Mr. Chapman’s salary shall be reduced by a percentage equal to the smallest percentage reduction imposed on any senior executive or the Chief Executive Officer, but in no case shall such reduction exceed ten percent.

 

Mr. Chapman is entitled to participate in the Company’s employee benefit plans and arrangements made available to the Company’s most senior executives, as well as the Company’s long-term incentive plan for senior executives. Pursuant to the Chapman Employment Agreement, should the Company achieve certain targets established by the compensation committee, Mr. Chapman shall be entitled to a target bonus of no less that 50% of his annual salary for the year in question. Mr. Chapman received an annual cash bonus of $475,000 for the fiscal year ended December 31, 2006 as well as an option to purchase 31,500 stock appreciation rights and was granted 6,675 stock units, as more fully described above under “— Grants of Plan Based Awards.”

 

If Mr. Chapman is terminated by the Company without Cause or resigns for Good Reason, he is entitled to be paid a lump sum amount equal to two times the then-current annual salary, currently equal to $1,000,000, in addition to all other accrued but unpaid entitlements. The Company will also provide Mr. Chapman with outplacement services for up to six months by a provider selected and paid for by the Company in an amount not to exceed $20,000. If Mr. Chapman is terminated by the Company without Cause, resigns for Good Reason, or retires, dies, or resigns as a result of a disability, he will be entitled to receive a pro rata bonus payment, at such time bonuses are paid to the Company’s other senior executives, based on the number of months worked in the applicable year. As a precondition to the Company’s obligation to pay the amounts described above, Mr. Chapman must execute a general release of claims. If the effective date of such termination without Cause or resignation for Good Reason occurs during a “trading blackout” or “quiet period” with respect to Common Shares or if the Company determines, upon the advice of legal counsel, that Mr. Chapman may not trade in Common Shares on the effective date of such termination due to his possession of material non-public information, and in each case the restriction or prohibition continues for a period of at least twenty consecutive calendar days, Mr. Chapman will be paid an additional lump sum amount equal to $100,000.

 

Upon the occurrence of a Change of Control, 50% of all unvested stock options and stock units granted to Mr. Chapman shall immediately vest; however, the Compensation Committee of the Board of Directors may, in its sole discretion, accelerate the vesting of additional stock options stock units upon the occurrence of a Change of Control. As of December 31, 2006 the market value of 50% of all unvested options and stock units were $3.8 million. Should Mr. Chapman’s employment be terminated for any reason other than for Cause or resignation without Good Reason within the 90-day period preceding a Change of Control or at any time after a Change of Control, then all of his unvested stock options and stock units shall vest as of the effective date of the termination. Except as set forth in the immediately preceding sentence, should Mr. Chapman’s employment be terminated for any reason other than for Cause or resignation without Good Reason and at the time of such termination Mr. Michael O. Johnson is no longer serving as the Company’s Chief Executive Officer, then 50% of such Executive’s unvested stock options and stock units shall vest immediately prior to such termination. If Mr. Chapman’s employment is terminated as a result of his death or disability, all unvested stock options and stock units will vest as of the date of such termination. Except as set forth above, all unvested stock options and stock units shall be forfeited upon the termination of Mr. Chapman’s employment with the Company. As of December 31, 2006 the market value of all unvested options and stock units was $7.6 million.

 

Richard Goudis.  We have also entered into an executive employment agreement, or the Goudis Employment Agreement, effective on October 24, 2006, with Mr. Goudis through our subsidiary Herbalife America. Pursuant to the Goudis Employment Agreement, Mr. Goudis serves as Herbalife America’s Chief Financial Officer. The base salary for Mr. Goudis, effective January 1, 2006, is $525,000. If the Company’s Chief Executive Officer’s salary is increased, then Mr. Goudis salary set forth above shall be increased by the same percentage. However, if in any

given year Mr. Goudis accepts an increase in base salary of a greater percentage than that received by the Chief Executive Officer, then Mr. Goudis’ salary shall no longer be tied to any increases in the Chief Executive Officer’s salary. Should the Company adopt an across-the-board reduction in salaries for senior executives and its Chief Executive Officer, then Mr. Goudis’ salary shall be reduced by a percentage equal to the smallest percentage reduction imposed on any senior executive or the Chief Executive Officer, but in no case shall such reduction exceed ten percent.

 

Mr. Goudis is entitled to participate in the Company’s employee benefit plans and arrangements made available to the Company’s most senior executives, as well as the Company’s long-term incentive plan for senior executives. Pursuant to the Goudis Employment Agreement, should the Company achieve certain targets established by the compensation committee of the Board of Directors, Mr. Goudis shall be entitled to a target bonus of 50% of his annual salary for the year in question. Mr. Goudis received an annual cash bonus of $498,750 for the fiscal year ended December 31, 2006 as well as an option to purchase 31,500 stock appreciation rights and was granted 18,375 stock units, as more fully described above under “— Grants of Plan Based Awards.”

 

If Mr. Goudis is terminated by the Company without Cause or resigns for Good Reason, he is entitled to be paid a lump sum amount equal to two times the then-current annual salary, currently equal to $1,050,000, in addition to all other accrued but unpaid entitlements. The Company will also provide Mr. Goudis with outplacement services for up to six months by a provider selected and paid for by the Company in an amount not to exceed $20,000. If Mr. Goudis is terminated by the Company without Cause, resigns for Good Reason, or retires, dies, or resigns as a result of a disability, he will be entitled to receive a pro rata bonus payment, at such time bonuses are paid to the Company’s other senior executives, based on the number of months worked in the applicable year. As a precondition to the Company’s obligation to pay the amounts described above, Mr. Goudis must execute a general release of claims. If the effective date of such termination without Cause or resignation for Good Reason occurs during a “trading blackout” or “quiet period” with respect to Common Shares or if the Company determines, upon the advice of legal counsel, that Mr. Goudis may not trade in Common Shares on the effective date of such termination due to his possession of material non-public information, and in each case the restriction or prohibition continues for a period of at least twenty consecutive calendar days, Mr. Goudis will be paid an additional lump sum amount equal to $125,000.

 

Upon the occurrence of a Change of Control, 50% of all unvested stock options and stock units granted to Mr. Goudis shall immediately vest; however, the Compensation Committee of the Board of Directors may, in its sole discretion, accelerate the vesting of additional stock options and stock units upon the occurrence of a Change of Control. As of December 31, 2006 the market value of 50% of all unvested options and stock units were $4.1 million. Should Mr. Goudis’ employment be terminated for any reason other than for Cause or resignation without Good Reason within the 90-day period preceding a Change of Control or at any time after a Change of Control, then all of his unvested stock options stock units shall vest as of the effective date of the termination. Except as set forth in the immediately preceding sentence, should Mr. Goudis’s employment be terminated for any reason other than for Cause or resignation without Good Reason and at the time of such termination Mr. Michael O. Johnson is no longer serving as the Company’s Chief Executive Officer, then 50% of such Executive’s unvested stock options and stock units shall vest immediately prior to such termination. If Mr. Goudis’s employment is terminated as a result of his death or disability, all unvested stock options and stock units will vest as of the date of such termination. Except as set forth above, all unvested stock options and stock units shall be forfeited upon the termination of Mr. Goudis’s employment with the Company. As of December 31, 2006 the market value of all unvested options and stock units was $8.2 million.

 

Paul Noack.  We entered into an executive employment agreement, or the Noack Employment Agreement, effective January 1, 2004, and amended on April 17, 2006 with Mr. Paul Noack through our subsidiary Herbalife America. Pursuant to the Noack Employment Agreement, Mr. Noack will serve as Chief Strategic Officer through December 31, 2006. For his services as Chief Strategic Officer, Mr. Noack will be entitled to a salary of $450,000 per year. In addition, Mr. Noack shall be entitled to a target bonus of 50% of his end of the year salary in accordance with the senior executive bonus plan. Mr. Noack received an annual cash bonus of $426,000 for the fiscal year ended December 31, 2006 including a $26,000 adjustment to 2005 as well as an option to purchase 161,500 stock

appreciation rights and was granted 23,375 stock units, as more fully described above under “— Grants of Plan Based Awards.”

 

Upon termination of Mr. Noack’s employment by us without cause, or upon his resignation for good reason, Mr. Noack would be entitled to receive his then-current base salary for the remainder of the term under the Noack Employment Agreement, subject to his duty to mitigate; provided that such payments would cease if Mr. Noack obtains subsequent employment or fails to document to us on a monthly basis that he is making reasonable efforts to seek employment. As of January 1, 2007 Mr. Noack became an “at will” employee.

 

Definitions.  For the purposes of the Johnson Employment Agreement, the following terms have the following definitions:

 

 

 

For the purposes of the summaries of the Probert, Goudis and Chapman Employment Agreements, the following terms have the following definitions:

 

 

Potential Payments Upon Termination or Change in Control

 

The information below describes certain compensation that would have become payable under existing plans and contractual arrangements assuming a termination of employment and/or change in control had occurred on December 31, 2006 (based upon the closing price of Common Shares on December 29, 2006 of $40.16), given the Named Executive Officers’ compensation and service levels as of such date. In addition to the benefits described below, upon any termination of employment, each of the Named Executive Officers would also be entitled to the amount shown in the column labeled “Aggregate Balance at Last FYE” in the “2006 Nonqualified Deferred Compensation” table on page 41.

 

As of December 31, 2006, the Company had entered into employment agreements with each of the Named Executive Officers. As described in more detail above under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards” beginning on page 31, the employment agreements with the Named Executive Officers (other than Mr. Noack who became an employee “at-will” as of January 1, 2007) generally provide for the payment of benefits if the executive’s employment with the Company is terminated either by the Company without Cause or by the executive for Good Reason. The employment agreements with the Named Executive Officers do not provide for any additional payments or benefits upon a termination of employment by the Company for Cause, upon the executive’s resignation other for Good Reason, as applicable, or upon the executive’s death or disability. In addition, the employment agreement with Mr. Johnson provides for enhanced benefits upon termination of employment in connection with a Sale Event. The receipt of benefits following termination under each of the employment agreements is contingent upon the affected executive executing and not revoking a general release in favor of the Company.

 

In addition to the employment agreements with the Named Executive Officers, as described in more detail above under “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards” beginning on page 31, the award agreements governing the equity-based compensation awards (including stock options, stock appreciation rights and restricted stock units) granted to each of the Named Executive Officers other than Mr. Noack generally provide for accelerated vesting (i) upon the occurrence of a Change in Control, (ii) upon a termination of employment for any reason other than a termination for Cause or without Good Reason in connection with a Change in Control, and (iii) a termination of employment by reason of the executive’s death or disability.

 

The tables below set forth the estimated value of the potential payments to each Named Executive Officer, assuming the executive’s employment had terminated on December 31, 2006 and/or that a change in control of the

Company had also occurred on that date. Amounts are reported without any reduction for possible delay in the commencement or timing of payments.

 

 

 

 

Outstanding Equity Awards at 2006 Fiscal Year-End

 

The following table sets forth equity awards of the Named Executive Officers outstanding as of December 31, 2006.