SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934

(AMENDMENT NO.___)

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HERBALIFE LTD.

 

March 15, 2010

 

Dear Fellow Shareholder:

 

We are pleased to enclose information about the 2010 Annual General Meeting of Shareholders, or the Meeting, of Herbalife Ltd., or the Company, to be held on Thursday, April 29, 2010 at 9:00 a.m., Pacific Daylight Time, at the principal executive offices of one of the Company’s U.S. subsidiaries located at 800 W. Olympic Blvd., Suite 406, Los Angeles, California 90015. As discussed in more detail in the enclosed Proxy Statement, at the Meeting you will be asked to consider proposals to:

 

 

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

 

Best Regards,

 

 

MICHAEL O. JOHNSON

Chairman and Chief Executive Officer

 

 

 

 

HERBALIFE LTD.

 

NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS

To Be Held Thursday, April 29, 2010

 

To the Shareholders:

 

NOTICE IS HEREBY GIVEN that the 2010 Annual General Meeting of Shareholders, or the Meeting, of Herbalife Ltd., a Cayman Islands exempted limited liability company, or the Company, will be held on Thursday, April 29, 2010 at 9:00 a.m., Pacific Daylight Time, at the principal executive offices of one of the Company’s U.S. subsidiaries located at 800 W. Olympic Blvd., Suite 406, Los Angeles, California 90015 for the following purposes:

 

 

Each of the above proposals will be proposed as Ordinary Resolutions as permitted by the Companies Law (2009 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 1, 2010, are entitled to notice of and to vote at the Meeting and any subsequent adjournment(s) or postponement(s) thereof.

 

All shareholders are cordially invited to attend the Meeting in person. However, to assure your representation at the Meeting, you are urged to vote promptly. You may vote your shares via a toll-free telephone number or over the Internet. If you received a paper copy of the proxy card by mail, you may sign, date and mail the proxy card in the envelope provided. Instructions regarding voting are contained in the Notice of Internet Availability of Proxy Materials and the proxy card.

 

Sincerely,

 

BRETT R. CHAPMAN
General Counsel and Corporate Secretary

 

Los Angeles, California

March 15, 2010

HERBALIFE LTD.

 

PROXY STATEMENT FOR 2010

ANNUAL GENERAL MEETING OF SHAREHOLDERS

 

Herbalife Ltd., also referred to as we, our, us, Herbalife or the Company, is calling its 2010 Annual General Meeting of Shareholders, or the Meeting, to be held on Thursday, April 29, 2010 at 9:00 a.m., Pacific Daylight Time, at the principal executive offices of one of the Company’s U.S. subsidiaries located at 800 W. Olympic Blvd., Suite 406, Los Angeles, California 90015.

 

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

 

 

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. You may vote your shares via a toll-free telephone number or over the Internet. If you received a paper copy of the proxy card by mail, you may sign, date and mail the proxy card in the envelope provided. Instructions regarding voting are contained in the Notice of Internet Availability of Proxy Materials and 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 15, 2010, and is first being made available to shareholders of the Company on or about March 18, 2010. A Notice Regarding Internet Availability of Proxy Materials for the Annual General Meeting was mailed to shareholders of the Company on or about March 18, 2010, which contained instructions on how to access our proxy materials, including our Proxy Statement and Annual Report.

Table of Contents

 

 

Information Concerning Solicitation and Voting

 

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 29, 2010, at 9:00 a.m., Pacific Daylight Time, and at any subsequent adjournment(s) or postponement(s) thereof, for the purposes set forth herein and in the accompanying Notice of Annual General Meeting of Shareholders. The Meeting will be held at the principal executive offices of one of the Company’s U.S. subsidiaries, Herbalife International, Inc., at 800 W. Olympic Blvd., Los Angeles, Suite 406 California 90015. Our telephone number is (213) 745-0500.

 

Internet Availability of Proxy Materials.  Under rules recently adopted by the U.S. Securities and Exchange Commission, or the SEC, we are furnishing proxy materials to our shareholders primarily via the Internet, instead of mailing printed copies of those materials to each shareholder. On March 18, 2010, we intend to mail to our shareholders a Notice of Internet Availability of Proxy Materials containing instructions on how to access our proxy materials, including our Proxy Statement and our Annual Report.

 

Record Date and Voting Securities.  Only shareholders of record at the close of business on March 1, 2010, 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 the Record Date 60,324,654 Common Shares were issued and outstanding and held of record by 903 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 the 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 ratification of the appointment of independent registered public accountants, 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. 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, (b) granting a subsequent proxy through the Internet or telephone or (c) 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. We will, upon request, reimburse brokerage firms and others for their reasonable expenses in forwarding solicitation material to the beneficial owners of Common Shares.

 

Additional Information.  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.”

 

Important Notice Regarding the Availability of Proxy Materials for the Annual General
Meeting of Shareholders to Be Held on April 29, 2010.
The Proxy Statement and Annual Report to Shareholders are available at
http://bnymellon.mobular.net/bnymellon/hlf

 

Generally

 

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 Board of Directors has, by resolution, presently fixed the number of directors at nine. 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. 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 2011 and 2012, respectively. Currently, each class has three 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 Jeffrey T. Dunn for election as Class III directors to serve three-year terms expiring at the 2013 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.

 

Director Qualifications

 

The Board believes that the Board, as a whole, should possess a combination of skills, professional experience and diversity of backgrounds necessary to oversee the Company’s business. In addition, the Board believes that there are certain attributes that every director should possess, as reflected in the Board’s membership criteria discussed below. Accordingly, the Board and the nominating and corporate governance committee consider the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs.

 

The nominating and corporate governance committee is responsible for developing and recommending Board membership criteria to the Board for approval. The criteria, which are set forth in the Company’s Principles of Corporate Governance, include independent and sound judgment, integrity, the ability to commit sufficient time and attention to Board activities, and the absence of potential conflicts with the Company’s interests. In addition, the nominating and corporate governance committee periodically evaluates the composition of the Board to assess the skills and experience that are currently represented on the Board, as well as the skills and experience that the Board will find valuable in the future, given the Company’s current situation and strategic plans. The nominating and corporate governance committee seeks a variety of occupational, educational, and personal backgrounds on the Board in order to obtain a range of viewpoints and perspectives and to enhance the diversity of the Board in such areas as professional experience, geography, race, gender, ethnicity and age. While the nominating and corporate governance committee does not have a formal policy with respect to diversity, the nominating and corporate governance committee believes that it is essential that Board members represent diverse viewpoints. This periodic assessment enables the Board to update the skills and experience it seeks in the Board as a whole, and in individual directors, as the Company’s needs evolve and change over time and to assess effectiveness of efforts at pursuing diversity. In identifying director candidates from time to time, the nominating and corporate governance committee may establish specific skills and experience that it believes the Company should seek in order to constitute a balanced and effective board.

 

In evaluating director candidates, and considering incumbent directors for renomination to the Board, the nominating and corporate governance committee has considered a variety of factors. These include each nominee’s independence, financial literacy, personal and professional accomplishments, and experience, each in light of the

composition of the Board as a whole and the needs of the Company in general, and for incumbent directors, past performance on the Board. The table below sets forth information about the three nominees and the directors whose terms of office continue beyond the Meeting, including each such person’s specific experience, qualifications, attributes and skills that led our Board of Directors to conclude that such nominee/director should serve on our Board of Directors. The process undertaken by the nominating and corporate governance committee in recommending qualified director candidates is described below under “The Board of Directors — Board Committees — Nominating and Corporate Governance Committee.”

 

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 UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” LEROY T. BARNES, JR., RICHARD P. BERMINGHAM AND JEFFREY T. DUNN.

 

NOMINEES

 

 

CONTINUING DIRECTORS

 

 

Director Independence

 

Our Board of Directors has affirmatively determined that each of Messrs. Barnes, Bermingham, Dashe, Dunn and Higby and Ms. Nicholas is, and, during their tenure on the Board, each of Mr. Gaba and Ms. Rico were, independent 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 included as part of our Principles of Corporate Governance that are available on our website at www.herbalife.com by following the links through “Investor Relations” to “Corporate Governance.” 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 relationship with the Company.

 

Board Meetings

 

The Board of Directors met eight times during fiscal 2009. 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. Under the Company’s Principles of Corporate Governance, which are available on the Company’s website www.herbalife.com, by following the links 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. All then-current members of the Board of Directors attended the 2009 annual general meeting other than Mr. Leon Waisbein, whose directorship term expired at the 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 as well as a session of only the independent directors. Additional meetings of the Board of Directors, executive sessions of non-management directors and sessions of independent directors may be held from time to time as required or determined to be necessary. The Board of Directors has created the position of Lead Director to preside over executive sessions of non-management directors. The position is filled by an independent director elected by the independent directors

serving a two year term. Richard P. Bermingham currently serves as the Lead Director and his term is scheduled to expire in April 2011.

 

Board Leadership

 

Currently Mr. Johnson serves as our Chairman and CEO. The Board has determined that a board leadership structure featuring a single leader as Chairman and CEO combined with a Lead Director best serves the interests of the Company and its shareholders. Combining the roles of Chairman and CEO makes clear that the individual serving in these roles has primary responsibility for managing the Company’s business, under the oversight and review of the Board. Under this structure, the Chairman and CEO chairs Board meetings, where the Board discusses strategic and business issues. The Board believes that this approach makes sense because the CEO is the individual with primary responsibility for implementing the Company’s strategy, directing the work of other executive officers and leading implementation of the Company’s strategic plans as approved by the Board. This structure results in a single leader being directly accountable to the Board and, through the Board, to shareholders, and enables the CEO to act as the key link between the Board and other members of management.

 

In addition, the Board believes this structure is appropriate for the Company as the CEO is the person most knowledgeable about the Company and its business and is therefore the individual best able to provide guidance for productive board meetings. The unique nature of the Company’s direct selling business model requires that the Chairman and CEO have forged a close relationship with, and obtain and maintain the trust of, the Company’s independent distributors.

 

Because the Board also believes that strong, independent Board leadership is a critical aspect of effective corporate governance, the Board has established the position of Lead Director. The Lead Director is an independent director elected for a two year term by the independent directors. The Lead Director chairs the board meetings during all executive sessions and when the Chairman and CEO is unable to participate in board meetings, and is a contact point for shareholders and third parties who may desire to contact the Board independently of the Chairman and CEO. Mr. Bermingham, who has extensive business experience, including in the capacity of a CEO, currently serves as the Lead Director. The responsibilities of the Lead Director, who chairs the board meetings during all executive sessions and when the Chairman and CEO is unable to participate in board meetings, include:

 

 

The Board believes that a single leader serving as Chairman and CEO, together with an experienced and engaged Lead Director, is the most appropriate leadership structure for the Board at this time. The Board periodically reviews the structure of Board and Company leadership as part of the succession planning process.

The Board’s Role in Risk Oversight

 

The full Board of Directors has the ultimate responsibility for risk oversight regarding the Company. The Board oversees a Company-wide approach to risk management, designed to enhance shareholder value and to support the achievement of strategic objectives and to improve long-term organizational performance. The first aspect of the Board’s approach to risk management is to determine the appropriate level of risk for the Company generally, followed by an assessment of the specific risks the Company faces and the steps management is taking to manage those risks. The full Board’s involvement in setting the Company’s business strategy facilitates those assessments, culminating in the development of a strategic plan that reflects the Board’s and management’s concensus as to appropriate levels of risk as to specific aspects of the Company’s business and the appropriate measures to manage those risks. Additionally, the full Board of Directors participates in a periodic enterprise risk management assessment during its quarterly meetings. In this process, risk is assessed throughout the business, focusing on risks arising out of various aspects of the Company’s strategic plan and its implementation, including financial, legal/compliance, operational/strategic and compensation risks. The Board also assesses its role in risk oversight throughout our business. In addition to the discussion of risk with the full Board at least once a year, the independent directors discuss risk management during executive sessions without management present with the Lead Director presiding.

 

While the full Board of Directors has the ultimate oversight responsibility for the risk management process, various Board committees also have responsibility for risk management in certain areas. In particular, the audit committee focuses on financial risk, including internal controls and assesses the Company’s risk profile with the Company’s internal auditors. The internal controls risks profile drives the internal audit plan for the coming year. The audit committee also handles violations of the Company’s Code of Ethics and related corporate policies. Finally, the compensation committee periodically reviews compensation practices and policies to confirm that they do not encourage excessive risk taking. Management regularly reports on each such risk to the relevant committee or the full Board, as appropriate, and additional review or reporting on enterprise risks is conducted as needed or as requested by the Board or the relevant committee.

 

2009 Director Compensation

 

The table below summarizes the compensation paid by the Company to non-management directors for the fiscal year ended December 31, 2009.

 

 

 

 

 

Through April 29, 2009, each non-management director received (i) $25,000 per year for services as a director and $5,000 for each Board committee on which the director served (and an additional $20,000 per year for the chair of the audit committee and for the chair of the compensation committee, and an additional $10,000 for the chair of the nominating and corporate governance committee), (ii) $5,000 for each Board meeting attended by the director in person or $1,000 per Board meeting attended telephonically, (iii) $3,500 for each audit committee meeting attended either in person or telephonically, and (iv) $2,500 for each compensation committee meeting and for each nominating and corporate governance committee meeting attended either in person or telephonically. In order to make the compensation program competitive with other public company board compensation programs and to ensure that the Company continued to attract and retain the services of exemplary director candidates, our director compensation program was amended effective April 30, 2009 to provide that, from and after that date, each non-management director received (i) $60,000 per year for services as a director and $5,000 for each Board committee on which the director serves and an additional $20,000 per year for the Lead Director, an additional $15,000 per year for the chair of the audit committee, an additional $10,000 per year for the chair of the compensation committee and an additional $5,000 per year for the chair of the nominating and corporate governance committee, (ii) $1,500 for each Board meeting attended by the director in person or $1,000 per Board meeting attended telephonically, (iii) $2,500 for each audit committee meeting attended either in person or telephonically and (iv) $1,500 for each compensation committee and for each nominating and corporate governance committee meeting attended either in person or telephonically. Independent directors also receive a $100,000 equivalent annual equity grant.

 

The Company has adopted stock ownership guidelines applicable to each non-management director. Specifically, each non-management 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. Each non-management director that has served on our Board for more than two years is compliant with these guidelines.

 

The table below summarizes the equity-based awards held by the Company’s non-management directors as of December 31, 2009.

 

Effective January 15, 2006, the Company established the Independent Directors Deferred Compensation and Stock Unit Plan, or the Independent Directors Plan, for the award of restricted stock units, or RSUs, to independent directors and to allow for deferral of compensation realized in connection with such RSUs and other director compensation. The purpose of the Independent Directors 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, and to motivate and to align their interests with those of the equity holders. The Independent Directors Plan is part of the Herbalife Ltd. 2005 Stock Incentive Plan. Effective January 27, 2009, the Independent Directors Plan and award agreements granted thereunder were amended to eliminate the ability to make further deferrals of compensation by independent directors. In addition, the Independent Directors Plan was further amended such that awards to independent directors in 2009 and thereafter will be in the form of stock-settled stock appreciation rights, or SARs, instead of RSUs, and to eliminate a two-year automatic deferral feature following vesting with respect to awards (or portions thereof) that vested in 2009 or that will be granted in 2010 and beyond.

 

Shareholder Communications with 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 Richard P. Bermingham in his capacity as the Lead Director, may do so by writing to Herbalife Ltd., c/o Corporate Secretary, 800 W. Olympic Blvd, Suite 406, Los Angeles, CA 90015, 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 communications 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 communications 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.

 

Committees of the Board

 

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

 

Audit Committee

 

From January 1, 2009 to March 9, 2009, the audit committee consisted of Messrs. Barnes, Bermingham and Gaba, each of whom is or was independent as discussed above under “— Director Independence.” Mr. Gaba passed away on March 9, 2009. From March 10, 2009 through April 29, 2009, the audit committee consisted of Messrs. Barnes, Bermingham and Higby, each of whom is independent as discussed above under “— Director Independence.” Since April 30, 2009, the audit committee has consisted of Messrs. Barnes, Bermingham, Dashe and Higby, each of whom is 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 Dashe and Higby are, and Mr. Gaba (while on the audit committee) was, financially literate, and that Mr. Bermingham is an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K.

 

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 2009, the audit committee met four times.

 

Nominating and Corporate Governance Committee

 

From January 1, 2009 to March 6, 2009, the nominating and corporate governance committee consisted of Mmes. Nicholas and Rico and Mr. Barnes, each of whom is or was independent as discussed above under “— Director Independence.” Ms. Rico resigned from the Board on March 6, 2009. Since March 9, 2009, the nominating and corporate governance committee has consisted of Ms. Nicholas and Messrs. Barnes and Bermingham, each of whom is independent as discussed above under “— Director Independence.” The principal duties of the nominating and corporate governance committee are as follows:

 

 

In identifying candidates to serve on the Board, the nominating and corporate governance committee first determines the evolving needs of the Board 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, as discussed in greater detail above under “Proposal 1: The Election of Directors — Director Qualifications.” 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.

 

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.”

 

The 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 2009, the nominating and corporate governance committee met seven times.

 

Compensation Committee

 

From January 1, 2009 to March 6, 2009, the compensation committee consisted of Mr. Bermingham and Mmes. Nicholas and Rico, each of whom is or was independent as discussed above under “— Director Independence.” Ms. Rico resigned from the Board on March 6, 2009. From March 9, 2009 through April 29, 2009, the compensation committee consisted of Messrs. Barnes and Bermingham and Ms. Nicholas, each of whom is

independent as discussed above under “— Director Independence.” Since April 30, 2009, the compensation committee has consisted of Messrs. Bermingham, Dashe and Higby and Ms. Nicholas, each of whom is independent as discussed above under “— Director Independence.” 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.” Among other duties, the compensation committee is responsible for making the initial risk assessment of the Company’s compensation programs and determining whether those programs require modification to remain consistent with the Board’s determinations as to the levels of risk that are appropriate for the Company. In its assessment, the compensation committee reviewed the Company’s compensation structure and noted numerous ways in which risk is potentially mitigated by practices and policies that include: the balanced mix between short- and long-term incentives; the use of multiple performance measures for the CEO’s annual incentive; strong internal controls; the use of stock ownership guidelines; and the existence of an anti-hedging policy. In light of its analysis, the committee believes that the architecture of the Company’s compensation programs provide various safeguards to protect against undue risk. In fiscal 2009, the compensation committee met eight times.

 

Compensation Committee Interlocks and Insider Participation

 

During the fiscal year ended December 31, 2009, Messrs. Bermingham, Barnes, Dashe and Higby and Mmes. Nicholas and Rico served on the compensation committee of the Board of Directors. During the fiscal year ended December 31, 2009, there were no relationships or transactions between the Company and any member of the compensation committee requiring disclosure hereunder.

 

Our Board of Directors has adopted a resolution unanimously approving, and is recommending to the shareholders for their approval, a proposed amendment to and restatement of the Company’s 2005 Stock Incentive Plan, or the 2005 Plan, to among other things, increase the number of Common Shares authorized for issuance upon the exercise of any stock options, SARs, restricted stock, RSUs or dividend equivalents granted thereunder by 700,000 Common Shares, to clarify the prohibition on repricing without shareholder approval, as well as to make other immaterial administrative changes. The proposed amendment to the number of authorized Common Shares available under the 2005 Plan is subject to approval by the shareholders at the Meeting.

 

The proposed amendment to and restatement of the 2005 Plan would increase the aggregate number of Common Shares authorized for issuance under the 2005 Plan by 700,000 Common Shares. If approved, the additional Common Shares will be issuable in connection with each type of award authorized to be granted pursuant

to the 2005 Plan. This increase is proposed to provide sufficient Common Shares to cover new award grants to enable the Company to attract, retain and motivate directors, officers, employees and consultants by providing for or increasing their economic interests in the success of the Company.

 

Purposes and Effects of the Amendment and Restatement of the 2005 Plan

 

The Company currently maintains one active stock incentive plan for the purpose of granting stock-based compensation awards, the 2005 Plan, which was originally approved by the shareholders on November 2, 2005. As of March 1, 2010, a total of 675,019 Common Shares remained available for new award grants under the 2005 Plan. In addition, as of March 1, 2010, (i) 4,221,347 shares were covered by options and SARs granted under the 2005 Plan and (ii) 710,243 shares were subject to unvested awards of stock units and vested stock units with deferred settlement dates granted under the 2005 Plan.

 

The Company believes that incentives and stock-based compensation awards motivate its directors, officers, employees and consultants to focus on the objective of creating shareholder value and promoting the success of the Company. The Company also believes that incentive compensation plans are an important tool for attracting, retaining and motivating highly qualified and skilled directors, officers, employees and consultants. As noted above, the Board of Directors approved the proposed amendment and restatement of the 2005 Plan, in part, because the number of shares available under the 2005 Plan as currently in effect does not provide flexibility to adequately provide for future incentives or hirings. In addition to the increase in the number of Common Shares authorized for issuance in connection with equity awards made under the 2005 Plan, the amendment and restatement also clarifies the prohibition on repricing without shareholder approval by including a prohibition on replacing any stock options or SARs that are underwater (i.e., awards where the current fair market value of the Common Share issuable upon exercise of such award is less than the award’s exercise price) with cash or awards with lower exercise prices. Lastly, each Common Share issued under awards other than options or SARs (so called “full value” awards) will count against the number of Common Shares available under the 2005 Plan as one and one-half (1.5), rather than two (2), Common Shares, which ratio better reflects the relative value of those awards.

 

Plan Features and Grant Practices that Protect Shareholder Interests

 

The 2005 Plan, as amended and restated, and the Company’s grant practices include a number of features intended to protect the interests of shareholders:

 

 

 

Section 162(m)

 

The Board of Directors continues to believe that it is in the best interests of the Company and its shareholders to continue to provide for a stock incentive plan under which stock-based compensation awards made to the Company’s executive officers can qualify for deductibility by the Company for federal income tax purposes. Accordingly, the 2005 Plan has been (and with this amendment and restatement remains) structured in a manner such that awards under it can satisfy the requirements for “performance-based” compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. In general, under Section 162(m), in order for the Company to be able to deduct compensation in excess of $1 million paid in any one year to the Company’s Chief Executive Officer or any of the Company’s three other most highly compensated executive officers (other than the Company’s Chief Financial Officer), such compensation must qualify as “performance-based.” One of the requirements of “performance-based” compensation for purposes of Section 162(m) of the Code is that the material terms of the performance goals under which compensation may be paid be disclosed to and approved by the Company’s shareholders. For purposes of Section 162(m), the material terms include (i) the employees eligible to receive compensation, (ii) a description of the business criteria on which the performance goal is based and (iii) the maximum amount of compensation that can be paid to an employee under the performance goal. With respect to awards of restricted stock, stock units, and performance units under the 2005 Plan, each of these aspects is discussed below, and shareholder approval of this proposal will be deemed to constitute re-approval of each of these aspects of the 2005 Plan for purposes of the approval requirements of Section 162(m).

 

Summary of the 2005 Plan

 

The following summary of the material provisions of the 2005 Plan as proposed to be amended and restated is qualified in its entirety by the complete text of the proposed amended and restated 2005 Plan, a copy of which is attached hereto as Appendix A.

 

General.  The 2005 Plan provides for the grant of incentive stock options, nonqualified stock options, SARs, restricted stock, stock units, performance units and dividend equivalents. Incentive stock options granted under the 2005 Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code. Nonqualified stock options are stock options that are not intended to qualify as incentive stock options under the Code. See “— Federal Income Tax Consequences of the 2005 Plan” for a discussion of the tax treatment of awards that may be granted under the 2005 Plan.

 

Eligibility.  Any person who is a current or prospective director, officer, employee or consultant of the Company or any of its subsidiaries is eligible to be selected as a recipient of an award under the 2005 Plan. Incentive stock options may only be granted to employees of the Company and its subsidiaries that are at director level and above and where participation in the 2005 Plan is permitted by local law. As of March 1, 2010, there were approximately 230 eligible plan participants.

 

Shares Subject to the 2005 Plan.  Currently, the maximum number of Common Shares that may be issued pursuant to awards granted under the 2005 Plan is 4,000,000, plus (i) any shares that remained available for issuance under the Company’s 2004 Stock Incentive Plan, or the 2004 Plan, and (ii) any awards under the 2004 Plan that expire or are forfeited, terminated or otherwise cancelled, or that are settled in cash in lieu of Common Shares. The number of Common Shares described in clauses (i) and (ii) above are collectively referred to herein as the Additional Common Shares. To date, 3,238,590 Additional Common Shares have become available for grant under the 2005 Plan. If the proposed amendment and restatement of the 2005 Plan is approved, the maximum number of Common Shares that may be issued pursuant to awards granted under the 2005 Plan will be 4,700,000, plus any Additional Common Shares, for a total of 7,938,590 Common Shares. In addition, Common Shares issuable under the 2005 Plan are subject to certain adjustments for corporate transactions, as described in “— Adjustments.”

Any Common Shares subject to awards under the 2005 Plan that expire or are forfeited, terminated or otherwise cancelled, or that are settled in cash in lieu of Common Shares, will become available for subsequent awards under the 2005 Plan. However, Common Shares subject to awards under the 2005 Plan that are not issued upon the net settlement or net exercise of options or SARs, Common Shares that are delivered to or retained by the Company to pay the exercise price or withholding taxes related to awards and Common Shares repurchased on the open market with the proceeds of option exercises, will not be available for additional grants under the 2005 Plan.

 

The 2005 Plan provides that each Common Share issued under awards other than options or SARs will count against the number of Common Shares available under the 2005 Plan as one and one-half (1.5) Common Shares. Common Shares issued under options or SARs count against the Common Shares available under the 2005 Plan as one (1) Common Share. Any Common Shares that again become available for grant under the 2005 Plan shall be added back as one (1) Common Share if such shares were subject to options or SARs, and as one and one-half (1.5) Common Shares if such shares were subject to awards other than options or SARs.

 

The 2005 Plan also provides for a per person, per year limit on Common Shares subject to all awards granted under the 2005 Plan of 1,250,000, and a per person, per year limit on the amount, in cash, that may be payable pursuant to that portion of a performance unit that is intended to satisfy the requirements for “performance based compensation” under Section 162(m) of $5,000,000.

 

Administration.  The 2005 Plan is administered by the compensation committee, or in the absence of a compensation committee, the Board of Directors itself. Such administering body of the 2005 Plan is referred to in this “Summary of the 2005 Plan” as the Committee. However, (i) with respect to any award that is intended to satisfy SEC Rule 16b-3, the Committee must consist solely of two or more directors, each of whom is a “non-employee director” for purposes of Rule 16b-3; and (ii) with respect to any award that is intended to qualify as “performance-based compensation” under Section 162(m) of the Code, the Committee must be consist solely of two or more directors, each of whom is an “outside director” for purposes of Section 162(m).

 

The Committee has full and final authority to administer the 2005 Plan to, among other things: prescribe rules relating to the 2005 Plan; select the persons to whom awards will be granted under the 2005 Plan; grant awards; determine the terms and conditions of those awards and whether any such terms and conditions, such as performances goals, have been satisfied; interpret and construe the 2005 Plan; and exercise its discretion with respect to powers and rights granted to it under the 2005 Plan.

 

Stock Options.  The 2005 Plan authorizes the Committee to grant incentive stock options and nonqualified stock options. The terms and conditions of options granted under the 2005 Plan will be determined by the Committee in its discretion, subject to certain restrictions contained in the 2005 Plan. Among the restrictions on the Committee’s discretion are the following:

 

 

The exercise price of an option may be paid through various means specified by the Committee, including in cash, by delivery of Common Shares previously acquired by the optionee or by cashless exercise procedures permitted and established by the Committee.

 

Stock Appreciation Rights, or SARs.  The 2005 Plan authorizes the Committee to grant SARs. A SAR represents the right to receive, upon exercise, an amount equal to the difference between the value of a Common Share on the date of exercise and the exercise price of the SAR, subject to limitations imposed by the Committee in its discretion. SARs may be granted alone or in tandem with other awards granted under the 2005 Plan. In general, the Committee determines, in its discretion, the terms and conditions of SARs granted under the 2005 Plan, subject

to the terms of the 2005 Plan, including the same restrictions applicable with respect to options granted under the 2005 Plan described above. SARs granted in tandem with an option will have the same terms and conditions as the option with respect to which it was granted. SARs may be settled in Common Shares, cash or a combination thereof, as determined by the Committee.

 

Restricted Stock and Stock Units.  The 2005 Plan authorizes the Committee to grant awards of restricted stock and stock units with time-based vesting or performance-based vesting. A stock unit represents the right to receive a specified number of Common Shares upon vesting or at a later date permitted in the award agreement. Restricted stock and stock units may be settled in Common Shares, cash, or a combination thereof, as determined by the Committee. The terms and conditions of restricted stock and stock units will be determined by the Committee in its discretion, subject to certain restrictions contained in the 2005 Plan. Among the restrictions on the Committee’s discretion are the following:

 

 

Performance Units.  The 2005 Plan authorizes the Committee to grant performance units payable in cash, Common Shares, or a combination thereof, based upon the achievement of specified performance goals during a specified performance period. Subject to the 2005 Plan, the performance goals, performance period and other terms and conditions applicable to performance awards will be specified by the Committee and set forth in the award agreement. Subject to the terms of the 2005 Plan, the performance goals, performance period and other terms and conditions of performance units will be determined by the Committee in its discretion; provided that the performance period shall not be less than one year.

 

Performance-Based Awards.  Section 162(m) of the Code limits the Company’s federal income tax deduction for compensation paid to any of the officers named in its Proxy Statement. The limit is $1 million per officer per year, with certain exceptions. This deductibility cap does not apply to “performance-based compensation,” if approved in advance by the Company’s shareholders. The 2005 Plan provides that all or a portion of an award of performance units or an award of restricted stock or stock units that are subject to performance-based vesting may be designed to qualify as deductible “performance-based compensation.”

 

The performance criteria for that portion of any award of performance units, restricted stock or stock units that is intended to qualify as deductible performance-based compensation will be a measure based on one or more Qualifying Performance Criteria (as defined below). Notwithstanding satisfaction of any performance goals, the number of Common Shares granted, issued, retained and/or vested under an award of restricted stock, stock units, and the amount paid under an award of performance units, may be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine. No award of performance units, restricted stock or stock units granted under the 2005 Plan that is intended to satisfy the requirements for “performance based compensation” under Section 162(m) of the Code will be payable unless the Committee certifies in writing that the applicable performance goals have been satisfied.

 

Qualifying Performance Criteria.  The performance criteria, or Qualifying Performance Criteria, for any award of restricted stock, stock units or performance units that is intended to satisfy the requirements for “performance based compensation” under Section 162(m) of the Code shall be any one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or subsidiary, either individually, alternatively or in any combination, and measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as specified by the Committee: (i) cash flow (before or after dividends), (ii) earnings per share (including earnings before interest, taxes, depreciation and amortization), (iii) stock price, (iv) return on equity, (v) total shareholder return, (vi) return on capital (including return on total capital or return on invested capital), (vii) return on assets or net assets, (viii) market capitalization, (ix) economic value added, (x) debt leverage (debt to capital), (xi) revenue, (xii) income or net income,

(xiii) operating income, (xiv) operating profit or net operating profit, (xv) operating margin or profit margin, (xvi) return on operating revenue, (xvii) cash from operations, (xviii) operating ratio, (xix) operating revenue, or (xx) customer service. The Committee may appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to exclude any of the following events that occurs during a performance period: (i) asset write-downs, (ii) litigation or claim judgments or settlements, (iii) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (iv) accruals for reorganization and restructuring programs, and (v) any extraordinary non-recurring items as described in FASB ASC Subtopic 225-20 and/or in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the applicable year.

 

Dividend Equivalents.  The 2005 Plan authorizes the Committee to grant dividend equivalents independently or in tandem with any award other than an award of stock options or SARs. Dividend equivalents are payable in cash, Common Shares or stock units in an amount equivalent to the dividends that would have been paid on Common Shares had the shares been outstanding from the date an award was granted. Dividend equivalents may be granted with conditions as determined by the Committee, including that such amounts (if any) shall be deemed to have been reinvested in additional Common Shares.

 

Adjustments.  Upon an increase or decrease in the number of issued Common Shares resulting from a reorganization, reclassification, combination of shares, stock split, reverse stock split, spin-off, dividend (other than regular, cash dividends) or otherwise, the number of Common Shares authorized for issuance under the 2005 Plan, and the number of Common Shares covered by each outstanding award and the price per Common Share covered by each outstanding award, shall be proportionately adjusted by the Committee to reflect such increase or decrease.

 

Change of Control.  Unless otherwise provided for under the terms of the transaction, the Committee may provide that any or all of the following shall occur in connection with a Change of Control of the Company, or upon termination of an award recipient’s employment following a Change of Control:

 

 

The definition of a Change of Control for the purposes of the 2005 Plan is set forth under “Executive Compensation — Potential Payments upon Termination or Change in Control — Definitions.”

 

Restrictions on Transfer.  Unless the Committee specifies otherwise, awards granted under the 2005 Plan may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated other than by will or the laws of descent and distribution, and each award is exercisable only by the recipient thereof during his or her lifetime. In no event may options or SARs be transferred for value or consideration.

 

Plan Amendments.  The Board of Directors may amend or terminate all or any part of the 2005 Plan at any time and in any manner; provided that, (i) the Company’s shareholders must approve any amendment or termination if shareholder approval is required under any applicable law, regulation or NYSE or other applicable listing requirements; and (ii) award recipients must consent to any amendment or termination that would materially impair their rights under outstanding awards, unless the Committee determines that the amendment or termination is either required or advisable to satisfy any applicable law or regulation or to meet the requirements of any accounting standard or avoid adverse financial accounting consequences thereunder. The Committee may modify the provisions of any award at any time and in any manner as may be necessary for it to conform to local rules and regulations in any jurisdiction outside the United States.

 

Plan Duration.  The 2005 Plan was adopted by the Board of Directors on September 23, 2005, and approved by the shareholders on November 2, 2005. No award may be granted under the 2005 Plan after November 2, 2015,

the tenth anniversary of the date the 2005 Plan was approved by the shareholders, but any award granted prior to that date may extend beyond that date.

 

New Plan Benefits.  Because benefits under the 2005 Plan will depend on the Committee’s actions and the fair market value of Common Shares at various future dates, it is not possible to determine the benefits that will be received by directors, executive officers and other employees if the 2005 Plan, as amended and restated, is approved by the Company’s shareholders.

 

Federal Income Tax Consequences of the 2005 Plan

 

The following is only a summary of the effect of U.S. federal income taxation upon the participant and the Company with respect to the grant and exercise of awards under the 2005 Plan, is not complete, does not discuss the income tax laws of any state or foreign country in which a participant may reside, and is subject to change. Recipients of awards under the 2005 Plan should consult their own tax advisors regarding the specific tax consequences to them of participating in the 2005 Plan.

 

Incentive Stock Options.  Pursuant to the 2005 Plan, employees may be granted options that are intended to qualify as “incentive stock options” under the provisions of Section 422 of the Code. Except as described in the following two sentences, the employee is generally not taxed and the Company is not entitled to a deduction on the grant or exercise of an incentive stock option, so long as the option is exercised while the employee is employed by the Company or its subsidiaries, or within three months following termination of employment (one year if termination is due to permanent disability). The amount by which the fair market value of the Common Shares acquired upon exercise of the option exceeds the exercise price will be included as a positive adjustment in the calculation of the employee’s “alternative minimum taxable income” in the year of exercise. The “alternative minimum tax” imposed on individual taxpayers is generally equal to the amount by which a specified percentage of the individual’s alternative minimum taxable income (reduced by certain exemption amounts) exceeds his or her regular income tax liability for the year.

 

If the employee disposes of Common Shares acquired upon exercise of an incentive stock option at any time within one year after the date of exercise or two years after the date of grant of the option (such a disposition is referred to as a disqualifying disposition), then the employee will recognize (i) capital gain in an amount equal to the excess, if any, of the sales price over the fair market value of the Common Shares on the date of exercise; (ii) ordinary income in an amount equal to the excess, if any, of the lesser of the sales price or the fair market value of the Common Shares on the date of exercise over the exercise price of the option; and (iii) capital loss equal to the excess, if any, of the exercise price over the sales price.

 

In the event of a disqualifying disposition, the Company will generally be entitled to a deduction in an amount equal to the amount of ordinary income recognized by the employee. If the employee sells shares acquired upon exercise of an incentive stock option at any time after the first anniversary of the date of exercise and the second anniversary of the date of grant of the option, then the employee will recognize long-term capital gain or loss equal to the difference between the sales price and the exercise price of the option, and the Company will not be entitled to any deduction.

 

Nonqualified Stock Options.  Pursuant to the 2005 Plan, eligible individuals may be granted options that do not qualify for treatment as “incentive stock options” (referred to as nonqualified stock options). The grant of a nonqualified stock option is generally not a taxable event for the optionee. Upon exercise of a nonqualified stock option, the optionee will generally recognize ordinary income in an amount equal to the excess of the fair market value of the Common Shares on the date of exercise over the exercise price, and the Company will be entitled to a deduction equal to such amount. A subsequent disposition of the Common Shares will give rise to capital gain or loss equal to the difference between the sales price and the sum of the exercise price paid with respect to the Common Shares plus the ordinary income recognized with respect to the Common Shares. Any capital gain or loss on the subsequent disposition of Common Shares acquired through the exercise of a nonqualified stock option will generally be treated as a long-term or short-term capital gain or loss, depending on whether the holding period for the Common Shares exceeds one year at the time of the disposition.

Stock Appreciation Rights, or SARs.  Pursuant to the 2005 Plan, eligible individuals may be granted SARs. The grant of SARs is generally not a taxable event for the grantee. Upon exercise of a SAR, the grantee will generally recognize ordinary income in an amount equal to the fair market value on the date of exercise of the Common Shares or other property received upon exercise of the SAR, and the Company will be entitled to a deduction equal to such amount. A subsequent disposition of any Common Shares received by the grantee upon the exercise of a SAR will give rise to capital gain or loss equal to the difference between the sales price and the ordinary income recognized with respect to the Common Shares. Any capital gain or loss on the subsequent disposition of such Common Shares will generally be treated as a long-term or short-term capital gain or loss, depending on whether the holding period for the Common Shares exceeds one year at the time of the disposition.

 

Restricted Stock.  Pursuant to the 2005 Plan, eligible individuals may be granted restricted stock. Unless the grantee makes a timely election under Section 83(b) of the Code, he or she will generally not recognize any taxable income until the restrictions on the Common Shares expire or are removed, at which time the grantee will recognize ordinary income in an amount equal to the excess of the fair market value of the Common Shares at that time over the purchase price for the restricted shares, if any. If the grantee makes an election under Section 83(b) within 30 days after receiving shares of restricted stock, he or she will recognize ordinary income on the date of receipt equal to the excess of the fair market value of the Common Shares on that date over the purchase price, if any, for the restricted shares, if any. The Company will generally be entitled to a deduction equal to the amount of ordinary income recognized by the grantee at the time such income is recognized by the grantee.

 

Stock Units.  Pursuant to the 2005 Plan, eligible individuals may be granted stock units. The grant of a stock unit is generally not a taxable event for the grantee. In general, the grantee will not recognize any taxable income until the Common Shares subject to the stock unit (or cash equal to the value of such Common Shares) are distributed to him or her without of any restrictions, at which time the grantee will recognize ordinary income equal to the excess of the fair market value of the Common Shares (or cash) at that time over the purchase price for the Common Shares, if any. The Company will generally be entitled to a deduction equal to the amount of ordinary income recognized by the grantee at the time such income is recognized by the grantee.

 

Performance Units.  Pursuant to the 2005 Plan, eligible individuals may be granted performance units. The grant of a performance unit is generally not a taxable event for the grantee. Upon payment of a performance unit, the grantee will recognize ordinary income equal to the fair market value of any Common Shares or cash received. The Company will generally be entitled to a deduction equal to the amount of ordinary income recognized by the grantee at the time such income is recognized by the grantee.

 

Dividend Equivalents.  Pursuant to the 2005 Plan, eligible individuals may be granted dividend equivalents. Upon payment of amounts associated with a dividend equivalent, the grantee will recognize ordinary income equal to the fair market value of any Common Shares or cash received. The Company will generally be entitled to a deduction equal to the amount of ordinary income recognized by the grantee at the time such income is recognized by the grantee.

 

Withholding of Taxes.  Generally, the Company will be required to withhold applicable taxes with respect to any ordinary income recognized by a grantee in connection with awards granted under the 2005 Plan. The grantee may be required to pay the withholding taxes to the Company or make other provisions satisfactory to the Company for the payment of the withholding taxes as a condition to the exercise of options or the receipt of unrestricted stock pursuant to stock units and performance units. Special rules will apply in cases where a grantee pays the exercise or purchase price of an award, or the applicable withholding tax obligations, by delivering previously owned Common Shares or by reducing the number of Common Shares otherwise issuable pursuant to the award. Such a delivery of Common Shares will in certain circumstances result in the recognition of income with respect to those Common Shares.

 

Other Tax Issues.  Awards to eligible individuals under the 2005 Plan may provide for accelerated vesting or payment in the event of a change in control of the Company. In that event, and depending upon the individual circumstances of the holder of the award, certain amounts with respect to such awards may constitute “excess parachute payments” under the “golden parachute” provisions of the Code. Pursuant to these provisions, a grantee will be subject to a 20% excise tax on any “excess parachute payment” and the Company will be denied any deduction with respect to such payment.

 

As noted above, Section 162(m) of the Code limits the Company’s federal income tax deduction for compensation paid to any of the Named Executive Officers, as defined under “Executive Compensation — Compensation Discussion and Analysis. In certain instances the Company may be denied a compensation deduction for awards granted to certain Company officers that do not qualify as “performance-based compensation” to the extent their aggregate compensation exceeds $1 million in a given year.

 

Additional Plan Disclosure

 

As of December 31, 2009, there were 7,371,832 stock options and SARs outstanding under our 2005 Stock Incentive Plan and preceding equity plans with a weighted average exercise price of $24.84 and a weighted average remaining life of 5.9 years. The following table sets forth additional information regarding stock options and SARs outstanding as of December 31, 2009:

 

 

“Substantially in-the-money options and SARs outstanding in excess of six years” is defined for this purpose as Herbalife Ltd. options and SARs that are fully vested and have an exercise price of less than $12.06. Additional information regarding these options and SARs is as follows:

 

 

The following table sets forth information regarding awards granted and earned over the last three fiscal years.

 

Equity Awards Granted

 

 

 

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE 2005 PLAN.

 

The audit committee has selected KPMG LLP as the Company’s independent registered public accountants for the fiscal year ending December 31, 2010. Services provided to the Company and its subsidiaries by KPMG LLP in fiscal 2008 and 2009 are described under “— Fees to Independent Registered Public Accountants for Fiscal 2008 and 2009.” Additional information regarding the audit committee is set forth in the “Audit Committee Report.”

 

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 UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FOR FISCAL 2010.

 

Audit Committee Report

 

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 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 2009 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 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, 2009, which have been filed with 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, 2010.

 

AUDIT COMMITTEE OF
THE BOARD OF DIRECTORS

 

Leroy T. Barnes, Jr., Chairman
Richard P. Bermingham
Murray H. Dashe
Lawrence M. Higby

 

Fees to Independent Registered Public Accountants for Fiscal 2008 and 2009

 

The following services were provided by KPMG LLP during fiscal 2008 and 2009:

 

 

 

 

Pre-Approval Policy

 

The audit committee has adopted pre-approval policies and procedures for 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 fees and services described in the table above were pre-approved pursuant to this policy.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The following Compensation Discussion and Analysis describes the material elements of the compensation and benefit programs for our executive officers identified in the “2009 Summary Compensation Table,” or the Named Executive Officers. The compensation committee of the Board of Directors, or the Committee, has responsibility for establishing, developing and implementing these programs. Compensation and employment agreements for our Chairman and Chief Executive Officer, Michael O. Johnson, are recommended by the Committee. These recommendations are then referred to the independent members of our Board of Directors for consideration and approval.

 

Herbalife and other consumer products companies faced a very uncertain economic environment in 2009 due to the global financial and economic crisis, the high rate of unemployment, and the low level of consumer confidence and spending. The Committee concluded that Company management performed exceptionally well by delivering growth in a very challenging environment, as reflected in several highlights:

 

 

In addition, results trended strongly upward in the fourth quarter setting a promising base for further improvements in 2010. The Committee’s compensation decisions reflect that conclusion.

 

Overall Objectives of Executive Compensation Program

 

As a global leader in network marketing, we operate in an environment of challenging regulatory, economic and political issues with approximately 80% of our sales generated outside of the United States. Our success depends on the leadership of highly-talented, adaptive and dedicated executives who can apply the necessary skills to operate effectively in our unique global business model. Thus, our compensation program for the Named Executive Officers provides highly-competitive rewards to executives who contribute to our success, as defined primarily by superior growth in profitability and shareholder returns.

 

The Committee believes that it advances shareholder interests by assembling and maintaining a high-performing management team. To promote this objective, the Committee was guided by the following underlying principles in developing our executive compensation program:

 

 

 

How Compensation is Established

 

In determining base salary, target annual incentives and guideline equity awards, the Committee uses the Named Executive Officers’ current level of compensation as the starting point. Our compensation decisions consider several factors, including job scope, level of capabilities and experience, internal pay relationships, the individual’s performance, and market pay data. In addition, wealth accumulation is considered when making equity grants. Variations in compensation among our executive officers reflect differences in the scope and complexity of the functions they oversee, the contribution of those functions to our overall performance, their experience and capabilities, and individual performance. Although we do not use compensation data regarding other companies as the basis for our executive compensation decisions or specifically target a percentile of compensation within our peer group, we do consider the compensation practices of our peers to obtain a general understanding of competitive compensation practices. Please refer to the discussion below under “— Peer Group” for a more detailed discussion of our use of peer group and general industry compensation data.

 

Independent Compensation Advisor

 

The Committee has retained Towers Watson, formerly Towers Perrin, a globally recognized compensation consulting firm, to assist the Committee in evaluating our executive compensation programs and in setting executive officers’ compensation. The independent compensation advisor provides an additional objective perspective as to the reasonableness of our executive compensation programs and practices and their effectiveness in supporting our business and compensation objectives. During 2009, the advisor regularly participated in Committee meetings and advised the Committee with respect to compensation trends and best practices, plan design, competitive pay levels, consideration of individual employment or severance agreements (in the case of Messrs. Goudis and Walsh, respectively), our shareholder approved equity plan, and individual pay decisions with respect to our Named Executive Officers and other executive officers. While our advisor regularly consults with management in performing work requested by the Committee, Towers Watson did not perform any separate services for management in 2009.

 

Role of Executive Officers in Executive Compensation Decisions

 

The CEO reviews compensation data gathered from the peer group and general industry compensation surveys, considers each executive officer’s performance and makes a recommendation to the Committee on changes to base salary, annual incentive awards (except for Messrs. Goudis and Chapman, for whom incentive awards are determined by formula pursuant to each of their employment agreements) and equity awards for each executive officer other than himself. The CEO participates in Committee meetings at the Committee’s request to provide background information regarding the Company’s strategic objectives and to evaluate the performance of and compensation recommendations for the other executive officers. The Committee utilizes the information provided by the CEO along with input from its compensation advisor and the knowledge and experience of its members in making compensation decisions. With respect to CEO compensation, the Chair of the Committee, with input from the independent members of the Board, recommends the CEO’s compensation to the Committee in executive session, not attended by the CEO. Once a recommendation has been established by the Committee, the CEO’s compensation is reviewed and approved in a meeting of all independent members of the Board.

 

Purpose of Compensation Elements and Pay Mix

 

The compensation and benefits program for our Named Executive Officers consists of and is designed to achieve the following:

 

 

 

 

 

The portion of total compensation that is fixed in the form of base salary and benefits is intended to provide a competitive foundation to total compensation with target annual incentive compensation and equity grant value set as a percentage of base salary and a fixed rate of pay for the work being performed by each executive. The annual compensation opportunity above base salary and limited benefits, perquisites and other personal benefits is at risk and must be earned through the achievement of annual performance goals, which represent performance expectations of the Board and management. In setting target compensation, the Committee focuses on the total compensation opportunity for the executive. Although there is no specified mix of compensation elements, the proportion of compensation designed to be delivered in base salary versus variable pay depends on the executive’s position and the ability of that position to influence overall Company outcomes. The more senior the level of the executive, the greater the percentage of pay opportunity that is variable.

 

Based on the compensation awarded for 2009, the mix of base salary, annual incentives and long term incentives in the total compensation of our Named Executive Officers is set forth in the following table:

 

 

 

 

Base Salaries

 

In consideration of the economic environment and challenges facing the Company, during its annual review, the Committee supported management’s recommendation that no increases be made to the base salaries of our Named Executive Officers in 2009 from base salary levels in effect at the end of 2008.

Annual Incentive Awards

 

General

 

Our annual cash incentive plans are designed to motivate and reward the achievement of annual goals including financial and operating results that deliver value to our shareholders. The Committee establishes performance criteria for our incentive plans each year. Pursuant to the terms of their employment agreements, incentive awards for Messrs. Johnson, Goudis, and Chapman are provided under the Herbalife Executive Incentive Plan, or the EIP, which is based on the achievement of targeted Earnings Per Share, or EPS. In addition, Mr. Johnson’s agreement provides for an additional Alternative Performance Target incentive, or APT, to allow the Committee a degree of flexibility in incentivizing and rewarding him for the achievement of key strategic, as well as financial, targets. The Committee selected growth in Volume Points as the APT incentive performance measure in 2009. The annual incentive payable to each of Messrs. Johnson, Goudis and Chapman under the EIP is based solely on achievement of the EPS criteria. Volume Points were used to determine the APT portion of annual incentives for Mr. Johnson in 2009 to encourage market share growth and will be extended to other Named Executive Officers in 2010.

 

Other executives, including Messrs. Walsh and Levy, participate in the Herbalife Senior Management Bonus Incentive Plan, or the SMBIP. The Committee based funding for this plan on achievement of a Company Operating Profit target that is in alignment with and commensurate to the EPS target for the EIP in 2009. Operating Profit was selected as the performance measure for SMBIP because it reflects the performance of management below the few senior executives who make decisions affecting EPS. Please refer to the description of the EPS, Volume Point and Operating Profit metrics below.

 

Targets and Award Determination

 

Performance targets in the incentive plans are aligned to what we believe to be the expectations of investors at the time of the annual budget review, and for 2009 were stated in terms of EPS, Operating Profit and Volume Points. These budget figures are built from the “bottom up” based on input from operating regions regarding trends in their respective markets, including the general economic environment, consumption of our products, distributor methods of operation, and degree of risk in achieving forecasted revenue and expense levels. In addition, from time to time the Committee may authorize the payment of additional discretionary awards in recognition of an employee’s performance.

 

For incentive plan purposes, these performance measures are defined as follows:

 

 

2009 Annual Incentive Plan Performance Targets

 

 

The EPS threshold level was introduced in 2009 and applies only for Mr. Johnson to encourage and reward him for the Company’s achievement of challenging EPS performance targets; awards for Mr. Johnson for the Company’s achievement of EPS results between threshold and target are determined at the discretion of the Committee. Messrs. Goudis and Chapman receive incentive awards under the EIP only if EPS meets or exceeds the targeted level. Similarly, there is no incentive plan funding for SMBIP participants unless Operating Profit meets or exceeds the targeted level. Under both the EIP and SMBIP, there are no additional awards for EPS and Operating Profit results between 100% and 102.9% of target, and awards and funding are prorated in steps for results between 103% and 106%. Under his APT incentive performance measure, Mr. Johnson’s award for Volume Point growth results between threshold and target and target and maximum are prorated in similar steps.

 

The Committee made certain adjustments to EPS and Operating Profit used to calculate incentive awards in 2009 in order to measure Operating Profit and EPS on a basis which is consistent with the Company’s public communications to investors and analysts. Some of the adjustments had the effect of increasing EPS and Operating Profit for these purposes, while other adjustments resulted in reductions. In the aggregate, the adjustments increased EPS from the publicly reported $3.22 to $3.30 and Operating Profit from $296 million to $307 million. Additionally, the Committee established a minimum threshold in 2009 of 90% of target to provide a discretionary funding pool to reward exceptional employee performance.

 

Under the terms of their employment agreements, awards for Messrs. Johnson, Goudis and Chapman are calculated solely on the basis of results relative to target performance goals. The Committee does not have the ability to increase or reduce awards in the EIP on a discretionary basis. SMBIP funding determined by Operating Profit results relative to target also may not be increased or reduced by the Committee. However, under the SMBIP, the funded amount is allocated to participants based on performance to individual and group goals. As a result, total awards under SMBIP are generally below the funded amount but may not exceed it.

 

Messrs. Johnson, Goudis and Chapman’s target and Mr. Johnson’s maximum incentive as a percentage of their respective base salary is set forth in their respective employment agreements. Target incentives for other executives are set by the Company depending on the level of the employee’s position and the scope of the employee’s responsibilities. In keeping with our philosophy to have the proportion of variable pay increase with seniority, Mr. Johnson has significantly higher target and maximum incentive levels than other Named Executive Officers. The following table shows the incentive eligible earnings (i.e., 2009 base salary), target and maximum incentive

percentages and amounts, and 2009 incentive awards for each Named Executive Officer. All 2009 awards to Named Executive Officers were based on the calculated results to target performance levels alone.

 

2009 Incentive Award Calculation

 

 

Long Term Incentive Awards

 

Equity grants are intended to align executive officers’ interests with the interests of shareholders by rewarding increases in the value of our share price and enabling us to attract, motivate and retain highly qualified individuals for positions of responsibility. The Committee also believes that these long-term incentives foster long-term decision making necessary for continued success. The 2005 Plan is administered by the Committee, which has authority to grant the following types of awards to our directors, executive officers, employees and consultants: stock options, SARs, restricted stock, RSUs, other stock-based awards or any combination of these types of awards.

 

To frame our equity grant decisions, the Committee established guideline grant values for the Named Executive Officers in consideration of prior equity grants, individual performance, scope of job responsibilities, and competitive practices using market data compiled by Towers Watson. Using these guidelines, our Chairman and CEO proposed to the Committee equity grants for each of the Named Executive Officers other than himself. At the same time, the Committee, separately and without the involvement of the Chairman and CEO, evaluated and proposed equity grants for the Chairman and CEO to the independent members of the Board of Directors for their approval. In 2009, due to the limited number of Common Shares available under the 2005 Plan, the Company did not provide equity grants to the Named Executive Officers that met these guidelines. Instead, the Company granted equity to the Named Executive Officers that approximated the number of Common Shares covered by their 2008 equity grants.

 

During 2009, we awarded two forms of long term incentives to our Named Executive Officers: SARs and RSUs, both of which are time-vested. SARs provide an opportunity for executives to earn additional compensation only to the extent our share price increases over the share price on date of grant and are less dilutive to our shareholders than stock options. SARs have an exercise price equal to the closing price of our Common Shares on the applicable grant date. The right to exercise SARs vests to the executive over future years of service. Executives may exercise vested SARs at any time while employed at Herbalife and for 30 days following termination of employment other than for cause, so long as any such exercise is no later than ten years following the date of grant. At exercise, the gains on SARs are settled by issuing Common Shares. RSUs provide Common Shares that vest to the executive over future years of service, delivering stock ownership to executives and exposing them to the same gains and losses in value as are experienced by our shareholders. Upon vesting, RSUs are settled in Common Shares. Dividend equivalents are paid with respect to unvested RSUs and RSUs that have vested but whose receipt has been deferred.

 

In 2009, we made two types of long term incentive grants to the Named Executive Officers: an annual grant in accordance with our recent practice and a special grant to encourage long-term retention and performance. In order to achieve an appropriate balance between long-term stock ownership and incentives for growth in each of the 2009 grants, 50% of each recipient’s grant value was awarded in the form of SARs and 50% was awarded in the form of

RSUs. The number of SARs granted is calculated by dividing the grant value by the option value determined in accordance with financial accounting and disclosure rules under ASC 718 “Share Based Payments” using the closing share price on the date of grant. The number of RSUs granted is calculated by dividing the grant value by Herbalife’s closing share price on the date of grant.

 

The annual grant program SARs awarded to our Named Executive Officers in 2009 vest and become exercisable to the executives based upon continued Company service over three years at the rate of 20% on the first anniversary of the award, 20% on the second anniversary of the award, and 60% on the third anniversary of the award. The annual grant program RSUs awarded to our Named Executive Officers in 2009 vest based upon continued Company service over three years at the rate of 1/3 on each anniversary of award. The SARs and RSUs granted in 2009 to encourage long-term retention and performance vest over five years vest at a rate of 1/3 on each of the third, fourth and fifth anniversaries of the award.

 

Equity Award Grant Policy

 

Our annual and long term retention grants of SARs and RSUs were made to our Named Executive Officers on February 27, 2009 immediately following a meeting of the Committee (and, in the case of Mr. Johnson, a meeting of the independent members of the Board approving his awards). It is the Company’s policy to conduct its annual grant award process at a time subsequent to the release of financial results for the preceding year. We currently operate a monthly grant approval process where awards are authorized for new hires, certain selected retention situations, and to newly promoted managers other than our executive officers. 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 Committee. The policy provides that the exercise price of stock options and SARs granted to executives will be established as the closing share price on the date of grant.

 

Hedging

 

Company policy 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

 

The Committee believes that Named Executive Officers should be shareholders and maintain significant holdings of Common Shares. Because a significant portion of each Named Executive Officer’s compensation is paid in the form of equity-based incentive compensation awards, the Committee believes that the use of ownership guidelines is an appropriate and beneficial approach to providing additional motivation to act in the long-term best interests of shareholders.

 

Pursuant to our policy, the CEO is encouraged to acquire and hold Common Shares with a market value equal to five times his base salary by 2013. The other Named Executive Officers are encouraged to acquire and hold Common Shares with a market value equal to two times their respective base salaries within five years of becoming a Named Executive Officer. The Committee reviews progress toward these standards annually. The Committee considers compliance with the guidelines in making new equity grants.

 

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 typically provided by competitors for the services of the Company’s employees. Health and welfare and paid time-off benefits help ensure that Herbalife has a healthy, productive and focused workforce.

In addition, our Named Executive Officers are eligible to participate in the following executive benefits and perquisites that we offer:

 

 

 

 

 

The Committee has decided to eliminate the practice of providing tax gross-ups for fringe benefits in 2010.

 

Employment Agreements

 

In order to attract highly qualified executives capable of leading the Company, we have previously entered into employment agreements with Mr. Johnson, Chairman and Chief Executive Officer, Mr. Goudis, Chief Operating Officer and Mr. Chapman, General Counsel and Corporate Secretary. Those agreements establish the terms and conditions for the employment relationship each executive has with the Company and specifies compensation, executive benefits, severance provisions, change in control provisions, preservation of confidential and proprietary information, non-solicitation, non-disparagement, and other conditions.

 

Severance and Change in Control Arrangements

 

As a result of these employment agreements, each of Messrs. Johnson, Goudis, and Chapman is eligible for certain benefits and payments if his employment terminates for various reasons or as a result of a change in control of the Company. The Company has provided these benefits to these three Named Executive Officers to allow them to focus on the value of strategic alternatives to shareholders without concern for the impact on their continued employment, as each of their offices is at heightened risk of turnover in the event of a change in control. Separation benefits include cash payments and other benefits in an amount the Company 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. The Company requires a general release with 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 Committee in some circumstances as a result of negotiation with executives, especially where the Company desires particular non-disparagement, cooperation with litigation, non-competition and non-solicitation terms.

 

The employment agreement for each of Messrs. Johnson, Goudis, and Chapman specifically details various provisions for benefits and cash payments in the event of a separation. Generally, these agreements provide for certain benefits upon death, disability, resignation by the executive with good reason or termination by the Company without cause.

 

The equity compensation awards granted to Messrs. Johnson, Goudis and Chapman contain change in control and termination provisions. In general, these arrangements provide for benefits upon a termination of such executive’s employment in connection with a change in control. Vesting of outstanding equity grants is accelerated solely upon the occurrence of a change of control. 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 the Company. Based on a competitive analysis of the severance and change in control arrangements maintained by the corporations in the Herbalife Peer Group, the Committee believes that these benefits are customary among the Herbalife Peer Group for executives in similar positions as these three executives.

 

Please refer to the discussion below under “— Potential Payments Upon Termination or Change in Control” for a more detailed discussion of our severance and change in control arrangements.

 

Peer Group

 

We believe that it is appropriate to offer industry competitive cash and equity compensation to our senior executives in support of our objective to assemble and maintain a high performing management team. To help us evaluate our 2009 compensation, Towers Watson analyzed publicly available information, including proxy data, as

well as recent market trends and certain compensation surveys as described below. Our current level of compensation for our executive officers was compared to compensation paid by an industry peer group approved by the Committee, or the Herbalife Peer Group. The criteria used to identify the Herbalife Peer Group were: (1) industry — we compete for talent with consumer product companies and general industry companies of similar size; (2) financial scope — our management talent should be similar to that of companies of a similar size in terms of revenues and market capitalization; and (3) business complexity — Herbalife operates in 75 countries around the world in a highly regulated business where 80% of its revenues are generated outside of the United States. For 2009, the Herbalife Peer Group was comprised of 16 corporations. All of the peer companies were within 50% and 200% of Herbalife annual revenues, market capitalization, or both. The Herbalife Peer Group median revenue of $2.4 billion and median market capitalization of $2.5 billion were equivalent to those of Herbalife. The Committee reviews and approves the Herbalife Peer Group annually to ensure that it remains appropriate. The following table presents the Herbalife Peer Group that was used for 2009:

 

 

Four companies from the 2008 Peer Group were removed for 2009 and one company was added. The Committee approved removing Avon Products, Estee Lauder, and Forest Laboratories from the Peer Group because their revenues and market capitalization are significantly above 200% of those of Herbalife. Elizabeth Arden was removed because its revenue and market capitalization are significantly below 50% of that of Herbalife. United Natural Foods was added to the Peer Group because it distributes nutritional supplements and has revenue within 50% and 200% of those of Herbalife.

 

Towers Watson also provided the Committee with a proprietary executive compensation survey of more than 1,000 companies from a large number of industry classifications that provided summarized data on levels of base salary, target annual incentives and stock-based and other long-term incentives that are used in assessing pay levels for Named Executive Officers whose roles are not regularly maintained by the companies in the Herbalife Peer Group. Neither the Company nor the Committee was provided with the names of those companies included in the survey information. The summary data reflected pay for companies with revenues between $1.0 billion and $3.0 billion or pay that has been size-adjusted based on Herbalife’s revenue size (approximately $2.5 billion). The Committee considers pay data from the Herbalife Peer Group for Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer, and General Counsel. General industry survey data was considered

when evaluating total pay of Mr. Levy, the Company’s Senior Vice President, Worldwide Sales & Marketing, for whose position proxy data was not available.

 

Tax Implications

 

Section 162(m) of the Code

 

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 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 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 Committee in ascertaining appropriate levels or modes of compensation.

 

Section 280G of the Code

 

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. Each of Messrs. Johnson, Goudis, and Chapman, as part of their employment agreements, would be provided with tax gross-up payments in the event their change in control payments become subject to this excise tax. The Committee believes that the provision of tax gross-up protection is appropriate and necessary for executive retention and consistent with the current practices of the Herbalife Peer Group. Please refer to the discussion 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

 

The Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on its review and discussion with management, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS

 

Lawrence M. Higby, Chairman
Richard P. Bermingham
Murray H. Dashe
Colombe M. Nicholas

 

Executive Officers of the Registrant

 

Set forth below is certain information as of the date hereof regarding each Named Executive Officer as well certain other employees of the Company.

 

 

Michael O. Johnson is Chairman and Chief Executive Officer of the Company. Mr. Johnson joined the Company in April 2003 after 17 years with The Walt Disney Company, where he most recently served as President of Walt Disney International, and also served as President of Asia Pacific for The Walt Disney Company and President of Buena Vista Home Entertainment. Mr. Johnson has also previously served as a publisher of Audio Times magazine, and has directed the regional sales efforts of Warner Amex Satellite Entertainment Company for three of its television channels, including MTV, Nickelodeon and The Movie Channel. Mr. Johnson formerly served as a director of Univision Communications, Inc., a television company serving Spanish-speaking Americans and currently serves on the Board of Regents for Loyola High School of Los Angeles. Mr. Johnson received his Bachelor of Arts in Political Science from Western State College.

 

Desmond Walsh became the Company’s President effective January 1, 2010. Mr. Walsh joined the Company in January 2004 as Senior Vice President, Worldwide Distributor Sales and was promoted to Executive Vice President for Worldwide Operations and Sales in April 2008. From 2001 to 2004, Mr. Walsh served as the Senior Vice President of the commercial division of DMX Music. Prior to DMX Music, Mr. Walsh spent five years as Vice President and General Manager of Supercomm, Inc., a subsidiary of The Walt Disney Company. Mr. Walsh also previously served in management positions at MovieQuik Systems, a division of The Southland Corporation (now 7-Eleven) and at Commtron Corporation, a leading consumer electronics and video distribution company. Mr. Walsh received his Bachelor of Laws degree from the University of London.

 

Richard Goudis served as the Company’s Chief Financial Officer in 2009 and was promoted to Chief Operating Officer effective January 1, 2010. Mr. Goudis joined the Company in June 2004 as Chief Financial Officer after serving in several positions and ultimately as the Chief Operating Officer of Rexall Sundown, a Nasdaq 100 company that was sold to Royal Numico in 2000, from 1998 to 2001. After the sale to Royal Numico, Mr. Goudis had operations responsibility for all of Royal Numico’s U.S. investments, including General Nutrition Centers, Unicity International and Rexall Sundown. From 2002 to May 2004, Mr. Goudis was a partner at Flamingo Capital Partners, a firm he founded in 2002. Mr. Goudis also previously worked at Sunbeam Corporation and Pratt & Whitney. Mr. Goudis graduated from the University of Massachusetts with a degree in Accounting and he received his MBA from Nova Southeastern University.

 

Brett R. Chapman is General Counsel and Corporate Secretary of the Company. Mr. Chapman joined the Company in October 2003 after spending thirteen years at The Walt Disney Company, most recently as its Senior Vice President and Deputy General Counsel, with responsibility for all legal matters relating to Disney’s Media Networks Group, including the ABC Television Network, the company’s cable properties including The Disney Channel and ESPN, and Disney’s radio and internet businesses. Prior to working at The Walt Disney Company, Mr. Chapman was an associate at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP. Mr. Chapman received his Bachelor of Science and Master of Science in Business Administration from California State University, Northridge and his Juris Doctorate from Southwestern University School of Law.

 

Robert Levy is Senior Vice President, Worldwide Distributor Sales and Marketing of the Company, responsible for sales strategy, product marketing and business development, distributor services and operations, distributor marketing and training and events and promotions. Mr. Levy was promoted to this position in 2008, after spending six years as managing director of the Company’s Southeast Asia, Americas and, most recently, its South America

region, responsible for all sales and marketing operations in those region. Mr. Levy joined the Company in 1994 and has served in a variety of management positions during his tenure, including overseeing the Company’s distributor training and distributor marketing functions as well as worldwide product licensing and new country openings.

 

John DeSimone is Chief Financial Officer of the Company effective January 1, 2010. Mr. DeSimone joined the Company in November 2007 as Senior Vice President — Finance and was promoted to the position of Senior Vice President — Finance & Distributor Operations in December 2008. From June 2004 through October 2007, Mr. DeSimone served as the Chief Executive Officer of Mobile Ventures, LLC (formerly known as Autoware, Inc.), an automotive aftermarket accessory distributor and retailer. Prior to working at Mobile Ventures, LLC, Mr. DeSimone previously served as the Controller, Vice President of Finance and Chief Financial Officer of Rexall Sundown, Inc., a multinational manufacturer and distributor of nutritional supplements and sports nutrition products that was publicly traded while Mr. DeSimone served as its Controller and Vice President of Finance. Mr. DeSimone received his Bachelor of Science in Business Administration, Accounting, from Bryant College.

 

Steve Henig, Ph.D. is Chief Scientific Officer of the Company. Dr. Henig joined the Company in July 2005 after spending 6 years at Ocean Spray Cranberries, Inc., as Senior Vice President, Technology and Innovation with responsibility for the company’s new products program and medical research program. Prior to working at Ocean Spray Cranberries, Inc. Dr. Henig served as Senior Vice President, Technology and Marketing services at Con Agra’s Grocery products. Dr. Henig holds a Ph.D. in food science from Rutgers University, a M.S. in food and biotechnology and a B.S. in chemical engineering from Technion-Israel Institute of Technology.

2009 Summary Compensation Table

 

The following table sets forth the total compensation for the fiscal years ended December 31, 2009, 2008 and 2007, of the Company’s Chairman and Chief Executive Officer, Chief Financial Officer, each of the three other most highly compensated executive officers.

 

 

 

 

 

 

 

 

2009 Grants of Plan-Based Awards

 

The following table sets forth all grants of plan-based awards made to the Named Executive Officers during the fiscal year ended December 31, 2009. For further discussion regarding the grants see “— 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 and award agreements with respect to grants made under the 2005 Plan with each of Messrs. Johnson, Chapman and Goudis, certain terms of which are summarized below. A

more detailed description of payments that would be due to the Named Executive Officers in connection with certain terminations or a change in control of the Company is set forth under “— Potential Payments Upon Termination or Change in Control.”

 

Michael O. Johnson.  The Company and one of our subsidiaries, Herbalife International of America, Inc., or Herbalife America, entered into an executive employment agreement with Mr. Johnson effective as of March 27, 2008, or the Johnson Employment Agreement, pursuant to which he serves as the Company’s Chairman and Chief Executive Officer.

 

Pursuant to the Johnson Employment Agreement, Mr. Johnson currently receives an annual salary of $1,200,000. 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. 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 America. In connection with the entry into the Johnson Employment Agreement, Mr. Johnson received a signing bonus of $1,500,000.

 

Brett R. Chapman.  We have also entered into an executive employment agreement with Mr. Chapman, or the Chapman Employment Agreement, effective on October 10, 2006, 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 August 20, 2007, is $550,000. 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, including the Chief Operating Officer but excluding the Chief Executive Officer, as well as the Company’s long-term incentive plan for senior executives, including the Chief Operating Officer but excluding the Chief Executive Officer. 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 than 50% of his annual salary for the year in question.

 

Richard Goudis.  We have also entered into an executive employment agreement with Mr. Goudis, or the Goudis Employment Agreement, effective on October 24, 2006, through our subsidiary Herbalife America. Mr. Goudis currently serves as Herbalife America’s Chief Operating Officer. The base salary for Mr. Goudis, effective January 1, 2010, is $625,000. 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 excluding the Chief Executive Officer, as well as the Company’s long-term incentive plan for senior executives excluding the Chief Executive Officer. 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 no less than 50% of his annual salary, which target bonus level has been increased to no less than 80% in connection with Mr. Goudis’ promotion to Chief Operating Officer.

Outstanding Equity Awards at 2009 Fiscal Year-End

 

The following table sets forth equity awards of the Named Executive Officers outstanding as of December 31, 2009.