Shareholders sue in LV to block Herbalife deal

Grace Leong

Tuesday, Sept. 21, 1999 | 11:31 a.m.

Two shareholders of Herbalife International Inc. sued the company in Clark County District Court in hopes of blocking a plan to retire its public stock and take it private, saying the deal undervalues their stock.

Herbalife's founder, chairman and chief executive, Mark Hughes, announced last week he would buy all outstanding Herbalife Class A and Class B shares he doesn't already own at $17 a piece in cash through a tender offer issued by his company MH Millennium Acquisition Corp.

Class A shares of Herbalife closed at $15.06 Monday from a 52-week low of $7.50, while Class B shares closed at $14.6875 from a 52-week low of $6.

The deal, valued at $500 million, will give Hughes, who owned 54 percent or 5.4 million voting Class A common shares, and 58 percent or 10.8 million non-voting Class B common shares, a 100 percent ownership and control of the Los Angeles-based company, which sells weight-management, personal care and nutritional products.

The suits were filed in Las Vegas because Herbalife is incorporated in Nevada.

The suits name as defendants company executives and directors including Hughes; Robert Sandler, Herbalife's executive vice president and general counsel; Christopher Miner, its executive vice president and chief executive-development and marketing; Christopher Pair, its chief operating officer; Timothy Gerrity, its chief financial officer; Michael Rosen; Alan Liker and Edward Hall.

The plaintiffs, Colleen Tharp, who owns Class A shares, and Francis McFarlain, who owns Class B shares, are seeking a court order prohibiting the leveraged buyout transaction.

They allege the defendants have breached their fiduciary duties to Herbalife's shareholders by excluding other potential suitors for the acquisition of the publicly held shares and by colluding in Hughes' alleged coercive tactics in the buyout.

The suit said each defendant is sued individually as a "conspirator, aider and abetter" and alleged they had initiated and timed their buyout of the shares to unfairly benefit Hughes at the expense of the shareholders.

The plaintiffs alleged that a review of the transaction's terms conducted and approved by a special committee of independent directors was a sham because of Hughes' "stranglehold" over the company.

They claim Hughes and his senior executives are forcing Herbalife's shareholders to relinquish their shares without adequate process to ensure that they received the highest price attainable under the circumstances for such shares.

The plaintiffs also allege it is "grossly and inherently unfair" for Hughes to obtain the remaining shares because he possessed proprietary corporate information concerning Herbalife's future financial prospects, and has allegedly used his substantive ownership of Herbalife's Class A stock to engineer the buyout in his own interest.

A Herbalife spokeswoman today said the Las Vegas lawsuit allegations are without merit.

Herbalife said in a press release issued Sep. 13 that its financial advisor, Bear, Stearns & Co. Inc. had rendered an opinion to the effect that the consideration to be paid in the tender offer is fair to Herbalife's public shareholders.

The company said that for the transaction to proceed, at least a majority of outstanding Class A shares and Class B shares, excluding those held by Hughes, must be tendered in the cash tender offer.

"This transaction is in the best interests of our public stockholders and Herbalife. The price being offered is substantially higher than our current and recent trading prices, and I am pleased to be able to make this premium price available to our public stockholders," said Hughes in the press release.

Herbalife said the transaction calls for raising $440 million in a combination of senior bank debt and high-yield debt, and will utilize about $60 million of company cash.