EXHIBIT 3.36
LIMITED LIABILITY COMPANY AGREEMENT
FOR
HERBALIFE LEINER, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
NY3 - 302963.01
TABLE OF CONTENTS
Page
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ARTICLE 1 - INTERPRETATION...................................................................................2
1.1 Definitions.....................................................................................2
1.2 Successors and Assigns..........................................................................8
1.3 Construction....................................................................................8
ARTICLE 2 - EFFECTIVE DATE 8
2.1 Effective Date..................................................................................8
ARTICLE 3 - FORMATION AND ORGANIZATIONAL MATTERS.............................................................8
3.1 Formation.......................................................................................8
3.2 Name............................................................................................8
3.3 Principal Place of Business.....................................................................8
3.4 Registered Office and Registered Agent..........................................................8
3.5 Permitted Businesses............................................................................9
3.6 Term............................................................................................9
ARTICLE 4 - CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS.......................................................9
4.1 Initial Capital Contributions...................................................................9
4.2 Additional Capital Contributions and Funding of the WFOE........................................9
4.3 Capital Accounts...............................................................................12
4.4 No Interest....................................................................................13
4.5 Failure to Make Capital Contributions..........................................................13
4.6 Member Loans to Company........................................................................14
4.7 No Withdrawal..................................................................................15
ARTICLE 5 - RIGHTS AND DUTIES OF BOARD OF MANAGERS..........................................................15
5.1 Management.....................................................................................15
5.2 Number, Appointment, Tenure....................................................................15
5.3 No Exclusive Duty to Company...................................................................16
5.4 Compensation and Reimbursement.................................................................16
5.5 Certain Powers of Board of Managers............................................................16
5.6 Meetings of Board of Managers..................................................................17
5.7 Resolutions Requiring Super-Majority Votes.....................................................17
5.8 Other Manner of Acting.........................................................................18
ARTICLE 6 - MANAGEMENT AND OPERATION OF THE WFOE............................................................18
6.1 Board of Directors.............................................................................18
6.2 Board Meeting of the WFOE......................................................................18
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6.3 Chairman of the Boards ........................................................................19
6.4 General Manager ...............................................................................19
6.5 Divisions of WFOE .............................................................................19
6.6 No Subsidy of Loss Among Divisions ............................................................20
6.7 Close Down of a Division ......................................................................20
6.8 Deputy General Manager ........................................................................22
6.9 The Chief Accountant ..........................................................................22
6.10 Salaries ......................................................................................22
6.11 Annual Operating Plan and Budgets .............................................................23
6.12 Transfer Pricing of the Manufacturing Division ................................................23
6.13 License Agreements ............................................................................23
6.14 Termination of the WFOE .......................................................................24
6.15 Financial Operating Policies and Procedures....................................................24
6.16 Ownership of Formulae etc......................................................................24
ARTICLE 7 - RIGHTS AND OBLIGATIONS OF MEMBERS...............................................................24
7.1 Limitation of Liability........................................................................24
7.2 List of Members................................................................................25
7.3 Company Books..................................................................................25
7.4 Priority and Return of Capital.................................................................25
7.5 No Preemptive Rights...........................................................................25
7.6 No Withdrawal or Resignation...................................................................25
7.7 Payments to Members............................................................................25
7.8 Indemnification................................................................................25
7.9 Competing Activities...........................................................................26
7.10 Transactions between the Company and the Members...............................................26
7.11 No Voting Rights...............................................................................26
ARTICLE 8 - STANDARD OF CARE AND INDEMNIFICATION OF MANAGERS, OFFICERS AND EMPLOYEES........................26
8.1 Standard of Care...............................................................................26
8.2 Indemnification of Managers, Officers and Employees............................................27
ARTICLE 9 - PERCENTAGE INTERESTS AND ADJUSTMENT.............................................................27
9.1 Percentage Interests...........................................................................27
9.2 Adjustment of Percentage Interests.............................................................27
9.3 Right to Terminate this Agreement and Right of Purchase........................................28
ARTICLE 10 - ACCOUNTING, PROFITS AND LOSSES OF WFOE'S DIVISIONS AND MEMBERS' FUNDING OBLIGATIONS............28
10.1 Divisional Accounting..........................................................................28
10.2 Divisional Gain or Loss Upon Sale of Assets....................................................28
10.3 Appraisal of the Assets of the Company and of the WFOE.........................................29
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ARTICLE 11 - ALLOCATIONS, INCOME TAX, DISTRIBUTIONS, ELECTIONS AND REPORTS..................................29
11.1 Allocations of Net Profit and Net Loss.........................................................29
11.2 Additional Allocation Provisions...............................................................30
11.3 Tax Allocations................................................................................32
11.4 Allocations With Respect to Changes in Membership Interests....................................32
11.5 Distributions..................................................................................32
11.6 Accounting Principles..........................................................................33
11.7 Interest on and Return of Capital Contributions................................................33
11.8 Loans to Company...............................................................................33
11.9 Records and Report.............................................................................33
11.10 Returns and Other Elections....................................................................34
11.11 Tax Matters Partner............................................................................34
11.12 Trapped Profits Reconciliation Payment.........................................................34
ARTICLE 12 - TRANSFER AND ASSIGNMENT OF MEMBERSHIP INTEREST.................................................35
12.1 General........................................................................................35
12.2 Specific Provisions Governing Transfers........................................................35
12.3 Right of First Refusal.........................................................................36
12.4 Further Requirements on Transfer...............................................................37
12.5 Effectiveness of Transfer......................................................................38
ARTICLE 13 - NEW MEMBERS 38
13.1 Restrictions on Admission of New Members.......................................................38
13.2 Allocations to New Members.....................................................................38
13.3 Agreement to be Bound by this Agreement........................................................38
ARTICLE 14 - TERMINATION AND DISSOLUTION 38
14.1 Dissolution....................................................................................38
14.2 Winding Up, Liquidation and Distribution of Assets.............................................39
14.3 Certificate of Cancellation....................................................................40
14.4 Effect of Filing of Certificate of Cancellation................................................41
14.5 Return of Contribution Nonrecourse to Other Members............................................41
ARTICLE 15 - COMPLIANCE WITH LEGAL REQUIREMENTS 41
15.1 Compliance with Applicable Laws................................................................41
15.2 Compliance with United States Export Controls..................................................41
15.3 Compliance with Foreign Corrupt Practices Act..................................................41
ARTICLE 16 - MISCELLANEOUS PROVISIONS 42
16.1 Notices........................................................................................42
16.2 Application of Delaware Law....................................................................42
16.3 Dispute Resolution.............................................................................42
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16.4 Waiver of Action for Partition.................................................................43
16.5 Entire Agreement and Amendments................................................................43
16.6 Execution of Additional Instruments ...........................................................43
16.7 Waivers .......................................................................................43
16.8 Rights and Remedies Cumulative ................................................................43
16.9 Severability ..................................................................................43
16.10 Binding Effect ................................................................................43
16.11 Creditors .....................................................................................43
16.12 Counterparts ..................................................................................43
16.13 Investment Representations.....................................................................43
16.14 Confidentiality................................................................................44
SCHEDULE A Members and Each Members Initial Capital Contributions...........................................46
SCHEDULE B Initial Annual Divisional Operating Plans........................................................47
SCHEDULE C Financial Operating Policies and Procedures......................................................48
SCHEDULE D WFOE's Pricing Policy For Sale Of Semi-Processed Materials.......................................60
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LIMITED LIABILITY COMPANY AGREEMENT
FOR
HERBALIFE LEINER, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
THIS LIMITED LIABILITY COMPANY AGREEMENT (the "Agreement") of HERBALIFE
LEINER, LLC (the "Company") is made and entered into as of this ______ day of
____________, 1999, by and between HERBALIFE INTERNATIONAL, INC., a Nevada
corporation ("Herbalife"), and LEINER HEALTH PRODUCTS, INC., a Delaware
corporation ("Leiner"), as members of the Company (collectively, the "Members").
RECITALS:
A. On February 16, 1999, Herbalife caused to be filed with the office of
the Secretary of State of the State of Delaware a Certificate of Formation of
the Company, a limited liability company organized under the laws of the State
of Delaware. Prior to the Effective Date of this Agreement, Herbalife was the
sole Member of the Company.
B. On December 28, 1997, Herbalife established "Herbalife International
(Suzhou) Nutritional Products Ltd.," a wholly foreign-owned enterprise company
in Suzhou, China (the "WFOE"). Herbalife is the sole investor in the WFOE.
C. Herbalife and Leiner desire to enter into a business arrangement
whereby Herbalife and Leiner will indirectly jointly and beneficially own the
WFOE through the Company.
D. As a step in the implementation of the proposed business arrangement
between Herbalife and Leiner, Herbalife has agreed to transfer to the Company
all of Herbalife's interest in the registered capital of the WFOE upon approval
by the relevant Chinese approval authority of the proposed transfer and of the
Amended and Restated Articles of Association of the WFOE as agreed by the
parties to this Agreement.
E. Concurrent with the execution of this Agreement, the parties will enter
into a Subscription Agreement of even date herewith, whereby they agree that,
upon the satisfaction of certain conditions precedent set forth therein, the
parties shall contribute to the capital of the Company, which shall fund inter
alia, the remaining amount of the registered capital of the WFOE.
F. The parties hereto desire to approve and adopt this Limited Liability
Company Agreement to govern the business and affairs of the Company and to set
forth
their respective rights, privileges, duties, obligations and mutual agreements
with respect to the Company and the WFOE, to be effective from the Effective
Date.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
INTERPRETATION
1.1. Definitions. The following terms used in this Agreement shall have
the following meanings (unless otherwise expressly provided herein):
"Affiliate" shall mean, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by, or under common control with
such Person, (ii) any Person owning, directly or indirectly, fifty percent (50%)
or more of the outstanding voting interests of such Person, (iii) any officer,
director, or general partner of such Person, or (iv) any Person who is an
officer, director, general partner, trustee, or holder of fifty percent (50%) or
more of the voting interests of any Person described in clauses (i) through
(iii) of this sentence. For purposes of this definition, the term "controls",
"is controlled by", or "is under common control with" shall mean the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of a Person.
"Approved Leiner Expenses" has the meaning set forth in Article 4.1.
"Articles of Association" shall mean the Amended and Restated Articles of
Association of the WFOE, as may be amended and in effect from time to time.
"Boards" shall mean, collectively, the Board of Managers of the Company
and the Board of Directors of the WFOE.
"Board of Directors" shall mean the Board of Directors of the WFOE.
"Board of Managers" shall mean the Board of Managers of the Company.
"Capital Account" as of any given date shall mean the Capital Account as
defined by Article 4.3(a).
"Capital Contribution" shall mean the amount of cash or the net fair
market value of any property contributed to the capital of the Company by a
Member whenever made. "Initial Capital Contribution" shall mean the amount set
forth in SCHEDULE A contributed to the Company pursuant to Article 4.1 of this
Agreement.
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"Certificate" shall mean the Certificate of Formation of the Company as
filed by the organizer of the Company with the Secretary of State of the State
of Delaware, as the same may be amended from time to time.
"Chairman" shall mean the Chairman of the Board of Managers and the
Chairman of the Board of Directors.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent superseding federal revenue laws.
"Company" shall mean Herbalife Leiner, LLC.
"Delaware Act" shall mean the Delaware Limited Liability Company Act at
Title 6 of the Delaware Code, Sections 18-101 through Sections
18-1109, as the same may be amended from time to time.
"Depreciation" means, for each Fiscal Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Fiscal Year for United States federal income tax
purposes, except that if the Gross Asset Value of an asset differs from its
adjusted basis for federal income tax purposes at any time during such Fiscal
Year, Depreciation shall be an amount which bears the same ratio to such Gross
Asset Value as of such time as the federal income tax depreciation,
amortization, or other cost recovery deduction for such Fiscal Year bears to
such adjusted tax basis; provided, however, that if the adjusted basis for
federal income tax purposes of an asset is zero, Depreciation shall be
determined with reference to such Gross Asset Value using any reasonable method
selected by the Board of Managers.
"Distribution Division" shall mean, with respect to Herbalife, the
Herbalife Division; and with respect to Leiner, the Leiner Division.
"Division" shall mean each or any of the WFOE's Divisions.
"Director" shall mean one or more members of the Board of Directors.
References to the Directors in the singular or as him, her, it, itself or other
like references shall also, where the context so requires, be deemed to include
the plural or the masculine or feminine reference, as the case may be.
"Effective Date" shall have the meaning set forth in Article 2.1.
"Fiscal Year" shall mean the fiscal year of the Company and/or the WFOE,
as the case may be, which shall be the calendar year.
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"GAAP" shall mean the Generally Accepted Accounting Principles of the
United States.
"Gross Asset Value" means, with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by a Member
to the Company shall be the gross fair market value of such asset.
(ii) The Gross Asset Values of all Company assets shall be adjusted to
equal their respective fair market values, as of the following
times:
(a) the acquisition of a Membership Interest in the Company by a
new or existing Member in exchange for more than a de minimis
Capital Contribution, if such adjustment is necessary or
appropriate to reflect the relative economic interests of the
Members in the Company;
(b) the distribution by the Company to a Member of more than a de
minimis amount of Company money or property as consideration
for a Membership Interest in the Company, if necessary or
appropriate to reflect the relative economic interests of the
Members;
(c) the liquidation of the Company within the meaning of Treasury
Regulation Section 1.704-1(b)(2)(ii)(g); and
(d) at such other times as necessary or advisable in order to
comply with Treasury Regulation Sections 1.704-1(b) and
1.704-2.
(iii) The Gross Asset Value of any Company asset distributed to a Member
shall be the gross fair market value of such asset on the date of
distribution.
(iv) The Gross Asset Values of Company assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such
assets pursuant to Code Section 734(b) or Code Section 743(b), but
only to the extent that such adjustments are taken into account in
determining Capital Accounts pursuant to Treasury Regulation Section
1.704-l(b)(2)(iv)(m) and subparagraph (vi) of the definition of "Net
Profit" and "Net Loss"; provided, however, that Gross Asset Values
shall not be adjusted pursuant to this subparagraph (iv) to the
extent that the Members reasonably
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determine that an adjustment pursuant to subparagraph (ii) is
necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this subparagraph
(iv).
(v) If the Board of Managers and a Member contributing or receiving
distribution of an asset cannot agree on the Gross Asset Value of
such asset, such value shall be determined by an independent
international accounting firm at the expense of the Company.
If the Gross Asset Value of an asset has been determined or adjusted
pursuant to paragraphs (i), (ii), or (iv) above, such Gross Asset Value shall
thereafter be adjusted by the Depreciation taken into account with respect to
such asset for purposes of computing Net Profit or Net Loss.
"Herbalife Division" shall have the meaning set forth in Article 6.5.
"Herbalife Net Profit or Net Loss" shall mean Net Profit or Net Loss
computed separately for the Herbalife Division under Article 10.1.
"Leiner Division" shall have the meaning set forth in Article 6.5.
"Leiner Net Profit or Net Loss" shall mean Net Profit or Net Loss computed
separately for the Leiner Division under Article 10.1.
"Manager" shall mean one or more members of the Board of Managers.
References to the Managers in the singular or as him, her, it, itself or other
like references shall also, where the context so requires, be deemed to include
the plural or the masculine or feminine reference, as the case may be.
"Manufacturing Division" shall have the meaning set forth in Article 6.5.
"Manufacturing Net Profit or Net Loss" shall mean the Net Profit or Net
Loss computed separately for the Manufacturing Division under Article 10.1.
"Member" shall mean, in connection with the formation of the Company,
Herbalife, and as of and after the Effective Date, each of Herbalife and Leiner,
and any other Person who may be admitted as a member of the Company in
accordance with Article 13 of this Agreement.
"Membership Interest" shall mean a Member's entire interest in the
Company, including such Member's share in the Company's Net Profit, Net Loss and
distribution of the Company's assets pursuant to this Agreement and the Delaware
Act and such other rights and privileges that the Member may enjoy by being a
Member.
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"MOFTEC" shall mean the Ministry of Foreign Trade and Economic Cooperation
of the PRC.
"Net Profit" or "Net Loss" shall mean, for each Fiscal Year (or other
relevant period), an amount equal to the Company's taxable income or loss for
such fiscal year, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss or deduction required to be stated
separately pursuant to Code Section 703(a)(l) shall be included in taxable
income or loss, and all fees and reimbursements payable to any Member shall be
regarded as deductions), with the following adjustments:
(i) Any income of the Company that is exempt from federal income tax and
not otherwise taken into account in computing Net Profit or Net Loss
pursuant to this definition of Net Profit or Net Loss shall be added
to such taxable income or loss;
(ii) Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treasury Regulation Section 1.704-l(b)(2)(iv)(i), and
not otherwise taken into account in computing Net Profit or Net Loss
pursuant to this definition of Net Profit or Net Loss shall be
subtracted from such taxable income or loss;
(iii) In the event the Gross Asset Value of any Company asset is adjusted
pursuant to subparagraph (ii) or subparagraph (iii) of the
definition of Gross Asset Value, the amount of such adjustment shall
be taken into account as gain or loss from the disposition of such
asset for purposes of computing Net Profit or Net Loss;
(iv) Gain or loss resulting from any disposition of property with respect
to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the
property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such Fiscal
Year, computed in accordance with the provisions in the definition
of "Depreciation" in this Article l above.
(vi) To the extent an adjustment to the adjusted tax basis of any Company
asset pursuant to Code Section 734(b) or Code Section 743(b) is
required
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pursuant to Treasury Regulation Section l.704-l(b)(2)(iv)(m)(4) to
be taken into account in determining Capital Accounts as a result of
a distribution other than in liquidation of a Member's Membership
Interest in the Company, the amount of such adjustment shall be
treated as an item of gain (if the adjustment increases the basis of
the asset) or loss (if the adjustment decreases the basis of the
asset) from the disposition of the asset and shall be taken into
account for purposes of computing Net Profit or Net Loss; and
(vii) Notwithstanding any other provision of this definition of Net Profit
or Net Loss, any items which are specially allocated pursuant to
Article 11.2 shall not be taken into account in computing Net Profit
or Net Loss.
"Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(3).
"Nonrecourse Deductions" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a fiscal
year of the Company shall be determined in accordance with the rules of Treasury
Regulation Section 1.704-2(c).
"PRC" shall mean the People's Republic of China (excluding for purposes of
this Agreement, Hong Kong, S.A.R., Macau and Taiwan).
"PRC Approval Authority" shall mean the Administrative Commission of the
Suzhou Industrial Park in Suzhou, China, which is the original approval and
examination authority of the WFOE, and/or such other relevant PRC authorities.
"Partner Minimum Gain" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Debt, determined in
accordance with Treasury Regulation Section 1.704-2(i)(3).
"Partner Nonrecourse Debt" has the meaning set forth in Treasury
Regulation Section 1.704-2(b)(4).
"Partner Nonrecourse Deductions" has the meaning set forth in Treasury
Regulation Section 1.704-2(i)(2), and the amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for a Company taxable year
shall be determined in accordance with the rules of Treasury Regulation Section
l.704-2(i)(2).
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"Partnership Minimum Gain" has the meaning set forth in Treasury
Regulation Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as
well as any net increase or decrease in Partnership Minimum Gain, for a Company
taxable year shall be determined in accordance with Treasury Regulation Section
1.704-2(d).
"Percentage Interest" shall mean the percentage of a Member's ownership in
the Company, initially as set forth opposite the name of such Member in Article
9.1, and as such percentage may be adjusted from time to time pursuant to the
terms of this Agreement, such adjusted percentage as prevailing at the relevant
time.
"Person" shall mean any individual, general partnership, limited
partnership, limited liability company, corporation, joint venture, trust,
business trust, estate, association, or other entity, whether foreign or
domestic, and their heirs, executors, administrators, legal representatives,
successors and assigns where the context so permits.
"Prime Rate" shall mean, on any relevant day, the prime rate as published
in the Western U.S. edition of The Wall Street Journal on that day, or if the
relevant day is not a business day, the prime rate as published in the Western
U.S. edition of The Wall Street Journal on the immediately preceding business
day.
"Regulatory Allocations" has the meaning set forth in Article 11.2.
"Reserves" shall mean funds set aside or amounts allocated to reserves
which shall be maintained in amounts deemed sufficient by the Board of Managers
for working capital and to pay taxes, insurance, debt service or other costs or
expenses incident to the ownership or operation of the Company's business.
"Subscription Agreement" shall mean the Subscription Agreement of even
date herewith between the Company, Herbalife and Leiner.
"Transfer" shall mean: (i) sell, assign, pledge, hypothecate, transfer,
exchange or otherwise transfer for consideration, or (ii) gift, bequeath or
otherwise transfer for no consideration; and where the context requires, the
term "Transfer" may be used as a noun.
"Transferring Member" shall mean any Member who Transfers all or any part
of its Membership Interest.
"Treasury Regulations" shall include temporary and final regulations
promulgated under the Code.
"WFOE" shall mean H&L (Suzhou) Health Products Ltd., formerly Herbalife
International (Suzhou) Nutritional Products Ltd., a wholly foreign-owned
enterprise company established and existing in the Suzhou Industrial Park,
Suzhou, People's
8
Republic of China, which is in the business of manufacturing in the PRC, and
selling and distributing in the PRC and international markets, health food
products, nutritional supplements, other food products, personal care products
and related promotional products.
"WFOE's Divisions" shall collectively mean the Herbalife Division, the
Leiner Division and the Manufacturing Division, each of which may be referred to
as a "Division".
1.2. Successors and Assigns. The expressions "Herbalife", "Leiner" and
"Member" shall where the context permits include their respective successors and
permitted assigns and any Person deriving title under them.
1.3. Construction. In this Agreement, unless the context requires
otherwise, words importing the singular include the plural and vice versa and
words importing a gender include every gender; references to this Agreement or
the Subscription Agreement or any other agreement referred to herein and therein
shall be construed as references to such document as the same may be amended, or
supplemented from time to time; unless otherwise stated, references to Articles
are to articles of this Agreement and references to Schedules are to schedules
to this Agreement. The headings in this Agreement are inserted for convenience
only and are in no way intended to describe, interpret, define, or limit the
scope, extent or intent of this Agreement or any provision hereof.
ARTICLE 2
EFFECTIVE DATE
2.1. Effective Date. This Agreement shall become effective on the
Effective Date. The term "Effective Date" as used herein shall refer to the date
upon which all of the conditions precedent set forth in Articles 3.2 and 3.3 of
the Subscription Agreement are satisfied or waived by the appropriate party or
parties thereto or such other date as is mutually agreed to in writing by
Herbalife and Leiner.
ARTICLE 3
FORMATION AND ORGANIZATIONAL MATTERS
3.1. Formation. The Company has been organized as a Delaware limited
liability company by executing and delivering the Certificate to the Secretary
of State of the State of Delaware in accordance with and pursuant to the
Delaware Act.
9
3.2. Name. The name of the Company is "Herbalife Leiner, LLC". The Company
may conduct business under that name or any other name approved and designated
by the Board of Managers.
3.3. Principal Place of Business. The principal place of business of the
Company shall be at 9800 La Cienega Boulevard, Inglewood, California 90301,
U.S.A. The Company may locate its places of business and registered office at
any other place or places as the Board of Managers may deem advisable.
3.4. Registered Office and Registered Agent. The Company's initial
registered office shall be at the office of its registered agent at 30 Old
Rudrick Lane, Dover, Delaware 19901, and the name of its initial registered
agent shall be CorpAmerica, Inc. At any time, the Board of managers may
designate another registered agent and/or registered office.
3.5. Permitted Businesses. The business of the Company shall be to invest
in, own, and operate the WFOE, and to carry on any and all activities in
connection therewith, and to have and exercise all of the powers, rights and
privileges which a limited liability company organized pursuant to the Delaware
Act may have and exercise. The Company shall have no other purpose and shall
engage in no other business activity, except as may be otherwise determined by
the Board of Managers.
3.6. Term. The term of the Company commenced on the date of the formation
of the Company in accordance with and pursuant to the Delaware Act, and shall
continue until October 5, 2048, the expiration date of the term of the WFOE (or
earlier if the WFOE is sold by the Company or liquidated prior to the expiration
date of its term), or the expiration date of any extended term of the WFOE,
unless the Company is earlier dissolved in accordance with either the provisions
of this Agreement or the Delaware Act.
ARTICLE 4
CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS
4.1. Initial Capital Contributions. Herbalife and Leiner have each
contributed such amount as set forth in Schedule A as its Initial Capital
Contribution. In addition, the parties hereto acknowledge that (i) Herbalife has
already incurred expenses in an amount equal to Six Hundred Four Thousand Eight
Hundred Forty-Three and 8/100 United States Dollars (US$604,843.08) in
connection with the formation and organization of the WFOE, which amount shall
be deemed to have been contributed by Herbalife to the capital of Company; and
(ii) Leiner has incurred expenses in connection with the formation and
organization of the WFOE, which amount shall be deemed to have been
10
contributed by Leiner to the capital of Company to the extent that such expenses
are approved by the relevant government authorities of the PRC (the "Approved
Leiner's Expenses").
4.2. Additional Capital Contributions and Funding of the WFOE.
(a) Each of Herbalife and Leiner shall make additional Capital
Contributions as each of them from time to time deems appropriate to fund all
the capital requirements of its Distribution Division (i.e., Herbalife for the
Herbalife Division and Leiner for the Leiner Division). Herbalife shall have the
obligation to make additional Capital Contributions to the Company to fund the
Herbalife Division to the extent required to enable the WFOE to meet on a timely
basis all financial obligations incurred by the WFOE on behalf of the Herbalife
Division. Leiner shall have the obligation to make additional Capital
Contributions to the Company to fund the Leiner Division to the extent required
to enable the WFOE to meet on a timely basis all financial obligations incurred
by the WFOE on behalf of the Leiner Division. Herbalife shall not be required to
make any additional Capital Contributions to fund the capital requirements of
the Leiner Division or financial obligations incurred by the WFOE on behalf of
the Leiner Division, and Leiner shall not be required to make any additional
Capital Contributions to fund the capital requirements of the Herbalife Division
or the financial obligations of the WFOE incurred on behalf of the Herbalife
Division.
(b) Herbalife and Leiner shall be required to make additional Capital
Contributions from time to time as directed by the Board of Managers to fund all
the capital requirements of the Manufacturing Division and all the financial
obligations of the WFOE incurred on behalf of the Manufacturing Division in
proportion to the their respective Percentage Interests, except that,
notwithstanding any other provision of this Agreement, the maximum amount of
capital that Leiner shall be required to contribute to the Manufacturing
Division under Article 4.1 (to the extent that any of Leiner's Initial Capital
Contributions thereunder is utilized by the Manufacturing Division), this
Article 4.2(b), Article 4.2(e) and Article 4.2(f), together with the Approved
Leiner Expenses (if any), shall not exceed Five Million United States Dollars
(US$5,000,000).
(c) The parties hereto acknowledge that the current total investment and
registered capital of the WFOE are Sixteen Million Eight Hundred Fifty Nine
Thousand United States Dollars (US$16,859,000) and Six Million Seven Hundred
Forty Three Thousand and Six Hundred United States Dollars (US$6,743,600),
respectively, and that the difference between the amount of total investment and
the registered capital may be funded either by loans from the Company, from the
Members or from any third party or banks and other financial institution, as
directed by the Board of Managers. The Members agree that the preference for
providing additional funding to the WFOE, after its original registered capital
has been fully contributed, is by way of loans from the
11
Company, funded by Capital Contributions or loans from the Members, or from bank
loans.
(d) After the Company has paid in the full amount of the approved
registered capital of the WFOE, whenever either the Herbalife Division or the
Leiner Division needs additional funding for its operations, Herbalife or
Leiner, as the case may be, shall submit to the Board of Managers of the Company
for approval a proposal outlining the purpose and the amount of the additional
funds required and the proposed source of the funds. Provided the Member
submitting the proposal agrees to fully fund the increase and the proposal would
not materially and adversely affect the overall business of the WFOE, the
Members shall cause the Board of Managers to approve the proposal. The Members
and the Board of Managers of the Company shall then procure that the Board of
Directors of the WFOE approve the same proposal, provided that if the additional
funding is to be provided by either of the parties or the Company, and not by a
bank or financial institutions, the injection of additional funds to the Company
for use by the Herbalife Division or the Leiner Division, as the case may be,
shall be by one of the following means, in the order set out below:
(i) To the extent that the difference between the approved amounts
of total investment and registered capital has not been fully funded by loans,
the responsible Member for the relevant Division shall either provide a loan or
contribute additional capital, in the amount of the additional funds required,
to the Company, and the Company shall provide the amount as a loan to the WFOE,
which shall then be utilized by the relevant Division.
(ii) If, at the time additional funds are required by the WFOE. the
difference between the then approved amounts of total investment and registered
capital has been fully handed by loans, the Members shall cause the Board of
Directors of the WFOE to unanimously approve a proposal for an increase in the
registered capital and total investment amount of the WFOE. After the
application for an increase of registered capital total investment amount has
been approved by the PRC Approval Authority, the party responsible for the
relevant Division shall either provide a loan or contribute additional capital,
in the amount of the additional funds required, to the Company, and the Company
shall contribute an amount not to exceed the unfunded portion of increased
registered capital to the WFOE as additional capital contribution, which shall
then be utilized by the relevant Division.
(iii) After the approved increase of registered capital of the WFOE
has been fully contributed by the Company, the difference between the increased
total investment amount and the increased registered capital may be funded by
the Member responsible for the relevant Division either by providing a loan or
by making additional
12
Capital Contributions to the Company and the Company shall provide the amount as
a loan to the WFOE.
(e) If the Manufacturing Division requires additional financing for its
operation after the Company has paid in the full amount of the approved
registered capital of the WFOE, the Deputy General Manager of the Manufacturing
Division shall submit to the Board of Managers a proposal outlining and
supporting the purpose and the amount of the additional funds required. If the
Board of Managers approves the funding request, which approval shall not be
unreasonably withheld, the Members shall cause the Board of Directors of the
WFOE to approve the funding request. Upon the approval of the Board of Directors
of the WFOE, Herbalife and Leiner shall each provide the funds required
proportionate to their respective Percentage Interests by any of the methods
enumerated in Article 4.2(d) (i) to (iii) as authorized by the Boards, provided
that, nothing herein shall require Leiner to contribute, in the aggregate, more
than Five Million United States Dollars (US$5,000,000) to the Manufacturing
Division pursuant to Article 4.1 (to the extent that any of Leiner's Initial
Capital Contribution is utilized by the Manufacturing Division and to the extent
that there is any Approved Leiner Expenses), Article 4.2(b), this Article 4.2(e)
and Article 4.2(f).
(f) Each of the Members shall make additional Capital Contributions to
the Company to meet the cash requirements of the Manufacturing Division. On the
first day of each fiscal quarter of the WFOE, each Member is required to fund,
through its Capital Contributions to the Company, any Projected Cash Flow
Deficit of the Manufacturing Division (as defined below) for that fiscal quarter
as determined at the end of the previous fiscal quarter, provided that nothing
herein shall require Leiner to contribute, in the aggregate, more than Five
Million United States Dollars (US$5,000,000) to the Manufacturing Division
pursuant to Article 4.1 (to the extent that any of Leiner's Initial Capital
Contribution is utilized by the Manufacturing Division and to the extent that
there is any Approved Leiner Expenses), Article 4.2(b), Article 4.2(e) and this
Article 4.2(f). As used herein, the term "Projected Cash Flow Deficit of the
Manufacturing Division" shall mean the additional net cash requirements of the
Manufacturing Division after considering all cash sources, uses and available
balances arising from the projected performance of the Manufacturing Division
for the following fiscal quarter based on a quarterly budget for the relevant
quarter prepared by the Deputy General Manager of the Manufacturing Division and
approved by the Boards.
(g) The parties agree that for purposes of fulfilling each Member's
obligations to fund the capital and cash requirements of the Manufacturing
Division and the financial obligations of the WFOE incurred on behalf of the
Manufacturing Division pursuant to Articles 4.2(b), 4.2(e) and 4.2(f), if, at
the time any such finding obligation arises, a Distribution Division has excess
cash that will not be utilized by such Distribution Division in the following
fiscal quarter, then the Member responsible for such
13
Distribution Division may use such excess cash to fund, in whole or in part, its
proportionate share of the Capital Contributions required to be made to the
Company for the benefit of the Manufacturing Division by transferring such
excess cash from the Distribution Division to the Manufacturing Division, and
the excess cash so transferred shall be treated as if it had been distributed to
the Member and then re-contributed by the Member to the Company as its Capital
Contribution for the benefit of the Manufacturing Division.
4.3 Capital Accounts.
(a) There shall be established and maintained for each Member on the
books of the Company a capital account (the "Capital Account") in accordance
with the following provisions: A separate Capital Account will be maintained for
each Member. Each Member's Capital Account will be increased by (1) the amount
of money contributed by such Member to the Company; (2) the Gross Asset Value of
property contributed by such Member to the Company (net of liabilities secured
by such contributed property that the Company is considered to assume or take
subject to under Code Section 752); (3) allocations to such Member of Net
Profit; and (4) items in the nature of income or gain which are specially
allocated pursuant to Article 11.2. Each Member's Capital Account will be
decreased by (1) the amount of money distributed to such Member by the Company;
(2) the Gross Asset Value of property distributed to such Member by the Company
(net of liabilities secured by such distributed property that such Member is
considered to assume or take subject to under Code Section 752); (3) allocations
to such Member of Net Losses; and (4) items in the nature of expenses or losses
which are specially allocated pursuant to Article 11.2.
(b) In the event of a permitted sale or exchange of a Membership Interest
in the Company pursuant to Article 12, the Capital Account of the Transferring
Member shall become the Capital Account of the transferee to the extent it
relates to the transferred Membership Interest in accordance with Section
1.704-1(b)(2)(iv) of the Treasury Regulations.
(c) The manner in which Capital Accounts are to be maintained pursuant to
this Article 4.3 is intended to comply with the requirements of Code Section
704(b) and the Treasury Regulations promulgated thereunder and the provisions
herein regarding maintenance of Capital Accounts shall be interpreted and
applied in a manner consistent with such Regulations. If the Company determines
that the manner in which Capital Accounts are to be maintained pursuant to the
preceding provisions of this Article 4.3 should be modified in order to comply
with Code Section 704(b) and the Treasury Regulations, then notwithstanding
anything to the contrary contained in the preceding provisions of this Article
4.3, the method in which Capital Accounts are maintained shall be so modified;
provided, however, that any change in the manner of maintaining Capital
14
Accounts shall not materially alter the economic agreement between or among the
Members as set forth in this Agreement.
4.4 No Interest. No interest shall accrue on or be paid by the Company to
any Member in respect of the Capital Contributions or Capital Account of such
Member.
4.5 Failure to Make Capital Contributions. If the Board of Managers has
determined that an additional Capital Contribution is required from any Member
pursuant to Article 4.2(b) or (e) (subject to Leiner's maximum obligation to
contribute no more than US$5 million), and if a Member does not timely
contribute capital as and when required pursuant to Article 4.2(b) or (e), that
Member shall be in default under this Agreement. In such event, the
non-defaulting Members may send the defaulting Member written notice of such
default, giving it ten (10) days from the date such notice is given to
contribute the entire amount of the defaulting Member's required Capital
Contribution. If the defaulting Member does not contribute its required capital
to the Company within said ten (10) day period, without prejudice to any
adjustment to the respective Percentage Interests of the Members pursuant to
Article 9.2, those non-defaulting Members may elect any one or more of the
following remedies:
(a) The non-defaulting Members may advance funds to the Company to cover
those amounts which the defaulting Member fails to contribute. Amounts which a
non-defaulting Member so advances on behalf of the defaulting Member shall
become a loan due and owing from the defaulting Member to such non-defaulting
Member and bear interest at a rate equal to the sum of (i) the Prime Rate and
(ii) two percent (2%) per annum. Interest shall accrue from day to day and
calculated on the actual number of days elapsed and a 360 day year for the
period from the date of the advance to the date when the loan is fully repaid.
All cash distributions otherwise distributable to the defaulting Member under
this Agreement shall instead be paid to the non-defaulting Members making such
advances until such advances and interest thereon are paid in full. In any
event, any such advances shall be due and payable by the defaulting on demand by
the non-defaulting Members. Any amounts repaid shall first be applied to
interest and thereafter to principal. Effective upon a Member becoming a
defaulting Member, such Member grants to the non-defaulting Members who advance
funds under this Article 4.5(a) a security interest in its Membership Interest
to secure its obligation to repay such advances and agrees to execute and
deliver a promissory note, together with a security agreement, and such UCC-l
financing statements and assignments of certificates of membership (or other
documents of transfer) as such non-defaulting Members may reasonably request.
(b) The Company or the non-defaulting Members may purchase the defaulting
Member's entire Membership Interest in accordance with the same terms and
conditions as those set forth in Article 12 except that the purchase price shall
be an amount equal to
15
eighty percent (80%) of the fair market value of the defaulting Member's
Membership Interest determined by an independent appraiser selected by the Board
of Managers, the costs of which shall be borne by the defaulting Member.
(c) The defaulting Members may not have the right, if so determined by the
Board of Managers, to receive any distributions from the Company until the
non-defaulting Members have first received distributions in an amount equal to
the additional capital contributed by each non-defaulting Member to the Company
plus simple interest thereon at a rate equal to the sum of (i) the Prime Rate
and (ii) two percent (2%) per annum per annum. Interest shall accrue from day to
day and calculated on the actual number of days elapsed and a 360 day year for
the period from the date the additional Capital Contribution was made by the
non-defaulting Member to the date when the loan is fully repaid.
(d) The defaulting Member may, if so determined by the Board of Managers,
lose its voting and approval rights under the Delaware Act, the Certificate and
this Agreement until such time as the defaulting Member cures the default.
(e) If the defaulting Member does not make a required contribution of
property, the Company may require the defaulting Member to contribute cash equal
to that portion of the fair market value of the contribution that has not been
made. This remedy is in addition to, and not in lieu of any other rights,
including the right to specific performance, the remedies listed above in this
Article 4.5, or any other rights of the Company or its Members under applicable
law.
Each Member acknowledges and agrees that the remedies described in this
Article 4.5 bear a reasonable relationship to the damages which the Members
estimate may be suffered by the Company and the non-defaulting Members by reason
of the failure of a defaulting Member to make an additional Capital Contribution
and the election of any or all of the above described remedies is not
unreasonable under the circumstances existing as of the date hereof. The
election of the non-defaulting Members, to pursue any remedy provided in this
Article 4.5 shall not be a waiver or limitation of the right to pursue an
additional or different remedy available hereunder or at law or in equity with
respect to any subsequent default.
4.6 Member Loans to Company. Except as otherwise provided herein, no
Member shall be required to make any loan or advance to the Company, guarantee
or otherwise provide security for any liability of the Company to any third
party, or to otherwise provide credit to or on behalf of the Company.
Notwithstanding the preceding sentence, the parties agree as follows:
16
(a) The Members shall cooperate with each other and the Board of Managers,
and enter into such documents as necessary or required, to obtain loans for the
Company, or the WFOE, as the case may be, that are determined by the Board of
Managers as necessary for the Company's business or operations, provided that,
nothing herein shall require a Member to guaranty any obligation of the Company
or the WFOE or to make Capital Contributions in excess of those required by this
Agreement. All loans from the Members to the Company and from the Company to the
WFOE shall be on such terms as the Boards shall approve with the votes of at
least two-thirds of the Managers or the Directors, as the case may be, then in
office, with the intent that no Member or Division shall obtain more favorable
terms than the other Members or Divisions.
(b) Any Member may voluntarily make a loan or advance to the Company;
provided, however, that any such loan or advance is determined by the Board of
Managers to be necessary to the business of the Company and the terms and
conditions thereof are approved in advance by the Board of Managers. In the
event that any Member makes a loan or advance to the Company, the amount of such
loan or advance shall be treated as a debt owed by the Company to such Member
and not as a Capital Contribution. Unless otherwise agreed by the Members, loans
by Members to the Company or the WFOE, or from the Company to the WFOE for the
lending Member's Division, shall be repaid pro-rata; provided, however, that no
lending Member's loan shall be repaid if by repayment of such loan that Member's
Division would be insolvent.
4.7 No Withdrawal. No Member shall have any right to withdraw any portion
of its Capital Contributions or, except as otherwise provided herein, to receive
any distributions of cash or property from the Company prior to the dissolution
and winding up of the Company.
ARTICLE 5
RIGHTS AND DUTIES OF BOARD OF MANAGERS
5.1 Management.
(a) The business and affairs of the Company shall be managed by its Board
of Managers. Except as set forth herein, the Board of Managers shall have full
and complete authority, power and discretion to manage and control the business,
affairs and properties of the Company, to make all decisions regarding those
matters and to perform any and all other acts or activities customary or
incidental to the management of the Company's business and objectives. No one
Manager may take or effect any action on behalf of the Company or otherwise bind
the Company in the absence of a formal delegation of authority by the Board of
Managers to such Manager. Unless authorized to do so by this Agreement or by the
Board of Managers, no Member, officer, attorney-in-
17
fact, employee or other agent of the Company shall have any power or authority
to bind the Company.
(b) The Board of Managers may delegate to Herbalife, or such other Person
the Board of Managers shall deem appropriate, authority to handle ministerial
and administrative matters on behalf of the Company. Such matters shall consist
of preparation and filing of tax returns of the Company, preparation and filing
of routine legal documents on behalf of the Company (such as filings with the
Delaware Secretary of State), sending notices to the Board of Managers and
preparation of minutes of the proceedings of the Board of Managers, opening and
maintaining bank and other depositary accounts on behalf of the Company,
provided that, any checks drawn on behalf of the Company or withdrawal of funds
from a Company account in excess of Ten Thousand United States Dollars
(US$10,000) or its equivalent in any foreign currency shall require two
signatures, one being a Manager appointed by Herbalife and one being a Manager
appointed by Leiner. Except as set forth in this Article 5.1(b), the Company
shall not delegate any authority or responsibility to Herbalife or any other
Person without the approval of not less than two-thirds of the members of the
Board of Managers. The fee to be paid to Herbalife in connection with performing
the duties described in this Article 5.1(b) shall be an amount determined by the
Board of Managers, which shall not exceed Thirty Thousand United States Dollars
(US$30,000) in any twelve-month period.
5.2 Number, Appointment, Tenure. The Board of Managers shall consist of
five (5) Managers, three (3) of whom shall be appointed by Herbalife and two (2)
of whom shall be appointed by Leiner. Either Member may, with or without cause,
remove and replace a Manager appointed by such Member at any time upon notice to
other Member. Unless removed earlier by the appointing Member, each Manager
shall serve for a term of two (2) years and may serve consecutive terms if so
appointed by the appointing Member. If a seat on the Board of Managers is
vacated by retirement, resignation, removal, disability or death, the Member
that originally appointed such Manager shall appoint a successor. Managers need
not be employed by the Members of the Company.
5.3 No Exclusive Duty to Company. No Manager shall be required to manage
the Company as his or her sole and exclusive function and he or she may be an
employee of a Member and/or have other business interests and engage in
activities in addition to those relating to the Company. No Manager nor any
Member shall incur any liability to the Company or to any of the Members as a
result of engaging in any other business or venture.
5.4 Compensation and Reimbursement. No Manager shall be entitled to
compensation from the Company for services rendered to the Company as such,
except that the Company shall reimburse the Managers for all reasonable expenses
incurred by
18
the Managers in connection with their service to the Company, including the
costs and expenses for attending meetings of the Board of Managers.
5.5 Certain Powers of Board of Managers. Without limiting the generality
of Article 5.1, the Board of Managers shall have power and authority, after due
action, on behalf of the Company:
(a) to acquire property from any Person as the Board of Managers may
determine, whether or not such Person is directly or indirectly affiliated or
connected with any Manager or Member;
(b) to borrow money for the Company on such terms as the Board of Managers
deem appropriate, and in connection therewith, to hypothecate, encumber and
grant security interests in the assets of the Company to secure repayment of the
borrowed sums. No debt shall be contracted or liability incurred by or on behalf
of the Company except by the Board of Managers, or to the extent permitted under
the Delaware Act, by agents or employees of the Company expressly authorized to
contract such debt or incur such liability by the Board of Managers;
(c) to lend money to the WFOE;
(d) to employ accountants, legal counsel or other experts to perform
services for the Company and to compensate them through the use of Company
funds;
(e) to invest Company funds;
(f) to execute on behalf of the Company all instruments and documents,
including, without limitation, checks; drafts; notes and other negotiable
instruments; mortgages or deeds of trust; security agreements; financing
statements; documents providing for the acquisition, mortgage or disposition of
the Company's property; assignments, bills of sale; leases; and any other
instruments or documents necessary to the business of the Company;
(g) to enter into any and all other agreements on behalf of the Company,
in such forms as the Board of Managers may approve;
(h) to appoint such agents, officers and delegees as may be necessary or
appropriate to the conduct of the business; and
(i) to open bank accounts in the name and on behalf of the Company and
determine who shall have the signatory power over such accounts,
19
(j) to do and perform all other acts as may be necessary or appropriate to
the conduct of the Company's business.
5.6 Meetings of Board of Managers. Meetings of the Board of Managers shall
be held upon the request of any two Managers; but in any event, the Board of
Managers shall meet at least once every six (6) months. The Board of Managers
may designate any place, either within or outside the State of Delaware, as the
place of meeting of the Board of Managers. If no designation is made, the place
of meeting shall be the principal place of business of the Company. Notice
stating the place, day and hour of the meeting and the purpose or purposes for
which the meeting is called shall be delivered not less than ten (10) nor more
than thirty (30) days before the date of the meeting. A majority of the Board of
Managers, including at least one Manager appointed by Herbalife and one Manager
appointed by Leiner, shall constitute a quorum at meetings of the Board of
Managers. At all meetings of the Board of Managers, a Manager may vote in person
or by proxy executed in writing authorizing another Manager to act on his or her
behalf. Such proxy shall be filed with the Board of Managers before or at the
time of the meeting. If a quorum is present, the affirmative vote of a majority
of the Managers then in office shall constitute the act of the Board of
Managers, except for matters requiring the affirmative votes of at least
two-thirds of the Managers then in office under Article 5.7.
5.7 Resolutions Requiring Super-Majority Votes. Resolutions on the
following matters shall only be adopted with the vote or written consent of at
least two-thirds of the Managers then in office:
(a) Any amendment to, or modification of, the Certificate;
(b) Any amendment or waiver of any of the provisions of this Agreement;
(c) The merger, corporate reorganization, acquisition, liquidation,
dissolution, or winding up of the Company, or any steps likely to lead to such
merger, corporate reorganization, acquisition, liquidation, dissolution, or
winding up of the Company;
(d) The sale, exchange, or other disposition of all, or substantially all,
of the Company's assets, including, without limitation, the registered capital
of the WFOE;
(e) The Transfer of all or any portion of a Member's Membership Interest
to a third party purchaser pursuant to Articles 12.2(b) and (c), but each
Manager's consent to such a transfer shall not be unreasonably withheld;
(f) The admission of any Person as a new Member other than the admission
of an Affiliate of an existing Member pursuant to Article 12;
20
(g) The cancellation of a semi-annual meeting of the Board of Managers;
(h) Any decision not to distribute any amount of the Manufacturing Net
Profit within one year of its accrual;
(i) Approval of the appointment or removal of the General Manager of the
WFOE;
(j) Any borrowing by the WFOE;
(k) The entry into any agreement or contract not in the ordinary course of
business, and the entry into any agreement or contract between the Company and
Herbalife or Leiner, or any of their Affiliates, including but not limited to
the trademark license agreements, technology license agreements and consulting
services agreements to be entered into pursuant to Article 6.13 (a) and (b);
(l) The adoption of any policy or resolution solely relating to or
concerning the operation, business or affairs of only one of the Distribution
Divisions or relating to any decision to fund financial obligations on behalf of
one of the Distribution Divisions; and
(m) Any other matters expressly provided under this Agreement as requiring
the approval or affirmative votes of no less than or at least two-thirds of the
Managers.
5.8 Other Manner of Acting. Any Manager may participate in a meeting by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in the meeting by means of such equipment shall constitute
presence in person at such meeting. Action may be taken without a meeting if the
action is evidenced by one or more written consents signed by all of the
Managers.
ARTICLE 6
MANAGEMENT AND OPERATION OF THE WFOE
6.1 Board of Directors. The parties hereto acknowledge and agree that the
business of the WFOE shall be managed by a Board of Directors in accordance with
the WFOE's Articles of Association, PRC law, and consistent with the provisions
of this Agreement and the plans and policies adopted by the Company's Board of
Managers. The Members shall ensure that the Board of Directors of the WFOE shall
have the same number of members as the Board of Managers of the Company and that
members of the Board of Managers of the Company at any time shall also serve as
members of the Board of Directors of the WFOE.
21
6.2 Board Meeting of the WFOE. If any meeting of the Board of Directors of
the WFOE is to be held, the Members shall cause the Board of Managers of the
Company to hold such a meeting immediately after a meeting of the Board of
Managers at the same seating. The Members shall procure that the Managers
appointed by each of them shall at all times cause the Board of Directors of the
WFOE to vote in favor of all decisions approved by the Board of Managers of the
Company.
6.3 Chairman of the Boards. The Members shall cause the Chairman of the
Board of Managers of the Company and the Chairman of the Board of Directors of
the WFOE to be the same person (the "Chairman"). The Chairman shall be selected
by Herbalife from the Managers and the Members shall cause each of their
representatives on the Board of Managers to elect the Manager selected by
Herbalife to be the Chairman of the Boards. The Chairman shall be the legal
representative of the WFOE. The Chairman shall, when present, preside at all
meetings of the Board of Managers and the Board of Directors. He shall also have
such powers and perform such duties as are specified in this Agreement and as
may from time to time be assigned to him by the Board of Managers.
6.4 General Manager. The WFOE shall have a General Manager who shall be
appointed by the affirmative votes of at least two-thirds of the Directors then
in office, shall serve a term of two years, and may serve consecutive terms if
re-appointed by the Board of Directors. The parties agree that the first General
Manager shall be Mr. Merv Stark. The General Manager shall be responsible for
such matters as may be required of the General Manager by PRC law and
regulations, including but not limited to signing and execution of agreements
and other documents for and on behalf of the WFOE as required by PRC law and
regulations or as shall be expressly delegated by the Board of Directors with
the approval of at least two-thirds of the Directors. The day-to-day operation
and active management of each of the Divisions shall, to the maximum extent
permitted by law, vest in the Deputy General Manager of the relevant Division as
provided in Article 6.8. The General Manager may be stationed outside of the
WFOE's principal place of business or branch offices.
6.5 Divisions of WFOE. The Members shall cause the following divisions and
departments to be established in the WFOE:
(a) Herbalife Division. The Herbalife Division, sometimes referred to
herein as the Distribution Division of Herbalife, shall be responsible for the
distribution of Herbalife's line of products, including those products
manufactured by the WFOE, and the profits, losses and management of which shall
be the sole responsibility of Herbalife.
(b) Leiner Division. The Leiner Division, sometimes referred to herein as
the Distribution Division of Herbalife, shall be responsible for the
distribution of Leiner's
22
line of products, including those products manufactured by the WFOE, and the
profits, losses and management of which shall be the sole responsibility of
Leiner.
(c) Manufacturing Division. The Manufacturing Division shall be
responsible for (i) the manufacturing of nutritional and personal care products
of the WFOE, and (ii) the sourcing in the PRC of raw materials, ingredients and
packaging materials for the nutritional and personal care products of the WFOE,
and if requested by the Members, for the Members' lines of products. The profits
and losses of the Manufacturing Division shall be shared by the parties as
provided in Article 11.1(c). The management of the Manufacturing Division shall
be the primary responsibility of the Deputy General Manager of the Manufacturing
Division in accordance with an annual budget of the Manufacturing Division
submitted to and approved by the Boards. The Deputy General Manager of the
Manufacturing Division shall cause an annual budget of the Manufacturing
Division to be prepared and submitted to the Boards for approval at least thirty
(30) days prior to the beginning of each new Fiscal Year.
6.6 No Subsidy of Loss Among Divisions. The Members acknowledge that it is
their intention that the WFOE shall be operated in such a way that the profits
of one Division must not be used to subsidize the losses or lack of profit of
the other Division(s).
6.7 Close Down of a Division.
(a) In the event that the Board of Managers determines in good faith that
for compelling financial or business reasons which have had, or are reasonably
expected to have, a material adverse effect on the WFOE, a Division of the WFOE
should be closed down, the Members shall cause their respective nominees on the
Board of the Directors to vote in favor of that decision and, except in the case
where the Member responsible for the Division to be closed down exercises its
right to purchase the assets of its Division as set forth below, shall cause the
said Division to be closed down by having the Member responsible for the
Division to be closed down sell or liquidate all of the assets and pay off all
of the liabilities of said Division as soon as reasonably practicable. If
necessary, the responsible Member of the Division to be closed down shall
contribute additional funds to the Company in order for the WFOE to pay off all
of the liabilities and to fulfill all of the outstanding financial obligations
of the WFOE incurred on behalf of the Division. If the Board of Managers directs
that the Herbalife Division is to be closed down, then Herbalife shall have the
right to purchase any or all of the assets belonging to the Herbalife Division
if it notifies the Board of Managers of its election to do so within thirty (30)
days after the Board of Managers resolves to close down the Herbalife Division.
If the Board of Managers directs that the Leiner Division is to be closed down,
then Leiner shall have the right to purchase any or all of the assets belonging
to the Leiner Division if it notifies the Board of Managers of its election to
do so within thirty (30) days after the Board of Managers resolves to close down
the Leiner Division. If
23
Herbalife or Leiner so elects to purchase the assets of a Division which is to
be closed down, then the schedule to close down that Division shall be
structured to permit Herbalife or Leiner, as the case may be, to form a new
legal entity in the PRC and obtain the requisite licenses for conducting
business in the PRC with the purchased assets provided that, in no event shall
the time period allowed to close down a Division exceed twelve (12) months. The
price to be paid by the Member electing to purchase the assets of the Division
to be closed down shall be the book value of such assets.
(b) At any time during the term of the WFOE, Herbalife or Leiner (the
"responsible Member") shall have the right to voluntarily close down the
Herbalife Division or the Leiner Division, as the case may be, by giving at
least thirty (30) days prior written notice to the other Member and the Boards.
The other Member shall have the right to purchase any of the fixed assets
(excluding any finished inventory) belonging solely to the Division to be closed
down by giving written notice to the responsible Member and the Boards within
thirty (30) days after the date of the closing down notice from the responsible
Member. The price to be paid by the other Member electing to purchase such fixed
assets shall be the fair market value of such fixed assets. If the Members
cannot agree on the fair market value of such fixed assets, such value shall be
determined by an independent international accounting firm, whose costs shall be
borne by the Members equally. If the other Member does not or fails to exercise
its right of purchase as aforesaid, then the responsible Member shall cause the
Division to be closed down as soon as reasonably practicable by selling or
liquidating all of the assets and paying off all of the liabilities of the
Division. If necessary, the responsible Member of the Division to be closed down
shall contribute additional funds to the Company in order for the WFOE to pay
off all of the liabilities and to fulfill all of the outstanding financial
obligations of the WFOE incurred on behalf of the Division.
(c) In the event of any change of current PRC law and policy which would
permit foreign invested enterprises to sell products, including products sold by
the WFOE, that are not manufactured by such foreign invested enterprises, then
each Member shall, subject to the provision below, have the right to voluntarily
close down its Distribution Division and transfer all of the assets of the
Distribution Division to be closed down to another legal entity formed by such
Member in the PRC or an Affiliate of such Member in the PRC ("Distributing
Company"), by giving at least thirty (30) days prior written notice to the other
Member and the Boards. After receipt of such a notice, the Members shall
negotiate in good faith and agree on the respective maximum aggregate amounts of
additional investment each Member is required to make to the Manufacturing
Division or the WFOE after the close down of the relevant Distribution
Division(s) pursuant to this Article 6.7(c). In addition, the Members shall
procure that each Distributing Company enter into a supply or sale and purchase
agreement with the WFOE, under the terms of which the Distributing Company
shall, after the close down of the relevant Distribution Division(s), purchase
its respective products that can be
24
manufactured by the WFOE based on the WFOE's manufacturing capability at the
time of the close down of the relevant Distribution Division(s), on
substantially the same terms as those purchases made between the relevant
Distribution Division(s) and the Manufacturing Division prior to the close down
of said Distribution Division(s).
(d) If the Herbalife Division is to be closed down, either as directed by
the Board of Managers pursuant to Article 6.7(a) above or voluntarily pursuant
to Article 6.7(b) or (c) above, or if Herbalife decides to put the business of
the Herbalife Division into dormancy, then Herbalife shall bear (i) all of the
costs and expenses relating to the closing down of the Herbalife Division, and
(ii) all of the actual out-of-pocket costs and expenses incurred specifically to
service or to maintain the Herbalife Division in dormancy as agreed upon by the
Members. If the Leiner Division is to be closed down, either as directed by the
Board of Managers pursuant to Article 6.7(a) above or voluntarily pursuant to
Articles 6.7(b) or (c) above, or if Leiner decides to put the business of the
Leiner Division into dormancy, then Leiner shall bear (i) all of the costs and
expenses relating to the closing down of the Leiner Division, and (ii) all of
the actual out-of-pocket costs and expenses incurred specifically to service or
to maintain the Leiner Division in dormancy as agreed upon by the Members.
6.8 Deputy General Manager. Each of the WFOE's Divisions shall be headed
by a Deputy General Manager who shall, to the maximum extent permitted by PRC
law, be responsible for the day-to-day operation and active business of the
relevant Division and for implementing plans and policies of the Boards. The
Deputy General Managers shall report to the Board of Directors but shall also at
the same time inform, and provide copies of all information and documents so
communicated to the Board of Directors to, the General Manager. The Deputy
General Manager of the Herbalife Division shall be selected by Herbalife, the
Deputy General Managers of the Leiner Division and the Manufacturing Division
shall be selected by Leiner, and the Members shall cause their respective
representatives on the Board of Directors to appoint all of the Deputy General
Managers so selected by the Members. The Deputy General Manager of each Division
shall be the chief operating officer of the relevant Division and shall decide
on all matters relating to the operation of that Division except for matters
relating to the WFOE that are specifically provided herein as to be decided by
the Board of Directors or the General Manager. The Deputy General Manager shall
have the authority to sign any contract, agreement or other document relating
solely to the business and operation of his or her responsible Division, except
where such document is required by PRC law or regulation to be signed by the
General Manager, then such document shall be co-signed by the General Manager.
Where a joint signature is required, the General Manager shall exert its best
efforts to promptly execute and deliver the requested document unless the
General Manager determines in good faith that such actions would violate any
applicable law, regulation or government policy, or would be inconsistent with
any business plan, policy or resolution adopted by the Boards or any provisions
of this Agreement or any
25
other agreement between the parties hereto. In such event, the General manager
shall immediately report the matters to the Board of Directors which may direct
the General manager to co-sign the document if it determines in good faith that
the document to be signed and the actions contemplated thereunder are not
illegal under applicable law, regulation or policy, or are not inconsistent with
any business plan, policy or resolution adopted by the Boards or any provisions
of this Agreement or any other agreement between the parties hereto.
6.9 The Chief Accountant. The WFOE shall have a Chief Accountant who shall
be appointed by the Board of Directors. The Chief Accountant shall be the chief
financial officer of the WFOE. The Chief Accountant shall: (i) have charge and
custody of and be responsible for all funds of the WFOE other than those
allocated to the each of the WFOE's Divisions; (ii) receive and give receipts
for moneys due and payable to the WFOE from any source whatsoever, and deposit
all such moneys in the name of the WFOE or a WFOE's Division in such banks,
trust companies or other depositories as shall be selected by the Board of
Directors; (iii) supervise the keeping of financial records and the preparation
of financial statements of each of the WFOE's Divisions and the WFOE, and (iv)
in general perform all the duties incident to the office of Chief Accountant and
such other duties as from time to time may be assigned to him by the General
Manager or by the Board of Directors.
6.10 Salaries. The salaries and other compensation of the officers and
other employees of the WFOE shall be fixed from time to time by the Board of
Directors, and no officer or employee shall be prevented from receiving such
salary by reason of the fact that he or she is also a Director of the WFOE or a
Manager of the Company.
6.11 Annual Operating Plan and Budgets. As soon as practicable following
the Effective Date, the parties hereto shall procure that the Boards approve the
WFOE's initial annual divisional operating plans attached hereto as SCHEDULE B.
The parties hereto shall procure that the WFOE prepare rolling four-year
divisional capital plans and annual divisional and consolidated operating plans
of the WFOE in accordance with the provisions set forth in Part III of SCHEDULE
C.
6.12 Transfer Pricing of the Manufacturing Division.
(a) For purposes of determining the Net Profit or Net Loss of the WFOE's
Divisions, on the internal accounts of the Divisions to be prepared by the
Company, the Manufacturing Division shall charge, and receive payment from, the
Herbalife Division and the Leiner Division, a price for each of the finished
products manufactured by the Manufacturing Division for such Divisions, so that
the Manufacturing Division shall have a gross margin equal to twenty percent
(20%) of the Transfer Price (as defined in Part I, Section B of SCHEDULE C) from
the "sale" of such products to the Herbalife Division or
26
the Leiner Division, as the case may be, as more particularly illustrated in
Part I, Section B of SCHEDULE C. For such accounting purposes, a "sale" of a
product from the Manufacturing Division shall be deemed to take place when the
Manufacturing Division finishes the production of the product and the product is
ready for sale by the Herbalife Division or the Leiner Division, as the case may
be.
(b) The Manufacturing Division shall charge a minimum price for the
procurement of, processing, manufacturing and sale of semi-processed materials
by the WFOE to either of the Members, any Affiliate of either Member, or any
third party, in accordance with the pricing policy set forth in SCHEDULE D.
6.13 License Agreements.
(a) Herbalife and Leiner shall, subject to the approval of the Boards,
enter into such trademark license and/or technology license with the WFOE as may
be required for the operation of the WFOE, under the terms of which the WFOE
shall pay a license fee and/or royalty at a reasonable rate determined by the
Boards as may be approved by the local counterpart of MOFTEC.
(b) Herbalife shall, subject to the approval of the Boards, enter into a
marketing consulting services agreement with the WFOE, under the terms of which
Herbalife shall provide marketing, training and other non-maintenance support
services to the WFOE in consideration for a service fee payable by the WFOE.
Leiner shall, subject to the approval of the Boards, enter into a manufacturing
consulting services agreement with the WFOE in consideration for a service fee
payable by the WFOE.
(c) Any technology license agreement entered into between Herbalife or
Leiner and the WFOE pursuant to Article 6.13(a) above shall be submitted for
approval by, and registration with, the relevant local counterpart of MOFTEC,
within ten (10) days after their execution. Any trademark license agreement
entered into between Herbalife or Leiner and the WFOE shall be registered with
the Office of Trademarks and Patents of the PRC within ten (10) days after their
execution.
(d) The license fees, royalties and service fees payable by the WFOE under
any technology or trademark license agreement and any consulting services
agreement shall, for the purposes of the WFOE's and the Divisions' internal
accounting and the determination of Herbalife Net Profit or Net Loss, or Leiner
Net Profit or Net Loss, be allocated as the expenses of the Herbalife Division,
or the Leiner Division, as the case may be, which utilizes the relevant
technology, trademark or services so licensed or provided, and if any of such
technology or service is utilized by the Manufacturing Division, the license
fees and royalties shall be charged as expenses to Herbalife and Leiner in
accordance with the provisions of Part I, Section B of SCHEDULE C under the
27
definition of "Fixed Factory Costs" for the purposes of determining the
Herbalife Net Profit or Net Loss, and the Leiner Net Profit or Net Loss,
respectively.
6.14 Termination of the WFOE. Upon the expiration of the term of the WFOE,
or upon the termination or dissolution of the WFOE upon the occurrence of any of
the termination events set forth in the Articles of Association of the WFOE, at
the election of either Herbalife or Leiner or both, the parties hereto shall, to
the extent permitted by law, procure that the Board of Managers of the Company,
the Board of Directors of the WFOE and the liquidation committee of the WFOE
take such actions so as to preserve the integrity of the assets of the WFOE and
either party may purchase the assets of its Division of the WFOE instead of
liquidating the assets for distribution of sales proceeds to the Company.
6.15 Financial Operating Policies and Procedures. The Members agree that
the Financial Operating Policies and Procedures attached hereto as SCHEDULE C
shall govern certain financial and accounting matters of the Company and the
WFOE as specified therein.
6.16 Ownership of Formulae etc. The parties hereto agree that all
formulae, know-how, trade secrets, patents, copyrights, trademarks and all other
similar proprietary rights (collectively, the "Intellectual Property Rights")
developed by either the Herbalife Division or the Leiner Division shall be
deemed to be owned by Herbalife or Leiner, as the case may be. Upon the
termination or dissolution of the WFOE, the parties shall cause the Board of
Directors or the liquidation committee of the WFOE to distribute such
Intellectual Property Rights to the Company, which shall in turn immediately
distribute such Intellectual Property Rights to Herbalife or Leiner, as the case
may be. Each party hereto covenants to the other party that it will not, and it
shall cause its respective Division in the WFOE not to, use the Intellectual
Property Rights of the other party at any time during and after the existence of
the WFOE.
ARTICLE 7
RIGHTS AND OBLIGATIONS OF MEMBERS
7.1 Limitation of Liability. A Member shall not be personally liable to
creditors of the Company for any debts, obligations, liabilities or losses of
the Company, whether arising in contract, tort or otherwise, beyond such
Member's Capital Contributions under Articles 4.1 and 4.2 and any additional
Capital Contributions made by such Member pursuant to the provisions of Article
6.7 and 11.12, except as otherwise required by law.
28
7.2 List of Members. Upon the written request of any Member, the Board of
Managers shall provide a list showing the names and addresses of all Members.
7.3 Company Books. In accordance with Article 11.8 herein, the Board of
Managers shall maintain and preserve, during the term of the Company, the
accounts, books and other relevant Company documents. Upon reasonable written
request, each Member and its duly authorized representative shall have the
right, at a time during ordinary business hours, as reasonably determined by the
Board of Managers, to inspect and copy such Company documents (at the requesting
Member's expense) which the Board of Managers, in its discretion, deems
appropriate for any purpose reasonably related to the requesting Member's
Membership Interest.
7.4 Priority and Return of Capital. Except as may be expressly provided in
Article 11, no Member shall have priority over any other Member, either as to
the return of Capital Contributions or as to Net Profit, Net Loss or
distributions; provided that this Article 7.4 shall not apply to (i) the
repayment by the Company of loans (as distinguished from Capital Contributions)
which a Member has made to the Company, and (ii) the payment of royalties,
license fees or service fees payable to Herbalife and Leiner by the WFOE.
7.5 No Preemptive Rights. Except as otherwise provided herein, no Member
shall have any preemptive or preferential right, including any such right with
respect to (a) additional Capital Contributions; (b) issuance or sale of
Membership Interests, whether unissued or hereafter created; (c) issuance of any
obligations, evidences of indebtedness or other securities of the Company
convertible into or exchangeable for, or carrying or accompanied by any rights
to receive, purchase or subscribe to, any such unissued Membership Interest; (d)
issuance of any right of, subscription to or right to receive, or any warrant or
option for the purchase of, any of the foregoing securities; or (e) issuance or
sale of any other securities that may be issued or sold by the Company.
7.6 No Withdrawal or Resignation. No Member shall have the right to
withdraw, retire or voluntarily resign as a Member of the Company prior to the
dissolution and winding up of the Company and any withdrawal, retirement or
resignation by a Member shall constitute a breach of this Agreement.
7.7 Payments to Members. Except as specified in this Agreement, no Member
or Affiliate of such member is entitled to remuneration for services rendered or
goods provided to the Company or the WFOE. However, the Company shall reimburse
the Members and their Affiliates for organizational expenses (including, without
limitation, legal and accounting fees and costs) incurred to form the Company
and to prepare the Certificate and this Agreement and, as approved by the
Members, for the actual cost of goods and materials used by the Company.
29
7.8 Indemnification. The Company shall indemnify and hold harmless each
Member for any act taken in its capacity as a Member, other than acts that
involve a breach of fiduciary duty. The standard of the fiduciary duties a
Member owes to the Company and to its Members are those of a partner to a
partnership and to the partners of the partnership.
7.9 Competing Activities. Each Member shall engage the services of the
Manufacturing Division whenever it or its Affiliates purchases directly from the
PRC raw materials, ingredients, semi-finished products, finished products and
packaging materials for its lines of products or business, whether to be sold in
the PRC market or abroad, to the extent that the Manufacturing Division has the
capability to process such materials. Each Member shall use its best efforts to
create business for the export of products manufactured by the WFOE. Subject to
the preceding sentences, the Members and their Affiliates may engage or invest
in any activity, other than those that might be in direct competition with the
Company or the WFOE in the PRC. Neither the Company nor any Member shall have
any right in or to such other activities or to the income or proceeds derived
therefrom. No Member shall be obligated to present any investment opportunity to
the Company, even if the opportunity is of the character that, if presented to
the Company, could be taken by the Company. Each Member shall have the right to
hold any investment opportunity for its own account or to recommend such
opportunity to persons other than the Company. The Members acknowledge that
certain Members and their Affiliates own and/or manage other businesses,
including businesses that may compete with the Company and for the Members'
time. Each Member hereby waives any and all rights and claims which he or she
may otherwise have against the other Members and their Affiliates as a result of
any of such activities.
7.10 Transactions between the Company and the Members. Notwithstanding
that it may constitute a conflict of interest, the Members and their Affiliates
may engage in any transaction with the Company or the WFOE so long as such
transaction is not expressly prohibited by this Agreement and so long as the
terms and conditions of such transaction, on an overall basis, are fair and
reasonable to the Company and are at least as favorable to the Company as those
that are generally available from persons capable of similarly performing them
or if Members holding a majority of the Membership Interests held by the Members
having no interest in such transaction (other than their interests as Members)
approve the transaction in writing.
7.11 No Voting Rights. The Members shall have no voting rights with
respect to matters relating to the management and affairs of the Company or the
WFOE, except through the appointment of their designated Managers in accordance
with Article 5.2 and the amendment of this Agreement.
30
ARTICLE 8
STANDARD OF CARE AND INDEMNIFICATION
OF MANAGERS, OFFICERS AND EMPLOYEES
8.1 Standard of Care. No Manager or officer shall be liable to any
Member or to the Company by reason of the actions of such person in the conduct
of the business of the Company except for fraud, gross negligence or willful
misconduct.
8.2 Indemnification of Managers, Officers and Employees. The Company
shall, to the fullest extent to which is it empowered to do so by the Delaware
Act or any other applicable law, indemnify and make advances for expenses to any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
is or was a Manager, officer or employee of the Company, against losses,
damages, expenses (including attorneys' fees), judgments, fines and amounts
reasonably incurred by him or her in connection with such action, suit or
proceeding.
ARTICLE 9
PERCENTAGE INTERESTS AND ADJUSTMENT
9.1 Percentage Interests. With effect from the Effective Date, the
initial respective Percentage Interests of the Members shall be as set forth
below, which interests may only be adjusted from time to time in accordance with
Article 9.2:
(a) Herbalife: 60%; and
(b) Leiner: 40%.
9.2 Adjustment of Percentage Interests. Upon the occurrence of any of
the following events (each an "Adjustment Event"), the Percentage Interests of
the Members shall be adjusted so that the Percentage Interest of each Member
shall be the percentage calculated by dividing the aggregate Capital
Contributions of such Member to the Manufacturing Division as at the time
immediately after the occurrence of the Adjustment Event by the total amount of
both Members' Capital Contributions to the Manufacturing Division as at the time
immediately after the occurrence of the Adjustment Event:
(a) Either Member's failure to make the additional Capital Contribution
to meet the cash requirements of the Manufacturing Division in proportion to its
Percentage Interest as required under Article 4.2(f);
31
(b) Either Member's failure to contribute additional capital to the
Company for the purpose of finding the capital requirements of the Manufacturing
Division and all the financial obligations of the WFOE incurred on behalf of the
Manufacturing Division in proportion to the its Percentage Interest (subject to
the Members' agreement that Leiner is only required to contribute capital to the
Company for purposes of finding the Manufacturing Division up to a maximum
amount of Five Million United States Dollars (US$5,000,000); or
(c) In the event that the Manufacturing Division is in need of
additional capital but Leiner chooses not to contribute more than its maximum
capital amount of Five Million United States Dollars (US$5,000,000) to the
Company to find the Manufacturing Division but Herbalife contributes additional
capital to the Company to fund any of such additional capital requirements of
the Manufacturing Division.
Except as provided in Articles 9.1 and 9.2, the Percentage Interests
shall not be adjusted in any other event. Herbalife and Leiner agree that that
their Capital Contributions to the Herbalife Division and Leiner Division,
respectively, shall not change their respective Percentage Interests.
9.3 Right to Terminate this Agreement and Right of Purchase.
(a) Subject to Article 4.5, whenever a Member's Percentage Interest
falls below ten percent (10%), that Member (the "Terminating Member") shall have
an option to terminate this Agreement, subject to the other Members' right of
purchase described in paragraph (b) below.
(b) The Terminating Member shall give written notice to the other
Members (the "non-terminating Members") of its intention to terminate this
Agreement if none of the other Members exercises the right to purchase the
Terminating Member's Percentage Interest within ninety (90) days after receiving
the written notice. The non-terminating Members, and each of them shall, on a
basis pro rata to their Percentage Interests or on a basis pro rata to the
Percentage Interests of those other Members exercising their right of purchase,
have the right to purchase all (but not less than all) of the Percentage
Interest of the Terminating Member by giving written notification to the
Terminating Member of their intention to do so within ninety (90) days after
receiving the written notice from the Terminating Member. The failure of the
non-terminating Members to so notify the Terminating Member of their desire to
exercise their right of purchase within said ninety (90) day period shall result
in the termination of this Agreement, the dissolution of the Company and the
WFOE.
(c) In the event that the non-terminating Members (or any one or more
of the non-terminating Members) give written notice to the Terminating Member of
their desire
32
to exercise their right to purchase all of the Terminating Member's Percentage
Interest in the Company, the purchase price shall be eighty percent (80%) of the
Terminating Member's Capital Account. The non-terminating Members shall have the
right to designate the time, date and place of closing, provided that the date
of closing shall be within six (6) months after the date of the non-terminating
Members' written notice to the Terminating Member of their desire to exercise
their right of purchase as aforesaid.
ARTICLE 10
ACCOUNTING; PROFITS AND LOSSES OF WFOE'S DIVISIONS
AND MEMBERS' FUNDING OBLIGATIONS
10.1 Divisional Accounting. In addition to the preparation of financial
statements as required by, and in accordance with, PRC laws and regulations, the
WFOE shall prepare separate calculations of the Net Profit or Net Loss for each
of the WFOE's Divisions in accordance with the provisions of Articles 6.12 and
6.13, Schedule C and any other relevant provisions of this Agreement.
10.2 Divisional Gain or Loss Upon Sale of Assets.
(a) In the event of the sale of all or part of the assets of more than
one Division, or of all or part of the assets of one or more Divisions together
with other assets of the WFOE, for purposes of determining the gain or loss of
each of the Divisions, the sales proceeds shall be allocated among the assets
sold in accordance with their relative fair market values as agreed by the
Members. If the Members cannot agree on such relative fair market values, such
determination shall be made by an independent international accounting firm at
the expense of the WFOE.
(b) In the event of the sale of any asset belonging solely to any one
of the Divisions, the gain, loss and proceeds of such sale shall be allocated to
the relevant Division to which the asset belonged.
10.3 Appraisal of the Assets of the Company and of the WFOE. In the
event that all or substantially all of the assets of the Company or of the WFOE
are to be sold under the terms of this Agreement, the price for the sale of such
assets shall be based upon the fair market value of the assets of each of the
Divisions. If the Members cannot agree on the fair market value of the assets of
each of the Divisions, such value shall be determined by an independent
international accounting firm at the expense of the WFOE.
33
ARTICLE 11
ALLOCATIONS, INCOME TAX, DISTRIBUTIONS,
ELECTIONS AND REPORTS
11.1 Allocations of Net Profit and Net Loss. The Net Profit or Net Loss
shall be allocated between the Members as follows:
(a) Herbalife Net Profit or Net Loss shall be allocated one hundred
percent (100%) to Herbalife.
(b) Leiner Net Profit or Net Loss shall be allocated one hundred
percent (100%) to Leiner.
(c) (i) Manufacturing Net Profit shall first be allocated to Herbalife
to the extent of any Manufacturing Net Loss allocated to Herbalife pursuant to
Article 11.l(c)(iii), but only if the Percentage Interests of the Members have
not been adjusted pursuant to Article 9.2 in connection with Herbalife's finding
of such Manufacturing Net Loss.
(ii) Manufacturing Net Profit or Net Loss shall next be allocated
between Herbalife and Leiner in proportion to their respective Percentage
Interests prevailing at the time of the allocation.
(iii) Notwithstanding the provisions of Article 11.1(c)(ii), no
Manufacturing Net Loss shall be allocated to Leiner to the extent such
allocation would create or increase a deficit in the "Leiner Manufacturing
Division Adjusted Capital Account". For purposes of the preceding sentence,
"Leiner Manufacturing Division Adjusted Capital Account" means the portion of
Leiner's Capital Account allocable to the Manufacturing Division, increased by
any amounts that Leiner is obligated (or deemed obligated pursuant to the
penultimate sentences of Treasury Regulations Sections l.704-2(g)(l) and
1.704-2(i)(5)) to contribute or restore to the Manufacturing Division. Any
Manufacturing Division Net Loss that is not allocated to Leiner because of the
application of this Article 11.1(c)(iii) shall be allocated to Herbalife. By way
of illustration, the Leiner Manufacturing Division Adjusted Capital Account
shall include any part of the Five Million United States Dollars (US$5,000,000)
that Leiner remains obligated to contribute to fund the Manufacturing Division
pursuant to Articles 4.1 and 4.2.
11.2 Additional Allocation Provisions. Notwithstanding the foregoing
provisions of this Article 11:
34
(a) Special Allocations.
(i) Minimum Gain Chargeback. Except as otherwise provided in
Treasury Regulation Section 1.704-2(f), and notwithstanding
any other provision of this Article 11, if there is a net
decrease in Partnership Minimum Gain during any fiscal year,
each Member shall be specially allocated items of Company
income and gain for such year (and, if necessary, subsequent
years) in an amount equal to such Member's share of the net
decrease in Partnership Minimum Gain, as determined under
Treasury Regulation Section 1.704-2(g). The items to be
allocated shall be determined in accordance with Treasury
Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This
Article 11.2(a)(i) is intended to qualify as a "minimum gain
chargeback" within the meaning of Treasury Regulation Section
1.704-2(f) and shall be interpreted consistently therewith.
(ii) Partner Minimum Gain Chargeback. Except as otherwise provided
in Treasury Regulation Section 1.704-2(i)(4), and
notwithstanding the any other provision of this Article 11, if
there is a net decrease in Partner Minimum Gain attributable
to a Partner Nonrecourse Debt during any fiscal year, each
Member who has a share of the Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in
accordance with Treasury Regulation Section 1.704-2(i)(5),
shall be specially allocated items of Company income and gain
for such year (and, if necessary, subsequent years) in an
amount equal to such Member's share of the net decrease in
Partner Minimum Gain attributable to such Partner Nonrecourse
Debt, determined in accordance with Treasury Regulation
Section 1.704-2(i)(4). The items to be so allocated shall be
determined in accordance with Treasury Regulation Sections
1.704-2(i)(4) and 1.704-2(j)(2). This Article 11 .2(a)(ii) is
intended to qualify as a "chargeback of partner nonrecourse
debt minimum gain" within the meaning of Treasury Regulation
Section 1.704-2(i) and shall be interpreted consistently
therewith.
(iii) Nonrecourse Deductions and Partner Nonrecourse Deductions. Any
Nonrecourse Deductions for any Fiscal Year shall be attributed
to the Divisions in accordance with the principles of Article
11.2(c) and allocated between the Members in the same manner
that the Net Profits of such Division are allocated under
Article 11.1. Any Partner Nonrecourse Deductions for any
Fiscal
35
Year shall be specially allocated to the Member(s) who bears
the economic risk of loss with respect to the Partner
Nonrecourse Debt to which such Partner Nonrecourse Deductions
are attributable, in accordance with Treasury Regulation
Section 1.704-2(i).
(iv) Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations or distributions
described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any other event causes
such Member to have a deficit in its Capital Account (which
for this purpose shall be increased by any amounts that such
Member is obligated, or is deemed obligated pursuant to the
penultimate sentences of Treasury Regulations Sections
1.704-2(g)(l) and 1.704-2(i)(5), to contribute or restore to
the Company and decreased by the items described in Treasury
Regulations Section 1.704-l(b)(2)(ii)(d)(4), (5) or (6)),
items of income and gain shall be specially allocated to such
Member in an amount and manner sufficient to eliminate such
deficit as quickly as possible; provided, however, that an
allocation shall be made under this Article 11.2(a)(iv) only
if and to the extent that such deficit would exist after all
other allocations provided for in this Article 11 had been
tentatively made as if this Article 11.2(a)(iv) were not in
the Agreement.
(b) Curative Allocation. The allocations set forth in Articles 11.2(a)
(the "Regulatory Allocations") are intended to comply with certain regulatory
requirements, including the requirements of Treasury Regulation Sections
1.704-1(b) and 1.704-2. Notwithstanding the provisions of Article 11.1, the
Regulatory Allocations shall be taken into account if necessary in allocating
other items of income, gain, loss and deduction among the Members so that, to
the extent possible, the net amount of such allocations of other items and the
Regulatory Allocations to each Member shall be equal to the net amount that
would have been allocated to each such Member if the Regulatory Allocations had
not occurred.
(c) Divisional Application.
(i) Nonrecourse Deductions and Partner Nonrecourse Deductions.
For purposes of making the allocations set forth in Articles 11.2(a)(iii), debt
shall first be allocated among the Divisions on the basis of the use of the
proceeds of such debt (or, if debt cannot be allocated among the Divisions on
such basis, on such other basis as the Board of Managers reasonably determines)
and the deductions attributable to such debt shall be attributed to the
corresponding Division.
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(ii) Chargebacks. For purposes of making the allocations set
forth in Articles 11.2(a)(i) and (ii), items of income or gain shall, to the
extent possible, be charged back from the same Division that produced the
corresponding Nonrecourse Deductions or Partner Nonrecourse Deductions (or, if
the income or gain cannot be charged back on such basis, on such other basis as
the Board of Managers reasonably determines).
11.3 Tax Allocations.
(a) In General. Except as otherwise provided in this Article 11.3, for
income tax purposes each item of income, gain, loss and deduction (collectively,
"Tax Items") shall be allocated among the Members in the same manner as its
correlative item of "book" income, gain, loss or deduction is allocated in
accordance with the provisions set forth in Articles 11.1 and 11.2.
(b) Allocations Respecting Section 704(c) Reevaluations. Tax Items with
respect to Company property that is contributed to the Company by a Member shall
be shared among the Members for income tax purposes pursuant to Treasury
Regulations promulgated under Section 704(c) of the Code, so as to take into
account the variation, if any, between the basis of the property to the Company
and its initial Gross Asset Value. With respect to Company property, if any,
that is initially contributed to the Company upon its formation, such variation
between basis and initial Gross Asset Value shall be taken into account using a
method chosen by the Board of Managers consistent with the Treasury Regulations.
In the event the Gross Asset Value of any Company asset is adjusted pursuant to
subparagraph (ii) of the definition of Gross Asset Value, subsequent allocations
of tax items with respect to such asset shall take account of the variation, if
any, between the adjusted basis of such asset and its Gross Asset Value in the
same manner as under Code Section 704(c) and the applicable Treasury Regulation
under the same method.
11.4 Allocations With Respect to Changes in Membership Interests. If
any Membership Interest is transferred, or is increased or decreased during any
Fiscal Year by reason of the admission of a new Member or otherwise, each item
of income, gain, loss, deduction, or credit for such Fiscal Year shall be
allocated among the Members in accordance with any method, as determined by the
Board of Managers, permitted by Code Section 706(d) and the Treasury Regulations
promulgated thereunder, in order to take into account the Members' varying
interests during such Fiscal Year.
37
11.5 Distributions. Distributions and liquidating distributions shall
be made as follows:
(a) Subject to Section 18-607 of the Delaware Act, the Board of
Managers may cause the Company to make distributions of cash or other property
at such time and in such amounts as shall be determined by the Board of
Managers. The parties agree that they shall cause the Boards to distribute any
and all of the after-tax net profits of the WFOE (after allocation to statutory
reserve fund and employee bonus and welfare funds of the WFOE) to the Members
through the Company at the end of each Fiscal Year. Except as otherwise agreed
by the parties. such distributions shall be made as follows:
(i) first, to the extent that prior distributions with
respect to such Net Profit has not been made pursuant
to this paragraph (a)(i), to the Members to the
extent of and in proportion to the aggregate amount
for all periods of Net Profit (net of the aggregate
amount of Net Loss) that has been allocated to each;
(ii) next, to the Members to the extent of and in
proportion to their positive Capital Account balances
after giving effect to any distribution under
paragraph (i) above;
(iii) finally, to the Members in proportion to their
respective Percentage Interests prevailing at the
time of the distribution.
(b) Upon liquidation of the Company, liquidating distributions shall be
made in accordance with Article 14.2 below.
(c) The Company may offset damages for breach of this Agreement by a
Member whose Membership Interest is liquidated against the amount otherwise
distributable to such Member pursuant to this Article 11.5.
(d) A Member has no right to demand and receive any distribution in a
form other than cash.
(e) All amounts required to be withheld pursuant to the Code or any
provision of any foreign, state or local tax law with respect to any
distribution or allocation to a Member may, in the sole discretion of the Board
of Managers, be treated for all purposes under this Agreement as amounts
distributed to such Member pursuant to this Article 11.5 (to be offset against
distributions that would otherwise be made to such Member).
38
11.6 Accounting Principles. The Company's financial statements shall be
prepared and its profit and loss statement shall be determined in accordance
with GAAP applied on a consistent basis using the accrual method of accounting.
11.7 Interest on and Return of Capital Contributions. No Member shall
be entitled to interest on its Capital Contribution or to a return of its
Capital Contribution.
11.8 Loans to Company. Nothing in this Agreement shall prevent any
Member from making secured or unsecured loans to the Company by agreement with
the Company.
11.9 Records and Report. At the expense of the Company, the Board of
Managers shall maintain records and accounts of the operations and expenditures
of the Company. At a minimum, the Company shall keep at its principal place of
business the following records:
(a) A current list of the full name and last known business or mailing
address of each Member and Manager;
(b) A copy of the Certificate and all amendments thereto, together with
executed copies of any powers of attorney pursuant to which any amendment has
been executed;
(c) Copies of the Company's financial statements and federal, state and
local income tax returns and reports, if any, for the three most recent years;
and
(d) Copies of the Company's currently effective written Agreement, as
amended.
11.10 Returns and Other Elections. The Tax Matters Partner (as defined
in Article 11.11) shall cause the preparation and timely filing of all tax
returns required to be filed by the Company pursuant to the Code and all other
tax returns deemed necessary and required in each jurisdiction in which the
Company does business. Copies of such returns or pertinent information therefrom
shall be furnished to the Members within a reasonable time after the end of the
Company's Fiscal Year. All elections permitted to be made by the Company under
federal or state laws shall be made by the Tax Matters Partner in its sole
discretion. In recognition of the fact that the Company expects to be treated as
a partnership for U.S. federal income tax purposes, the Members agree to treat
their Membership Interest as partnership interests for U.S. federal and state
income tax purposes and to report all Company items consistent with the
partnership information return.
39
11.11 Tax Matters Partner. Herbalife is designated the "Tax Matters
Partner" (as defined in Code Section 6231), and is authorized and required to
represent the Company (at the Company's expense) in connection with all
examinations of the Company's affairs by tax authorities, including, without
limitation, administrative and judicial proceedings, and to expend Company funds
for professional services and costs associated therewith. The Tax Matters
Partner shall exercise a duty of reasonable care in the discharge of such duties
and shall consult with the Members in connection with any material tax elections
to be made by the Tax Matters Partner for the Company. The Members agree to
cooperate with each other and to do or refrain from doing any and all things
reasonably required to conduct such proceedings.
11.12 Trapped Profits Reconciliation Payment. At the end of each of the
WFOE's fiscal years, in the event that the Distribution Division of one Member
(the "Receiving Member") has Trapped Profits (as defined below) in its
Distribution Division and the WFOE is unable to distribute the full amount of
such Trapped Profits to the Receiving Member by reason of the cumulative net
losses of the other Member's Division (the "Paying Member") at the end of such
fiscal year, then the Paying Member shall, within ten (10) days of the receipt
of a written request by the Receiving Member, make a Capital Contribution (the
"Trapped Profits Payment") to the Company, which shall immediately distribute
the amount of the Trapped Profits Payment to the Receiving Member. The Paying
Member's Capital Account shall be increased by the amount of the Trapped Profits
Payment, and the Capital Account of the Receiving Member shall be decreased by
the amount of the Trapped Profits Payment. The Receiving Member shall,
immediately upon receipt of the Trapped Profits Payment, cause its Distribution
Division to transfer cash to the Distribution Division of the Paying Member in
an amount equal to the Trapped Profits Payment. The Trapped Profits Payment
shall equal the lesser of the following amounts: (i) the Trapped Profits of the
Distribution Division of the Receiving Member, and (ii) (A) the cumulative net
losses of the Distribution Division of the Paying Member, less (B) all Trapped
Profits Payments previously paid by the Paying Member pursuant to this Article
11.12. For purposes of this Article 11.12, the term "Trapped Profits" of the
Receiving Member's Distribution Division shall equal the cumulative net profits
of such Division (after allocation to statutory reserve and employee bonus and
welfare finds of the WFOE as required under PRC law and regulations) in the
relevant fiscal year of the WFOE, reduced by the sum of (a) all prior
distributions to the Receiving Member pursuant to Article 11.5(a)(i) (including
any excess cash that is deemed to have been distributed to the Receiving Member
under Article 4.2(g) to the extent that such deemed distribution is made out of
the net profits of the Receiving Member's Distribution Division), and (b) all
Trapped Profits Payments previously made to the Receiving Member pursuant to
this Article 11.12. The parties agree that the profits and losses of the
Manufacturing Division shall be ignored for purposes of calculating the Trapped
Profits Payment under this Article 11.12, and that to the extent that the WFOE
40
has any after-tax net profits after allocation to its statutory funds, such net
profits shall be distributed first before the Trapped Profits Payment is made
pursuant to this Article 11.12.
ARTICLE 12
TRANSFER AND ASSIGNMENT OF MEMBERSHIP INTEREST
12.1 General. No Member shall Transfer any of its Membership Interest,
except in accordance with the provisions contained herein. Any Transfer pursuant
to this Article 12 shall only be effective to the extent set forth in this
Article 12. Each Member hereby acknowledges the reasonableness of the
restrictions on the Transfers of Membership Interests imposed by this Agreement
in view of the Company purposes and the relationship of the Members.
Accordingly, the restrictions on Transfers contained herein shall be
specifically enforceable. In the event that any Member pledges or otherwise
encumbers any of its Membership Interest as security for repayment of a
liability, any such pledge or hypothecation shall be made pursuant to a pledge
or hypothecation agreement that requires the pledgee or secured party to be
bound by all the terms and conditions of this Article 12; provided, however,
that if such secured party is already a Member, than such Member hereby consents
in advance to be bound by the terms hereof in respect of such pledged Membership
Interest.
12.2 Specific Provisions Governing Transfers. The following specific
provisions shall apply to any and all Transfers of Membership Interest:
(a) Transfers to Affiliates Allowed. A Member may Transfer all, but not
part, of its Membership Interest to an Affiliate at any time without the consent
of the other Members. The Members expressly agree that a Member may, pursuant to
this Article 12.2(a), Transfer its Membership Interest to an Affiliate which
subsequently offers any of such Affiliate's shares for sale in an initial public
offering of such Affiliate's shares.
(b) No Transfer in First Four (4) Years Except to Affiliates. No Member
shall Transfer any of its Membership Interest within four (4) years after the
Effective Date without the prior written consent of the other Members, except
for the Transfer of its Membership Interest to an Affiliate of the Member
pursuant to the provisions of Article 12.2(a) above.
(c) Transfers after Four (4) Years. At any time after the fifth (5th)
anniversary of the Effective Date, a Member may Transfer all or any portion of
its Membership Interest to a third party purchaser (including another existing
Member) with the prior
41
written consent of the other Members and subject to the other Members' right of
first refusal as set forth in Article 12.3.
12.3 Right of First Refusal.
(a) At any time after the fifth (5th) anniversary of the Effective
Date, a Member that desires to sell all or any portion of its Membership
Interest in the Company) (a "Selling Member") to a third party purchaser
(including another existing Member), after obtaining the prior written consent
of the other Members to such sale, shall obtain from such third party purchaser
a bona fide written offer to purchase such interest, stating the terms and
conditions upon which the purchase is to be made and the consideration offered
therefor. The Selling Member shall give written notification to the remaining
Members, by certified mail, express overnight courier or personal delivery, of
its intention to so transfer such interest, furnishing to the remaining Members
a copy of the aforesaid written offer to purchase such interest.
(b) The remaining Members, and each of them shall, on a basis pro rata
to their Percentage Interests or on a basis pro rata to the Percentage Interests
of those remaining Members exercising their right of first refusal, have the
right to exercise a right of first refusal to purchase all (but not less than
all) of the interest proposed to be sold by the Selling Member upon the same
terms and conditions as stated in the aforesaid written offer to purchase by
giving written notification to the Selling Member of their intention to do so
within thirty (30) days after receiving written notice from the Selling Member.
The failure of all the remaining Members (or any one or more of them) to so
notify the Selling Member of their desire to exercise this right of first
refusal within said thirty (30) day period shall result in the termination of
the right of first refusal and the Selling Member shall be entitled to
consummate the sale of its interest in the Company, or such portion of its
interest, if any, with respect to which the right of first refusal has not been
exercised, to such third party purchaser.
(c) In the event the remaining Members (or any one or more of the
remaining Members) give written notice to the Selling Member of their desire to
exercise this right of first refusal and to purchase all of the Selling Member's
interest in the Company which the Selling Member desires to sell upon the same
terms and conditions as are stated in the aforesaid written offer to purchase,
the remaining Members shall have the right to designate the time, date and place
of closing, provided that the date of closing shall be within ninety (90) days
after receipt of written notification from the Selling Member of the third party
offer to purchase.
(d) In the event of either the purchase of the Selling Member's
Membership Interest a third party purchaser or the gift of an Membership
Interest, and as a condition to recognizing one or more of the effectiveness and
binding nature of any such Transfer
42
and substitution of a new Member as against the Company or otherwise, the
remaining Members may require the Selling Member or gifting Member and the
proposed purchaser, donee or successor-in-interest, as the case may be to
execute, acknowledge and deliver to the remaining Members such instruments of
transfer, assignment and assumption and such other certificates, representations
and documents, and to perform all such other acts which the remaining Members
may deem necessary or desirable to:
(i) constitute such purchaser, as an Member;
(ii) confirm that the person desiring to be admitted as a
Member, has accepted, assumed and agreed to be subject to and bound by all of
the terms, obligations and conditions of this Agreement, as the same may have
been further amended;
(iii) preserve the Company after the completion of such sale,
transfer, assignment, or substitution under the laws of each jurisdiction in
which the Company is qualified, organized or does business;
(iv) maintain the status of the Company as a partnership for
federal tax purposes; and
(v) assure compliance with any applicable state and federal
laws including securities laws and regulations.
(e) Any Transfer of a Membership Interest or admission of a Member in
compliance with this Article 12 shall be deemed effective as of the last day of
the calendar month in which the remaining Members' consent thereto was given,
or, if no such consent was required pursuant to Article 12.3(f), then on such
date that the donee or successor in interest complies with Article 12.3(d). The
Selling Member agrees, upon request of the remaining Members, to execute such
certificates or other documents and perform such other acts as may be reasonably
requested by the remaining Members from time to time in connection with such
sale, transfer, assignment, or substitution. The Selling Member hereby
indemnifies the Company and the remaining Members against any and all loss,
damage, or expense (including, without limitation, tax liabilities or loss of
tax benefits) arising directly or indirectly as a result of any transfer or
purported transfer in violation of this Article 12.
(f) A gifting Member may gift all or any portion of its Membership
Interest (without regard to Articles 12.3(a) and 12.3(b)), provided, however,
that the donee or other successor-in-interest (collectively, "donee") complies
with Article 12.3(d) and further provided that the donee is either the gifting
Member's spouse, former spouse, or lineal descendent (including adopted
children). In the event of the gift of all or any portion of a gifting Member's
Membership Interest to one or more donees who are under
43
25 years of age, one or more trusts shall be established to hold the gifted
interest(s) for the benefit of such donee(s) until all of the donee(s) reach the
age of at least 25 years.
12.4 Further Requirements on Transfer. Notwithstanding that a Transfer
is otherwise permitted under this Article 12, no Member shall Transfer any of
its or his Membership Interest: (i) without registration under applicable
federal and state securities laws, or unless it or he delivers an opinion of
counsel satisfactory to the other Members that registration under such laws is
not required; (ii) if the Membership Interest subject to the Transfer, when
added to the total of all other Membership Interests subject to sales or gifts
in the preceding twelve (12) consecutive months prior thereto, would result in
the termination of the Company under Section 708 of the Code; (iii) without any
proposed transferee or donee agreeing to be bound by this Agreement; (iv)
without the proposed transferee or donee making all representations and
delivering all such certificates, evidences or assurances reasonably requested
by the other Members; and (v) without the proposed transferee or donee paying
any reasonable expenses in connection with its admission as a Member.
12.5 Effectiveness of Transfer. Any Transfer of any of a Member's
Membership Interest in the Company will take effect on the first day following
receipt by the Members of written notice that all of the requirements of Article
12 have been met.
ARTICLE 13
NEW MEMBERS
13.1 Restrictions on Admission of New Members. The Company shall not
issue any additional Membership Interests to any Person other than Herbalife,
Leiner, or a permitted transferee of an existing Membership Interest in
accordance with Article 12, subject to the terms and conditions of this
Agreement. For the purpose of this Article 13, a "new Member" shall mean a
permitted transferee of an existing Membership Interest in accordance with
Article 12 which is admitted as a Member of the Company.
13.2 Allocations to New Members. No new Members shall be entitled to
any retroactive allocation of any item of income, gain, loss, deduction or
credit of the Company. The Board of Managers may, at its option, at the time a
Member is admitted, close the Company books (as though the Company's Fiscal Year
has ended) or make pro rata allocations of items of income, gain, loss,
deduction or credit to a new Member for that portion of the Company's Fiscal
Year in which the new Member was admitted, in accordance with the provisions of
Code Section 706(d) and the Treasury Regulations promulgated thereunder.
44
13.3 Agreement to be Bound by this Agreement. All new Members shall be
required to execute, acknowledge and deliver to the other Members such
certificates, representations and documents, and to perform all other acts which
the Board of Managers may deem necessary or desirable to confirm that such new
Members have accepted, assumed and agreed to be subject to and bound by all of
the terms, obligations and conditions of this Agreement, as the same may have
been further amended.
ARTICLE 14
TERMINATION AND DISSOLUTION
14.1 Dissolution.
(a) The Company shall be dissolved upon the occurrence of any of the
following events:
(i) the expiration of the period fixed for the duration
of the Company pursuant to Article 3.6;
(ii) the entry of a decree of judicial dissolution under
Section 18-802 of the Delaware Act;
(iii) the decision by the Board of Managers to dissolve the
Company;
(iv) the expiration of at least one (1) year's prior
written notice given by either Member exercising its
right to terminate this Agreement to the other Member
at any time after the fifth (5th) anniversary of the
Effective Date;
(v) at each ten-year anniversary of the Effective Date,
upon the expiration of at least one (1) year's prior
written notice given by either Member exercising its
right to terminate this Agreement to the other
Member; or
(vi) upon the exercise of a Member's option to terminate
this Agreement whenever that Member's Percentage
Interest falls below ten percent (10%) and the
non-terminating Member does not or fails to exercise
its right of purchase in accordance with Article 9.3.
(b) Dissolution of the Company shall be effective on the day the
Company's duration expires or as determined by the Board of Managers, as the
case may be, but the Company shall not terminate until the certificate of
cancellation shall be filed with the
45
Secretary of State of the State of Delaware and the assets of the Company are
distributed as provided in Article 14.2 below. Notwithstanding the dissolution
of the Company, prior to the termination of the Company, the business of the
Company and the affairs of the Members shall continue to be governed by this
Agreement.
14.2 Winding Up, Liquidation and Distribution of Assets.
(a) Upon dissolution, the Board of Managers may wind up the Company's
affairs provided that the Board of Managers has not wrongfully dissolved the
Company, but the Court of Chancery, upon cause shown, may wind up the Company's
affairs upon application of any Member or his legal representative, and in
connection therewith, may appoint a liquidating trustee.
(b) Upon dissolution, an accounting shall be made of the Company's
assets, liabilities and operations, from the date of the last previous
accounting until the date of dissolution. The Board of Managers shall
immediately proceed to wind up the affairs of the Company.
(c) If the Company is dissolved and its affairs are to be wound up, the
Board of Managers shall cause the WFOE (unless the WFOE is sold or otherwise
transferred by the Company) to liquidate in accordance with the provisions of
PRC law and its Articles of Association, cause the Board of Directors to serve
on the WFOE's liquidation committee, and shall:
(i) Sell or otherwise liquidate all of the Company's
assets and the WFOE's assets as promptly as
practicable, giving priority to the extent possible
under law, to Herbalife to purchase the assets of the
Herbalife Division and to Leiner to purchase the
assets of the Leiner Division;
(ii) Determine and allocate any Net Profit or Net Loss
resulting from such sales to the Members' Capital
Accounts in accordance with Articles 10.1, 10.2 and
11;
(iii) Discharge all liabilities of the Company, including
liabilities to Members who are creditors of the
Company to the extent permitted by law, excluding
liabilities for distributions to Members under
Article 11.5; and
(iv) Distribute the remaining assets to Members in
accordance with the positive balance (if any) of each
Member's Capital Account (as determined after taking
into account all Capital Account
46
adjustments for the Company's taxable year during
which the liquidation occurs), giving priority to the
extent possible under law, to Herbalife in respect of
the assets of the Herbalife Division and to Leiner in
respect of the assets of the Leiner Division. Any
such distributions to the Members in respect of their
Capital Accounts shall be made within the time
specified in Section 1.704-l(b)(2)(ii)(b)(2) of the
Treasury Regulations.
(d) Upon completion of the winding up, liquidation and distribution of
the assets of the Company, the Company shall be deemed terminated.
(e) The Board of Managers shall comply with all requirements of
applicable law pertaining to the winding up of the affairs of the Company and
the final distribution of its assets.
14.3 Certificate of Cancellation. When all debts, liabilities and
obligations of the Company have been paid and discharged or adequate provisions
have been made therefor and all of the remaining property and assets of the
Company have been distributed, a certificate of cancellation shall be executed
by one or more authorized persons, which certificate shall set forth the
information required by the Delaware Act. A certificate of cancellation shall be
filed with the Secretary of State of the State of Delaware to accomplish the
cancellation of the Certificate of the Company upon the dissolution and
completion of the winding up of the Company.
14.4 Effect of Filing of Certificate of Cancellation. Upon the filing
of the certificate of cancellation with the Secretary of State of the State of
Delaware, the existence of the Company shall cease, except for the purpose of
suits, other proceedings and appropriate action as provided in the Delaware Act.
The Board of Managers shall have authority to distribute any Company property
discovered after dissolution, convey real estate and take such other action as
may be necessary on behalf of and in the name of the Company.
14.5 Return of Contribution Nonrecourse to Other Members. Except as
provided by law or as expressly provided in this Agreement, upon dissolution,
each Member shall look solely to the assets of the Company for the return of its
Capital Contribution. If the property remaining after the payment or discharge
of the debts and liabilities of the Company is insufficient to return the cash
contribution of one or more Members, such Member or Members shall have no
recourse against any other Member, except as otherwise provided by law.
47
ARTICLE 15
COMPLIANCE WITH LEGAL REQUIREMENTS
15.1 Compliance with Applicable Laws. In the exercise of their respective
rights, and the performance of their respective obligations, under this
Agreement, each party hereto shall comply strictly, and shall utilize its best
efforts to cause the Company, the WFOE, each of its Affiliates, each Manager and
each Director to comply strictly, with all applicable laws, regulations and
governmental orders of the United States, the PRC and their respective political
subdivisions.
15.2 Compliance with United States Export Controls. The parties hereto
shall cause the Company and the WFOE to comply with all applicable United States
export control laws and regulations, including but not limited to, the Export
Administration Regulations, 15 C.F.R. Parts 730-774, and the export control laws
and regulations of the PRC. In furtherance of the parties' respective
obligations under this Article 15.2, neither party hereto shall cause or permit
the Company or the WFOE to export any commodities, software or technology, or
any direct product of such software or technology, from the United States or the
PRC, as the case may be, to any other country except as authorized under the
United States' and the PRC's export control laws and regulations. The parties'
obligations under this Article 15.2 shall survive the termination of this
Agreement for any reason whatsoever. Each party hereto shall have the right to
inspect all export and shipping records of the Company and the WFOE at any time
during the continuance of this Agreement, upon reasonable written notice to the
Company or the WFOE, as the case may be, to confirm compliance by the Company or
the WFOE, as the case may be, with all applicable United States and PRC export
control laws and regulations.
15.3 Compliance with Foreign Corrupt Practices Act. Each party hereto
acknowledges that the Company, as a limited liability company organized and
existing under the laws of the State of Delaware, U.S.A., is subject to the
provisions of the United States Foreign Corrupt Practices Act, 15 U.S.C. Section
78dd-l et seq. (the "FCPA"), which prohibits any United States person, firm,
corporation or other entity from paying, giving, or offering to pay or give any
money or any other thing of value to any foreign official, foreign political
party, or candidate for foreign political office for the purpose of obtaining or
retaining any business, or to secure any other unfair advantage. The parties
hereto shall therefore cause the Company, the WFOE, each Manager, each Director,
and each officer, employee and agent of the Company and the WFOE to comply with
all requirements of the FCPA, and each party hereby represents and warrants that
it has not, and will not, take or cause or permit to be taken any action which
would violate any provision of the FCPA, in connection with the performance of
this Agreement, any of the agreements attached as Schedules hereto, or any of
the transactions contemplated herein or therein.
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ARTICLE 16
MISCELLANEOUS PROVISIONS
16.1 Notices. Any notice, demand or communication required or permitted to
be given by any provision of this Agreement shall be in writing and shall be
addressed to each Member at the addresses shown in SCHEDULE A, and/or to the
Company at its principal office or to such other address as a party may from
time to time designate by notice to the other parties. Unless specifically
provided otherwise in this Agreement, any such notice, demand or communication
may be given personally, by mail, by facsimile or by express overnight courier.
If notice is given by mail, such notice shall be deemed to have been given when
actually received. If notice is given by facsimile, such notice shall be deemed
to be delivered when the facsimile is transmitted over the telephone lines, as
confirmed by the transmitting machine. If notice is given by express overnight
courier, such notice shall be deemed to be delivered when received at the
addressee's business or residence address, as confirmed by the courier service
tracking records.
16.2 Application of Delaware Law. This Agreement and its interpretation
shall be subject to and is governed exclusively by its terms and by the laws of
the State of Delaware, without regard to its conflicts of laws rules, and
specifically the Delaware Act and the Certificate. In the event of a direct
conflict between the provisions of this Agreement and the provisions of the
Delaware Act or the Certificate, such provisions of the Delaware Act or the
Certificate, as the case may be, will be controlling.
16.3 Dispute Resolution. Any dispute, controversy or claim arising out of
or relating to this Agreement shall be finally and exclusively resolved by
submission to a single arbitrator in accordance with the arbitration rules of
the American Arbitration Association in Los Angeles, California. The prevailing
party shall be entitled to reasonable attorneys' fees and costs. The arbitrator
shall set a limited time period and establish procedures designed to reduce the
cost and time for discovery while allowing the parties an opportunity, adequate
in the sole judgment of the arbitrator, to discover relevant information from
the opposing parties about the subject matter of the dispute. The arbitrator
shall rule on motions to compel or limit discovery and shall have the authority
to impose sanctions, including attorneys' fees and costs, to the same extent as
a court of competent law or equity, should the arbitrator determine that the
discovery was refused or objected to without substantial justification. The
arbitrator shall have the authority to grant any equitable and legal remedies
that would be available in any judicial proceeding instituted under California
substantive law to resolve a dispute.
16.4 Waiver of Action for Partition. Each Member irrevocably waives during
the term of the Company any right that it may have to maintain any action for
partition with respect to the property of the Company.
49
16.5 Entire Agreement and Amendments. This Agreement and the Subscription
Agreement, together with the Schedules attached hereto and the Exhibits attached
to the Subscription Agreement and all other agreements referred to herein and in
the Subscription Agreement, set forth the entire agreement between the parties
relating to the subject matter hereof and supersede all prior agreements,
understandings and communications, whether oral or written. This Agreement may
not be amended or modified except by a writing signed by all of the Members
owning Membership Interests at the relevant time and with the approval of at
least two-thirds of the Managers then in office.
16.6 Execution of Additional Instruments. Each Member hereby agrees to
execute such other and further statements of interest and holdings,
designations, powers of attorney and other instruments necessary to comply with
any laws, rules or regulations.
16.7 Waivers. The failure of any party to seek redress for violation of or
to insist upon the strict performance of any covenant or condition of this
Agreement shall not prevent a subsequent act, which would have originally
constituted a violation, from having the effect of an original violation.
16.8 Rights and Remedies Cumulative. The rights and remedies provided by
this Agreement are cumulative and the use of any one right or remedy by any
party shall not preclude or waive the right to use any or all other remedy. Said
rights and remedies are given in addition to any other rights the parties may
have by law, statute, ordinance or otherwise.
16.9 Severability. If any provision of this Agreement or the application
thereof to any person or circumstance shall be invalid, illegal or unenforceable
to any extent, the remainder of this Agreement and the application thereof shall
not be affected and shall be enforceable to the fullest extent permitted by law.
16.10 Binding Effect. Each and all of the covenants, terms, provisions and
agreements herein contained shall be binding upon and inure to the benefit of
the parties hereto and, to the extent permitted by this Agreement, their
respective heirs, legal representatives, successors and assigns.
16.11 Creditors. None of the provisions of this Agreement shall be for the
benefit of or enforceable by any creditors of the Company.
16.12 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same instrument.
50
16.13 Investment Representations. The undersigned Members understand (1)
that the Membership Interests issued pursuant to this Agreement have not been
registered under the Securities Act of 1933 or any state securities laws (the
"Securities Acts") because the Company is issuing these Membership Interests in
reliance upon the exemptions from the registrations requirements of the
Securities Acts providing for issuance of securities not involving a public
offering, (2) that the Company has relied upon the fact that the Membership
Interests are to be held by each Member for investment, and (3) that exemption
from registrations under the Securities Acts would not be available if the
Membership Interests were acquired by a Member with a view to distribution.
Accordingly, each Member hereby confirms to the Company that such Member
is acquiring a Membership Interest for such own Member's account, for investment
and not with a view to the resale or distribution thereof without complying with
an exemption for registration under the Securities Acts. Each Member agrees not
to transfer, sell or offer for sale any of portion of the Membership Interest
unless there is an effective registration or other qualification relating
thereto under the Securities Acts or unless the holder of the Membership
Interest delivers to the Company an opinion of counsel, satisfactory to the
Company, that such registration or other qualification under such Securities
Acts is not required in connection with such transfer, offer or sale. Each
Member understands that the Company is under no obligation to register the
Membership Interests or to assist such Member in complying with any exemption
from registration under the Securities Acts if such Member should at a later
date wish to dispose of the Membership Interest.
Prior to acquiring a Membership Interest, each Member has made an
investigation of the Company and its business and the Company has made available
to each such Member all information with respect thereto which such Member
needed to make an informed decision to acquire a Membership Interest. Each
Member considers himself to be a person possessing experience and sophistication
as an investor which are adequate for the evaluation of the merits and risks of
such Member's investment in a Membership Interest.
16.14 Confidentiality. Except as contemplated hereby or required by a
court of competent authority, each Member shall keep confidential for a period
of five (5) years and shall not disclose to others and shall use its reasonable
efforts to prevent its Affiliates and any of its, or its Affiliates', present or
former employees, agents, and representatives from disclosing to others without
the prior written consent of the Members any information which (1) pertains to
this Agreement, any negotiations pertaining thereto, any of the transactions
contemplated hereby, or the business of the Company, or (2) pertains to
confidential or proprietary information of any Member or the Company or which
any Member has labeled in writing as confidential or proprietary; provided that
any Member may disclose to its Affiliates' employees, agents, and
representatives any
51
information made available to such Member. No Member shall use, and each Member
shall use its best efforts to prevent any Affiliate of such Member from using,
any information which (1) pertains to this Agreement, any negotiations
pertaining hereto, any of the transactions contemplated hereby, or the business
of the Company, or (2) pertains to the confidential or proprietary information
of any Member or the Company or which any Member has labeled in writing as
confidential or proprietary, except in connection with the transactions
contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have caused their signatures, or
the signatures of their duly authorized representatives, to be set forth below
as of the day and year first above written.
MEMBERS:
HERBALIFE INTERNATIONAL, INC. LEINER HEALTH PRODUCTS, INC.
By: /s/ Christopher Pair By: /s/ Gale K. Benscessen
---------------------------- ----------------------------------
Name: Name: Gale K. Benscessen
Title: Title: President
52
SCHEDULE A
MEMBERS AND EACH MEMBER'S INITIAL CAPITAL CONTRIBUTIONS
Amount of Initial
Member Capital Contribution
------ --------------------
Herbalife International, Inc. US$507,000
1800 Century Park East, 15th Floor
Los Angeles, CA 90067-1501
Facsimile No.: (310) 557-3915
Attention: Christopher Pair
Leiner Health Products, Inc. US$505,770
901 East 233rd Street
Carson, CA 90745-6204
Facsimile No.: (310) 952-7763
Attention: Gale Bensussen
SCHEDULE B
INITIAL ANNUAL DIVISIONAL OPERATING PLANS
TO BE COMPLETED AND INSERTED UPON MUTUAL AGREEMENT OF THE PARTIES.
SCHEDULE C
FINANCIAL OPERATING POLICIES AND PROCEDURES
Table of Contents
I. Cost Allocation Provisions
A. Definition of Costs
B. Allocation of Costs
C. Timing of Cost Allocations
D. Allocation Approval
Cost Allocation Matrix
II. Profit and Loss Allocation of the WFOE and the Company
A. Allocation Methodology
B. Timing of Profit and Loss Allocations
C. Allocation Approval
III. Budgets, Books and Records and Reporting Process
A. Budgets
B. Books and Records; Financial Close and Reporting Process
Operating Budgets and Financial Close and Reporting Process Matrix
FINANCIAL OPERATING POLICIES AND PROCEDURES
I. COST ALLOCATION PROVISIONS
A. Definition of Costs
Division Costs
Herbalife Division Costs. The Herbalife Division Costs shall consist of
all costs and expenses incurred by the Herbalife Division's operation plus
Excess Fixed Costs of the Manufacturing Division allocated to Herbalife.
Leiner Division Costs. The Leiner Division Costs shall consist of all
costs and expenses incurred by the Leiner Division's operation plus Excess Fixed
Costs of the Manufacturing Division allocated to Leiner.
Manufacturing Division Costs. The Manufacturing Division Costs shall
consist of (i) all costs incurred by the Manufacturing Division's operation,
(ii) salary of the General Manager of the WFOE, and (iii) WFOE Corporate
Expenses less Excess Fixed Costs of the Manufacturing Division.
WFOE Costs
WFOE Costs shall be defined as consisting of: (i) identifiable Divisional
costs, or costs clearly identifiable and attributable to a particular Division
yet invoiced to the WFOE ("Identifiable Divisional Costs"); (ii) salary of the
General Manager of the WFOE, which shall be One United States Dollar (US$1.00)
per year; (iii) WFOE Corporate Expenses, which is defined to include all costs
and expenses incurred at the WFOE level which do not fall within items (i),
(ii), (iv), (v), (vi) and (vii) in this paragraph, for example, general office
and administrative costs, travel, legal, accounting, consulting and other
outside services, Board of Directors expenses, business licenses, and costs of
the departments and personnel of the WFOE which provide business services to the
Divisions; (iv) allocations to the reserve fund and employee bonus and welfare
funds of the WFOE ("Allocation to WFOE Funds"); (v) income taxes of the WFOE
("WFOE Income Taxes"); (vi) interest expense of the WFOE ("WFOE Interest
Expenses"); and (vii) foreign exchange net gains or losses.
Company Costs
Company Costs shall consist of any and all costs incurred at the Company
level other than interest expense of the Company ("Company Interest Expense"),
which shall be referred to as Company Corporate Expenses. Company Corporate
Expenses shall
56
include, but not be limited to: general office and administrative costs, travel,
legal, accounting, consulting and other outside services, Board of Managers
expenses, and taxes other than partnership income taxes.
B. Allocation of Costs
Divisional Cost Allocations
Herbalife Division. The Herbalife Division shall be responsible for all
Herbalife Division Costs.
Leiner Division. The Leiner Division shall be responsible for all Leiner
Division Costs.
Manufacturing Division. The Manufacturing Division shall charge the
Herbalife Division, the Leiner Division and any and all third parties for which
the Manufacturing Division produces products, a price for each product
manufactured by the Manufacturing Division.
With respect to the products manufactured by the Manufacturing Division
for either the Herbalife Division or the Leiner Division (each is sometimes
referred to as the "purchaser" or "purchasing division" below), the
Manufacturing Division shall charge a Transfer Price for each such product that
yields a twenty percent (20%) Gross Margin on the Transfer Price from the sale
of the product by the Manufacturing Division. The Gross Margin earned by the
Manufacturing Division shall be allocated (i) sixty percent (60%) to Herbalife
and (ii) forty percent (40%) to Leiner, subject to any adjustment in Percentage
Interests pursuant to Article 9.2 of the Limited Liability Company Agreement for
Herbalife Leiner LLC (the "Agreement"). The Excess Fixed Costs of the
Manufacturing Division shall be allocated initially (i) sixty-five percent (65%)
to Herbalife and (ii) thirty-five percent (35%) to Leiner, and shall be adjusted
from time to time in proportion to any adjustment in the Percentage Interests
pursuant to Article 9.2 of the Agreement (i.e., the allocation percentages shall
be adjusted with the same percentage change as that of the Percentage
Interests).
In the above paragraph:
"Transfer Price" shall be the sum of (i) Direct Costs and Variable
Factory Overhead collectively divided by .80, plus (ii) Allocated
Depreciation.
"Gross Margin" shall mean Transfer Price minus Manufacturing Costs.
57
"Depreciation" shall mean the current year estimated depreciation
and amortization for the Manufacturing Division.
"Allocated Depreciation" shall mean an amount calculated by applying
the Factor to the Depreciation.
"Factor" shall be the percentage derived by dividing the current
year estimated Direct Costs, as determined from the annual operating
budget, to the Direct Costs estimated for the fifth (5th) year of
production, as determined in the first five year plan established by
the Manufacturing Division, provided that 100% of Fixed Factory
Costs is allocated to Manufacturing Costs in the fifth (5th) year of
production.
"Manufacturing Costs" shall mean all of the Direct Costs plus an
amount equal to the Variable Factory Overhead plus Allocated
Depreciation.
"Direct Costs" shall mean all variable costs included in or
associated with the manufacturing of the product(s), including but
not limited to, raw materials, direct labor, packaging components,
labels, supplies consumed in manufacturing, cartons and containers,
quality assurance testing, etc.
"Variable Factory Overhead" shall be an amount calculated by
applying the Factor to the current year estimated Fixed Factory
Overhead.
"Fixed Factory Costs", sometimes referred to herein as "Fixed
Costs", shall mean the cash costs and expenses of the Manufacturing
Division not directly charged to the manufacturing of a product and
reasonably required to operate and maintain the Manufacturing
Division, which shall include general and administrative costs,
license fees and royalties for technology or service utilized by the
Manufacturing Division, all Company Costs, and all WFOE Costs
excluding those that are specifically allocated to either of the
Distribution Divisions pursuant to the section "WFOE Cost
Allocations" below. In interpreting this provision, the parties
agree that all costs and expenses that are not Direct Costs or have
not been specifically allocated to one of the Distribution Divisions
shall be treated as Fixed Factory Costs and no items shall be
double-counted.
58
Depreciation shall not be deducted in determining the Fixed Factory
Costs.
"Fixed Factory Overhead" shall mean Fixed Factory Costs minus
Depreciation.
"Excess Fixed Costs of the Manufacturing Division" shall mean the
Fixed Factory Overhead remaining after deducting the amount charged
to the Transfer Price as Variable Factory Overhead, defined as
"Excess Fixed Costs", plus "Excess Depreciation", defined as
Depreciation less Allocated Depreciation.
The Manufacturing Division shall invoice the purchaser of products
immediately upon completion of the manufacturing process and quality
assurance-approval. The purchasing division will pay for the products
immediately upon receipt of the invoice from the Manufacturing Division. The
"title" to and "ownership" of the products will pass to the purchaser upon
payment of the corresponding invoice.
The following is an illustration of the calculation of Gross Margin and
the allocation of the costs, profits and losses of the Manufacturing Division:
MANUFACTURING DIVISION: ALLOCATION OF COSTS, PROFITS LOSSES
(FOR ILLUSTRATION PURPOSES ONLY. AMOUNTS DO NOT REFLECT ESTIMATES OR FORECASTS.)
MANUFACTURING DIVISION P&L HERBALIFE ALLOCATION LEINER ALLOCATION
SHARE % SHARE %
Transfer Price 100 100%
Manufacturing Cost:
Direct Cost 62 62%
(1) Variable Factory Overhead Absorbed 12 12%
(2) Allocated Depreciation 8 8%
--------------
Total Manufacturing Cost 82 82%
--------------
Gross Margin 18 18% $ 11 60%* $ 7 40%*
(3) Excess Fixed Costs (18) -18% (12) 65%** (6) 35%**
(4) Excess Depreciation (12) -12% (8) 65%** (4) 35%**
--------------
Operating Income $ (12) -12%
==============
* Subject to any adjustment of Percentage Interests
** Subject to adjustment in proportion to any adjustment of Percentage
Interests
59
ALLOCATION OF FIXED COST OVERHEAD:
Fixed Costs $ 50
Less: Depreciation 20
----
Fixed Factory Overhead 30
Factor 39% Current year % of year 5 direct
costs used to allocate net
fixed cost overhead to
manufacturing cost calculation.
(1) Variable Factory Overhead 12
----
(3) Excess Fixed Costs 18
====
ALLOCATION OF DEPRECIATION:
Annual Depreciation $ 20
Factor 39% Current year % of year 5 direct
costs used to allocate net
fixed cost overhead to
manufacturing cost calculation.
(2) Allocation to Manufacturing Cost 8 Year 5 to have 100% net fixed
---- cost overhead absorbed in
manufacturing cost calculation.
(4) Excess Depreciation 12 Depreciation portion allocated
==== to manufacturing cost is
not marked up for a Gross
Margin of 20%.
FACTOR: Year 1 Year 2 Year 3 Year 4 Year 5
------ ------ ------ ------ ------
Projected Annual Direct Costs $ 19 $ 41 $ 62 $ 105 $ 162
Current Year % of Year 5 12% 25% 39% 65% 100%
With respect to semi-processed materials manufactured by the Manufacturing
Division for either Member, any Affiliate of either Member or any other third
parties, the Manufacturing Division shall charge a minimum price calculated as a
mark-up on the Direct Costs relating to the manufacturing of the semi-processed
materials in accordance with, and as more particularly provided in Schedule D to
the Agreement.
WFOE Cost Allocations
The WFOE Costs as defined herein shall be allocated in the following manner:
Identifiable Division Costs. The WFOE shall allocate to each Division all
specifically attributable divisional costs as appropriate. The WFOE shall
request all vendors, as appropriate and where possible, to allocate invoice
charges to the appropriate Divisions to ensure proper identification and
allocation of costs.
Salary of the General Manager of the WFOE shall be US$1.00 per year and
shall be allocated, as part of Fixed Factory Costs, to the Manufacturing
Division.
WFOE Corporate Expenses. The WFOE shall allocate all WFOE Corporate
Expenses as part of Fixed Factory Costs, to the Manufacturing Division.
Allocation to WFOE Funds. In any year for which the Board of Directors of
the WFOE makes allocations to the reserve fund and employee bonus and welfare
funds of the WFOE from the WFOE's after-tax net profits as required by PRC law
and regulations, the allocations so made to such funds shall be apportioned
among the Division(s) in proportion to the ratio which the net
60
profits of that Division bears to the WFOE's consolidated net profits after tax.
If at any time any amount that has been allocated to any of the WFOE reserve or
employee bonus or welfare fund is to be returned or released as not being
required for its intended usage, such amount shall be returned to each Division
in the same proportion as the aggregate contributions made by such Division to
such fund(s) bears to the aggregate contributions made by all Divisions to such
fund(s).
WFOE Income Taxes. In any year for which the WFOE incurs income tax
liability to the PRC, any political subdivision thereof, and/or any other taxing
authority within the PRC having jurisdiction over the WFOE with respect to
income taxes, the income taxes so paid and/or accrued by the WFOE shall be
apportioned among the Division(s) in accordance with the ratio which that
portion of the WFOE's taxable income attributable to each Division having
taxable income bears to the WFOE's taxable income. In no event shall any income
tax expense be allocated to a Division prior to the tax year after the last tax
year of the WFOE's PRC 100% income tax holiday.
WFOE Interest Expense. The WFOE shall allocate interest expense incurred
on indebtedness held at the WFOE level to the Divisions. Debt held at the WFOE
level may originate from third party lenders or via intercompany borrowings from
the Company. Interest expense on indebtedness as incurred by the WFOE regardless
of funding source will be allocated to each Division based upon the actual
interest expense incurred by the WFOE multiplied by the percentage of total debt
funding of the WFOE which was incurred for the benefit of such Division(s).
Foreign Exchange Net Gains or Losses. The WFOE shall allocate Foreign
Exchange Net Gains or Losses to the appropriate Division(s) as agreed by the
parties.
Company Level Cost Allocations
Company Corporate Expenses. Company Costs, herein defined and referred to
as Company Corporate Expenses, shall be allocated, as part of Fixed Factory
Overhead, to the Manufacturing Division.
Company Interest Expense. The Company shall allocate interest expense
incurred on the indebtedness held at the Company level to the Divisions which
utilized the indebtedness. Debt held at the Company level may originate from
third party lenders or the Members. Interest expense on indebtedness as incurred
by the Company regardless of funding source will be allocated to each Division
based upon the actual interest expense incurred by the Company multiplied by the
percentage of total debt funding of the Company which was incurred for the
benefit of such Division(s).
61
C. Timing of Cost Allocations
The Manufacturing Division, WFOE, and Company Cost Allocations shall be
allocated to the Divisions as described above at the conclusion of each monthly
fiscal period.
D. Allocation Approval
The Board of Directors shall approve the cost allocations for each of the
Divisions, the WFOE and the Company in accordance with the provisions of the
Agreement and this Schedule C.
II. PROFIT AND LOSS ALLOCATION OF THE WFOE AND THE COMPANY
A. Allocation Methodology
1. The Net Profit and Net Loss of the Divisions shall be allocated to
the Members' Capital Accounts in accordance with Article 11 of the
Agreement.
2. Any interest income of the Company or the WFOE shall be allocated to
the relevant Division(s) to the extent that such interest income is
generated from funds for the use of such Division(s). To the extent
that the funds that generated such income is not clearly
identifiable as belonging to a particular Division or is not
specifically attributable to a particular Division, then the
interest income generated from such funds of the Company or the WFOE
shall be allocated as part of the Company and WFOE Income as
provided in paragraph 3 below.
3. Company and WFOE Income, which is defined herein as any income of
the Company or the WFOE not specifically assigned under this
Schedule C or any provision in the Agreement to any of the
Divisions, shall be allocated equitably to the Members as the Board
of Managers shall determine. The Board of Managers shall, to the
extent possible, make the allocation based on the economic interests
of the Members in such income.
B. Timing of Profit and Loss Allocations
The Net Profit and Net Loss of the Divisions shall be allocated as
aforesaid at the conclusion of each monthly fiscal period.
62
C. Allocation Approval
The Board of Directors shall approve the profit and loss allocations for
each of the Divisions in accordance with the provisions of the Agreement and
this Schedule C.
III. BUDGETS, BOOKS AND RECORDS AND REPORTING PROCESS
A. Budgets
1. Manufacturing Division. The Deputy General Manager of the Manufacturing
Division shall prepare and submit to the Board of Directors an annual operating
plan ("AOP") for the Manufacturing Division at least 60 days prior to the
commencement of each new fiscal year of the WFOE. The Deputy General Manager of
the Manufacturing Division shall consult with Herbalife, Leiner and the WFOE
Chief Accountant in preparing each AOP. Such AOP shall be in sufficient detail
to provide an estimate of cash flows, capital requirements and other financial
requirements of the Manufacturing Division for the upcoming year. Such AOP shall
also include other information as may be necessary to enable the Board of
Directors to make an informed decision with respect to approval of such AOP.
In connection with preparation of the AOP for the Manufacturing Division,
the Deputy General Manager of the Manufacturing Division shall prepare and
submit to the Board of Directors a rolling four-year capital plan ("Capital
Plan"). Such Capital Plan shall set forth the projected fixed capital and
working capital expenditures for each of the next four years. The Deputy General
Manager of the Manufacturing Division shall consult with the Chief Accountant of
the WFOE, Leiner and Herbalife in preparing such Capital Plan. The Capital Plan
shall include such other information as may be necessary to enable the Board of
Directors to make an informed decision with respect to approval of such Capital
Plan.
The Board of Directors shall review the AOP and the Capital Plan of the
Manufacturing Division within 30 days of receipt. Approval shall be premised
upon the best interests of the WFOE as a whole, provided that, the Board of
Directors shall give deference to the expertise of the Deputy General Manager of
the Manufacturing Division with respect to all operational matters pertaining to
the Manufacturing Division. Failure to object to the AOP and/or the Capital Plan
within 30 days of receipt shall be deemed approval by the Board of Directors.
In addition, at least one (1) month prior to the commencement of each
fiscal quarter, the Deputy General Manager of the Manufacturing Division shall
prepare and submit to the Board of Directors for approval an operating budget of
the Manufacturing Division for following fiscal quarter. The Deputy General
Manager of the Manufacturing Division shall consult with Herbalife, Leiner and
the WFOE Chief Accountant in preparing each quarterly budget. Such quarterly
budget shall be in sufficient detail to provide an estimate of cash flows,
capital requirements and other financial requirements of the Manufacturing
Division for the upcoming
63
quarter, shall reflect any adjustments to be made to the AOP of the
Manufacturing Division for that fiscal year, and shall also include other
information as may be necessary to enable the Board of Directors to make an
informed decision with respect to approval of such quarterly budget. The
quarterly budget of the Manufacturing Division shall be deemed approved by the
Board of Directors if the Board of Directors fails to object to such quarterly
budget within 15 days of its receipt.
2. Herbalife Division and the Leiner Division. The Deputy General Managers
of the Herbalife Division and the Leiner Division shall each prepare an AOP and
Capital Plan for their respective divisions. Such AOPs shall be in sufficient
detail to provide an estimate of cash flows, capital requirements and other
financial requirements of the relevant Division for the upcoming year. Such AOPs
shall also include other information as may be necessary to enable the Board of
Directors to make an informed decision with respect to approval of such AOPs.
The Capital Plan for each of the Distribution Division shall set forth the
projected fixed capital and working capital expenditure for each of the four
years. Such Capital Plan shall include such other information as may be
necessary to enable the Board of Directors to make an informed decision with
respect to approval of such Capital Plan. Copies of such AOPs and Capital Plans
shall be furnished not later than 60 days prior to the commencement of each
fiscal year of the WFOE to the Board of Directors. To the extent required by the
laws, regulations or practices of the PRC, the Board of Directors shall approve
such Plans. In no event shall approval be withheld unless such plans, in the
good faith judgment of the Board of Directors, would violate the laws and
regulations of the PRC, or unless such plans provide for the incurrence or
assumption of indebtedness which has not been approved by the Board of Managers
or the Board of Directors, or unless such plans are inconsistent with any
provision of the Agreement or any policy or resolution adopted by the Board of
Managers or Board of Directors.
In addition, at least one (1) month prior to the commencement of each
fiscal quarter, the Deputy General Manager of each Distribution Division shall
prepare and submit to the Board of Directors for approval an operating budget of
such Distribution Division for following fiscal quarter. Such quarterly budget
shall be in sufficient detail to provide an estimate of cash flows, capital
requirements and other financial requirements of the relevant Distribution
Division for the upcoming quarter, shall reflect any adjustments to be made to
the AOP of relevant Distribution Division for that fiscal year, and shall also
include other information as may be necessary to enable the Board of Directors
to make an informed decision with respect to approval of such quarterly budget.
The quarterly budget of each Distribution Division shall be deemed approved by
the Board of Directors if the Board of Directors fails to object to such
quarterly budget within 15 days of its receipt.
3. WFOE Consolidated AOP and Rolling Capital Plans, Etc. Each year the
WFOE Chief Accountant shall consolidate the AOPs for each of the Divisions and
the accompanying divisional Capital Plans for the approval of both the Board of
Directors of the WFOE and the Board of Managers of the Company at least thirty
(30) days prior to the commencement of the
64
new fiscal year of the WFOE. Such plans shall be in sufficient detail to provide
an estimate of cash flow, capital requirements and other financial requirements
of the WFOE for such year. Such plans shall also include such other information
or other matters necessary in order to inform the Board of Directors of the WFOE
and the Board of Managers of the Company of the WFOE business and to enable the
parties to make an informed decision with respect to their approval of such
Plans. Submission of the WFOE consolidated AOP and Capital Plans to the Board of
Directors of the WFOE and the Board of Managers shall include the detailed AOPs
and Capital Plans of each of the Divisions.
The Board of Directors of the WFOE and the Board of Managers of the
Company shall review the proposed plans as prepared by the WFOE within thirty
(30) days of receipt and may offer revisions thereto. After the final Plans have
been approved, the Deputy General Managers shall implement the Plans and shall
be responsible for managing Divisional performance of the Plans.
In addition to the above, the WFOE Chief Accountant and the General
Manager, in consultation with the Deputy General Manager of each of the
Divisions, shall on a timely basis prepare an annual consolidated list of
imported goods of the WFOE for submission with the PRC Customs authorities, and
such other reports or plans as required of the WFOE in compliance with PRC laws
and regulations.
B. Books and Records; Financial Close and Reporting Process
1. Books and Records. The books, accounts and records of each Division
shall be maintained and managed at the WFOE level by the WFOE Chief Accountant.
In addition, the WFOE Chief Accountant shall keep consolidated books, accounts
and records with respect to the business and operation of the WFOE, and shall be
responsible for preparing financial statements and tax reports for the WFOE. All
the Deputy General Managers and all accounting staff assigned to any Division
shall fully cooperate with the WFOE Chief Accountant and his staff in connection
with the preparation of the books and records of each Division and the WFOE
financial statements and tax reports.
2. Monthly Close. There shall be a monthly financial close for each of the
Divisions and the WFOE. Such process shall include all closing month end journal
entries, reconciliations, inner-company eliminations and additional
consolidating and closing entries as may be required. The monthly close end
process shall be completed no later than 10 business days subsequent to the end
of each fiscal month. Concurrent with the completion of the monthly financial
close process, a monthly financial report for each Division shall be prepared by
the WFOE Chief Accountant with the assistance of the Deputy General Manager of
each Division. Such report shall be distributed to the Board of Directors, the
Board of Managers, the General Manager and each of the Deputy General Managers.
65
3. Quarterly and Annual Close. The quarterly and fiscal year end financial
close process shall follow the same procedures as the monthly financial close
process except that:
(i) The quarterly close shall be completed no later than 15 business
days following the end of each fiscal quarter, and
(ii) The fiscal year end close shall be completed no later than 15
days following the end of each fiscal year.
The quarterly and fiscal year end financial reporting process shall follow
the same procedures as the monthly financial reporting process, except that in
addition to the preparation of a quarterly financial report and a fiscal year
end report for each of Division, the WFOE Chief Accountant shall also prepare a
consolidated quarterly financial report and a fiscal year end report for the
WFOE respectively, concurrently with the completion of the quarterly and fiscal
year end financial close processes respectively. Such reports shall be
distributed to the Board of Directors, the Board of Managers, the General
Manager and each of the Deputy General Managers.
4. Accounting Policies. The fiscal year of the WFOE and the Company shall
be the calendar year. All financial statements shall be prepared in accordance
with GAAP and shall furthermore comply with all applicable PRC accounting and
financial reporting requirements and standards.
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OPERATING BUDGETS AND FINANCIAL CLOSE AND PROCESS
WFOE DIVISIONS TIMING WHO APPROVAL
Operating Budgets:
Annual Divisional X 60 days prior to Divisional Deputy Board of Directors
Operating Plans commencement General Manager
of each new
Fiscal Year
Rolling Four Year X 60 days prior to Divisional Deputy Board of Directors
Divisional Operating Plan commencement General Manager
of each new
Fiscal Year
Quarterly Divisional X One month prior Divisional Deputy Board of Directors
Operating Budget to the commence- General Manager
ment of each new
fiscal quarter
Annual WFOE Consolidated 30 days prior to the Chief Accountant Board of Directors and
Operating and Rolling Four X commencement of Board of Managers
Year Capital Plan each new Fiscal Year
Financial Close and
Reporting:
Monthly Financial Close X 10 business days Deputy General Board of Directors and
and Reporting Process subsequent to the Managers and Board of Managers
end of each fiscal Chief Accountant
month
Quarterly Financial Close X 15 business days Deputy General Board of Directors and
and Reporting Process subsequent to the Managers and Board of Managers
end of each fiscal Chief Accountant
quarter
Fiscal Year End Financial X 15 business days Deputy General Board of Directors and
Close and Reporting subsequent to the Managers and Board of Managers
end of each fiscal Chief Accountant
year
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SCHEDULE D
WFOE'S PRICING POLICY FOR SALE OF SEMI-PROCESSED MATERIALS
OBJECTIVE: The objective of this policy is to establish a guideline for
developing the minimum price that is to be applied for the sale of
Semi-Processed Materials from the WFOE to either Member of the Company (or any
of their related subsidiaries), or to an unrelated third party.
For the purpose of this policy, "Semi-Processed Materials" is defined as
component chemicals or combination of component chemicals that have been further
processed; such as milled, granulated, blended, spray dried and/or converted
into tablet of capsules. This policy only applies to raw materials, which can be
processed by the Manufacturing Division.
POLICY: The "minimum price" is to be the sum of all direct costs plus a 12.5%
mark-up of that sum to accommodate the absorption of a portion of plant overhead
and a profit margin for the benefit of the WFOE.
For the purpose of this policy, "direct costs" shall mean all items of expense
directly associated with the value-added manufacturing of the Semi-Processed
Materials, including, but not limited to, the following:
1. Purchase price of component ingredients;
2. Purchase price of manufacturing aids and consumable materials;
3. Inbound freight for items 1 and 2 above;
4. Cost of production labor (including benefits) directly attributable
to the value-added manufacturing for the Semi-Processed Materials
and
5. Laboratory tests, both analytical and microbiological.
For the purpose of this policy, the 12.5% is intended to be apportioned as
follows:
(a) 7.5% as an overhead absorption mark-up; and
(b) 5% as a profit mark-up.
POLICY EXCEPTION: If in the case that the purchase price of the component
ingredients are so intrinsically expensive that the application of the 12.5%
mark-up would make the resulting selling price of the Semi-Processed Materials
inherently un-competitive, the Deputy General Manager of the Manufacturing
Division may apply to the Board of Directors for approval to use
a lower margin in the calculation. This application should include the rationale
that supports the use of a lower margin.
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