Health Care and Eli Lilly and Co. and Health Care Businesses and Health Care & Life Sciences and Health Care & Insurance

Lilly shareholders fail to remove anti-takeover measures

April 18, 2011

A proposal that would have weakened Eli Lilly and Co.’s defenses against an unwanted takeover failed to pass Monday despite a large majority of shareholders voting to remove those barriers for the second straight year.

At the drugmaker’s annual shareholders meeting at its Indianapolis headquarters, 84.7 percent of the votes cast called for removing several provisions designed to prevent a hostile takeover of the company.

However, Lilly’s bylaws require approval from 80 percent of all shares—whether voted or not—before removing the provisions. By that standard, only 72.6 percent of shares were voted in favor of removal.

The vote tallies were nearly identical to those at last year’s meeting.

For the past 25 years, Lilly has required the approval of 80 percent of the shareholders not only to approve hostile takeovers, but also to enact measures used to achieve them, such as removing directors before their terms end or expanding the size of the board.

If the proposal had passed, such measures could have been approved by a bare majority of shareholders.

“Many shareholders believe that supermajority voting provisions impede accountability to shareholders and contribute to board and management entrenchment,” Lilly said in its proxy statement.

Investors typically favor low barriers to hostile takeovers because an acquiring company almost always pays a premium price to entice shareholders to approve such mergers.

Lilly’s board of directors, which has been fiercely independent during multiple waves of consolidation in the pharmaceutical industry, opposed the removal of the takeover barriers for three years. But it has now supported removal each of the past two years.

Board support has clearly made a difference. The proposed removal had received no higher than 57 percent support in previous years.

“While it is important to maintain appropriate defenses against inadequate takeover bids, it is also important for the board to maintain shareholder confidence by demonstrating that it is responsive and accountable to shareholders and committed to strong corporate governance,” Lilly said in the proxy.

Shareholders also failed to amass enough votes to approve annual election of Lilly directors, something the board has advocated for years. That proposal received 85 percent of shares voted, but only 73 percent of all shares. It needed 80 percent of all shares to pass.

However, with 88 percent in favor, stockholders did approve a proposal that will let them annually to express approval or disapproval of Lilly's executive compensation. The Dodd-Frank Act, approved by Congress last year, requires public companies to give their shareholders a so-called "say on pay" at least every two or three years.

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