Shareholders fail to remove Lilly's anti-takeover provision

April 19, 2010

A proposal that would have weakened Eli Lilly and Co.’s defenses against an unwanted takeover failed to pass Monday at the company’s annual meeting of shareholders.

The proposal to remove an 80-percent approval threshold for takeover bids against the wishes of Lilly’s board received approval from shareholders owning 74 percent of Lilly’s shares.

But to pass, the proposal needed the approval of investors holding 80 percent of all of Lilly’s outstanding shares.

The big hurdle was that nearly 15 percent of Lilly shares were not voted at all on the measure. Among those shares voted at today’s meeting, nearly 85 percent voted to remove the high threshold on hostile takeovers.

Another measure to make Lilly’s governance more shareholder friendly—annual election of directors instead of their current three-year terms—also failed to gain the favorable vote of 80 percent of Lilly’s 1.15 billion shares. It received nearly 75 percent approval.

The supermajority vote requirement, which has been in place for 25 years, applies not only to outright takeover bids, but also to measures used to achieve them, such as removing directors before their terms end or expanding the size of the board.

If Monday’s proposal had passed, it would have required a bare majority of votes to approve such actions in the future.

This is the fourth consecutive year the proposal has been made at Lilly’s shareholders meeting, but it is the first year the measure has been supported by Lilly’s board of directors.

That support clearly made a difference. The measure had received no higher than 57 percent support before.

Investors generally favor low barriers to takeover because an acquiring company almost always pays a premium price to entice shareholders to approve a merger.

Lilly's board, which has been fiercely independent during multiple waves of consolidation in the pharmaceutical industry, changed to support the measure because of its popularity among shareholders.

“While it is important to the company’s long-term success for the board 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,” read a statement from Lilly’s board in the company’s preliminary proxy statement.

Also, the board members noted in the company’s proxy statement that the laws of Indiana still provide protection against unwanted takeovers.

Indiana’s laws have been mimicked by many other states, but remain among the 10 most stringent, said Diane Denis, a corporate mergers and governance expert at Purdue University’s Krannert School of Management.

The five key provisions of Indiana’s laws are:

• A shareholder that acquires a controlling stake must receive approval from the majority of other shareholders before exercising the full voting power of that stake.

• A bidder that acquires a controlling stake must wait several years before being allowed to enter a merger agreement with the company.

• Specific procedures must be followed to determine a fair price for the company’s shares.

• Corporate boards are allowed to consider the interests of non-shareholders, such as employees or the local community, in rejecting a takeover bid.

• Poison pills, which turn non-voting shares into voting shares when a hostile bid is launched, are approved by state law.

The statement from Lilly’s board in the proxy specifically noted that Indiana law would help “to discourage a would-be acquirer from proceeding with a proposal that undervalues the company.”

Four proposals by Lilly shareholders that were opposed by management—most of them seeking more input on executive compensation—all failed to gain approval of the majority of shares voted at Monday’s meeting.

Lilly CEO John Lechleiter received one question from a shareholder about whether the company would be able to keep paying its dividend of $1.96 per share per year. Concerns about the dividend—which totals $2.1 billion a year—have risen as Lilly moves closer to a period where five of its top-selling drugs will have their sales sapped by cheaper generic versions.

In response, Lechleiter said, "We must navigate the waters up ahead, but as we do that our intention is to maintain our dividend."

Maintaining the dividend, but not increasing it, would break a 42-year streak of raising its dividend.



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