Lilly pulls back from proposals lowering takeover barriers

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Asked two decades ago what would become of Indianapolis if Eli Lilly and Co. were ever acquired, then-Mayor Stephen Goldsmith quipped, “God would not let that happen.”

He made the comment during one of the pharmaceutical giant’s swoons. The share price had slumped for a range of reasons, including concerns that Lilly didn’t have enough potential blockbusters wending through the R&D pipeline.

To be sure, the scenario remains anxiety-inducing. Even after years of belt-tightening that reduced Lilly’s Indianapolis employment to 10,150, the company still has an outsized, overwhelmingly positive influence on nearly all aspects of central Indiana—especially the region’s economic vitality.

Fortunately, a Lilly takeover looks less likely today than it has in a long time—for both obvious and more subtle reasons.

The obvious: Despite continuing uncertainty over whether Lilly has enough firepower in its R&D pipeline to offset a wave of patent expirations, its shares have been on a four-year tear, climbing from $28 to $57.

The rally lifted Lilly’s stock market value to $62 billion—well beyond the reach of most would-be suitors, especially considering they’d likely have to throw in billions more to get the board’s attention.

Then there are factors related to the dirt-dry world of corporate governance. For six consecutive years starting in 2007, Lilly’s board at its spring annual meeting unsuccessfully recommended measures that could have made it easier for a suitor to throw the company into play.

Lilly gave up this year, according to the proxy statement for the May 6 annual meeting. It said it opted against another vote because “we have concluded that the proposals would not be successful in 2013.”

One measure, which failed all six years, would have required that shareholders elect the entire board annually. The board had said it supported the proposal after considering the view of “some shareholders who believe that [staggered] boards have the effect of reducing the accountability of directors,” since only a portion of the board is up for election each year.

The board also acknowledged the flip side: The annual election of the entire board might make it easier for a hostile suitor, which would have the opportunity to replace the entire board at one meeting.

The other measure, voted down the past three years, would have amended the company’s articles of incorporation to eliminate a requirement that takeover bids and other major corporate actions receive 80-percent shareholder approval.

In supporting the proposal to reduce the approval requirement to a simple majority, the board noted that “many shareholders believe that supermajority voting provisions impede accountability to shareholders and contribute to board and management entrenchment.”

On the other hand, the board acknowledged, retaining such a high bar “can make it more difficult for one or a few large shareholders to take over or restructure the company without negotiating with the board.”

Both proposals garnered 63-percent to 77-percent support in past votes. They were on the low end last year, following the New York Stock Exchange’s adoption of a rule barring brokers from voting their clients’ shares on corporate governance matters, Lilly said in this year’s proxy.

The company notes in the proxy that it decided not to put the proposals to another vote this year after consulting with its major shareholders. It doesn’t name those shareholders, but the biggest—by far—is Lilly Endowment Inc., which holds an 11-percent stake.

A Lilly Endowment spokeswoman wouldn’t say how its board members viewed the proposals. But it’s hard to fathom they would have voted “yes.” While the endowment, founded in 1937 by Lilly family members, is separate from Eli Lilly and Co., it always has seemed to have the company’s back.

And removing obstacles to a sale of Lilly would seem to run counter to one of the three prongs of its mission—fostering community development, especially in central Indiana and across the state. It’s poured hundreds of millions into making our region a better place to live and work—a quest that would be undermined by the sale of Indianapolis’ most important employer.

Institutional investors typically embrace the kinds of changes Lilly’s board sought. Were Lilly Endowment not in the picture, the measures might have sailed through. It’s another example of how the super-secretive foundation, which oversees more than $6 billion in assets, helps keep the city on a prosperous course.•

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