Lilly shareholders reject proposals to lower takeover barriers

Eli Lilly and Co. shareholders have rejected two proposals that could make the Indianapolis-based drug maker more open to corporate takeovers.

At Lilly’s annual meeting last week, both proposals failed to garner shareholder votes representing at least 80 percent of outstanding shares—the necessary percentage for passage.

The first proposal called for overturning a supermajority-vote requirement provision that requires buyout bids garner at least 80 percent shareholder approval.

The second proposal called for the election of the entire Lilly board annually, rather than staggering elections for the 14 members over three years.

Lilly management—led by CEO David Ricks, who became CEO in January 2017—sought approval for both proposals.

Both proposals received approval from shareholders representing about 73 percent of outstanding shares, short of the 80 percent requirement.

Lilly’s board enacted the supermajority requirement more than three decades ago to discourage unwanted takeover attempts. Modern corporate governance experts, however, recommend against such policies. They say the supermajority-vote requirement and staggered board elections can serve to entrench directors and management who are failing to perform for shareholders.

From 2010 through 2012, shareholders also voted down eliminating the supermajority voting requirement.

Votes on the proposals over the course of those years garnered 63 percent to 77 percent support. Lilly management stopped asking in 2013, saying it concluded after conferring with shareholders that the proposals would be voted down.

In bringing the proposals back for shareholder approval this year, the company cited discussions it had in 2017 “with a number of our largest investors.” It didn’t name the investors.

In recommending elimination of the staggered board, the company’s proxy statement says, “The board believes it is important to maintain appropriate defenses to inadequate takeover bids, but also important to retain shareholder confidence by demonstrating that the board is accountable and responsive to shareholders.”

The biggest hurdle to overturning the proposal likely comes from Lilly’s biggest shareholder—the community-minded Lilly Endowment Inc., which holds an 11 percent stake.

In March, a spokeswoman for the Indianapolis-based endowment wouldn’t say how it would vote on the proposals. While the endowment, founded in 1937 by Lilly family members, is separate from Eli Lilly and Co., its devotion to owning a huge chunk of the company, even at the expense of diversifying to reduce risk, would suggest it’s motivated by more than investment returns.

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