Lilly takeover provision to be voted on again

A proposal that would make it easier for Eli Lilly and Co. to be purchased in an unwanted takeover will be voted on again by shareholders at the company’s annual meeting.

The effort to remove an 80-percent approval threshold for takeover bids against the wishes of Lilly’s board is on the agenda of the April 18 meeting, according to a proxy statement filed Feb. 4 with the Securities and Exchange Commission.

The proposal failed last year after receiving approval from 74 percent of shareholders owning Lilly stock. To pass, it needed the support of investors holding 80 percent of all of Lilly’s outstanding shares.

The supermajority vote requirement, which has been in place for more than 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 the proposal passes, it would require a bare majority of votes to approve such actions in the future.

“Many shareholders believe that supermajority voting provisions impede accountability to shareholders and contribute to board and management entrenchment,” Lilly said in its proxy. “If the board were to oppose eliminating the supermajority vote, there is a risk that those shareholders would lose confidence in the company’s governance and its board, which could threaten the company’s leadership stability and ability to carry out its long-term strategies for growth and success.”

Les Funtleyder, a portfolio manager of a health care mutual fund at Miller Tabak & Co. in New York, is uncertain whether the measure will pass this year. But, he said, the proposal likely would be a non-issue if Lilly’s stock were performing better.

Shares opened Friday morning at $35.62 each and haven’t steadily traded above $40 since 2008.

“Shareholders usually change the rules when they’re not happy with the share price,” he said. “And Lilly’s stock price hasn’t been that great.”

Even so, Funtleyder doesn’t consider Lilly a near-term acquisition target, simply because there aren’t many rivals financially stable enough to complete a deal.

“The problem is, there are only a small handful of companies in the position to acquire Lilly,” he said, “and they’re not doing that well, either.”

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, 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.

Last year’s vote was hindered by the fact that holders of nearly 15 percent of shares did not vote on the measure.
 
This will be the fifth consecutive year the proposal has been made at Lilly’s shareholders meeting. But it is just the second year the measure has been supported by Lilly’s board.

That support clearly made a difference last year. The proposal 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.