| • | Double trigger. Unlike “single trigger” plans that pay out immediately upon a change in control, the select plan requires a “double trigger” — a change in control the select plan requires a “double trigger” — a change-in-control followed by an involuntary loss of employment within two years. This is consistent with our intent to provide employees with financial protection resulting from a loss of employment. Covered terminations. Our participating NEOs are eligible for payments under our severance pay plan if, within two years of the change-in-control, their employment is terminated (i) without “Cause” by Elanco; or (ii) for “Good Reason” (e.g., a relocation or material reduction in title, work responsibilities, salary, variable pay potential, or benefits coverage) by the employee, each as is defined in the plan.
Severance payment. NEOs are eligible for two years’ base salary plus two times their target bonus for the then-current year.
Benefit continuation. Basic employee benefits such as health and life insurance would continue for 18 months following a participating NEO’s termination of employment, unless he or she becomes eligible for coverage with a new employer during that 18-month period.
No gross-ups. In some circumstances, the payments or other benefits received by a participating employee in connection with a change in control could exceed limits established under Section 280G of the Code resulting in an excise tax payment. We would not reimburse or gross-up employees for these taxes. However, the amount of benefits related to a change-in-control would be reduced to the maximum amount that would not result in an excise tax if the effect would be to deliver a greater after-tax benefit than the employee would receive if his or her benefits were not so reduced.
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| | • | Executive Compensation Tables
Covered terminations. Our participating NEOs are eligible for payments under our severance pay plan if, within two years of the change in control, their employment is terminated (i) without “cause” by Elanco; or (ii) for “good reason” (e.g., a relocation or material reduction in title, work responsibilities, salary, variable pay potential, or benefits coverage) by the employee, each as is defined in the plan.
|
| • | Severance payment. NEOs are eligible for two years’ base salary plus two times their target bonus for the then-current year. |
| • | Benefit continuation. Basic employee benefits such as health and life insurance would continue for a period of 18 months following a participating NEO’s termination of employment unless he or she becomes eligible for coverage with a new employer during that 18-month period. |
| • | No gross ups. In some circumstances, the payments or other benefits received by a participating employee in connection with a change in control could exceed limits established under Section 280G of the Code resulting in an excise tax payment. We would not reimburse or gross up employees for these taxes. However, the amount of benefits related to a change in control would be reduced to the maximum amount that would not result in an excise tax if the effect would be to deliver a greater after-tax benefit than the employee would receive if his or her benefits were not so reduced. |
Elanco Executive Severance Pay Plan In November 2020, we adopted the Elanco Executive Severance Pay Plan and Summary for our senior employees, including the NEOs. We adopted this plan following the Compensation and Human Capital Committee’s discussions with its independent compensation consultant, WTW, to fill a gap in our compensation programs and align them with market practices. Under the plan, severance benefits are payable to eligible employees if their employment is terminated by us without cause and in certain other specified circumstances that are not in connection with a change in control. The plan does not provide for benefits upon voluntary separation of service by the employee. 71 2023 Proxy Statement | | | |
TABLE OF CONTENTS | | | Executive Compensation Tables
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The severance benefits provided under the plan are as follows: A lump sum severance payment equal to the sum of (i) two times the amount of base salary for the CEO, or one times the base salary for other executives; plus (ii) two times (with respect to the CEO) or one times (with respect to other executives) the amount of their target annual cash incentive bonus for the year of termination or, if there is no target-based annual cash incentive bonus, then the annual cash bonus paid or payable for the most recently completed calendar year; plus (iii) a lump sum payment equal to 24 months (with respect to CEO) or 12 months (with respect to other executives) of Elanco contributions paid for active employees for medical and dental coverage. Outplacement services for up to twelve months following the termination date. Payments of (i) any accrued but unpaid base salary through the date of termination; (ii) any accrued but unpaid bonuses, subject to certain conditions; and (iii) all benefits and rights accrued under the employee benefit plans.
We are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of our President and Chief Executive Officer,CEO, Jeffrey N. Simmons. We have identified our median employee, using our employee population on December 31, 2020,2022, by use of a “consistently applied compensation measure” or “CACM.” We chose a CACM that closely approximates the annual total direct compensation of our non-contingent employees. Specifically, we identified the median employee by looking at annual base pay, bonus opportunity at target and the grant date fair value for standard equity awards. We then identified the median paid employee and calculated his or her total annual compensation in accordance with the requirements of the “Summary Compensation Table” above. We used the samea new median employee in 2021 as we did in 2020, because we believe there has not been any change2022 due to material changes in our employee population or employment compensation arrangements that we believe would significantly alterbecause of our pay ratio calculation.restructuring announced in December of 2021. In applying the CACM, we did not perform adjustments to the compensation paid to part-time employees to calculate what they would have been paid on a full-time basis and we chose not to include one-time equity awards when choosing the median employee, since the grant of such awards is not a recurring event. We also chose not to exclude any employees when determining our median employee. For 2021,2022, the annual total compensation of our median employee was $92,634.$59,388. Mr. Simmons’sSimmons’ annual total compensation for 2021,2022, as reported in the “Summary Compensation Table” above, was $12,060,015.$12,713,632. The ratio of Mr. Simmons’sSimmons’ total compensation to the median employee’s total compensation was 130:214:1. 67 202272 2023 Proxy Statement
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| | | Pay Versus Performance | |
Pay Versus Performance Table | | 2022 | | | 12,713,632 | | | (2,017,094) | | | 2,782,450 | | | 863,887 | | | 41 | | | 126 | | | (78,000,000) | | | 544,000,000 | | | | 2021 | | | 12,060,015 | | | 16,525,957 | | | 3,202,470 | | | 3,753,652 | | | 96 | | | 149 | | | (483,000,000) | | | 522,000,000 | | | | 2020 | | | 8,958,820 | | | 9,320,037 | | | 2,151,684 | | | 2,175,973 | | | 104 | | | 132 | | | (574,000,000) | | | 199,000,000 | |
(1)
| For 2022, the CEO was our Chief Executive Officer Mr. Jeffrey Simmons, and the other NEOs were Mr. Todd Young- Executive Vice President and Chief Financial Officer; Dr. Ellen de Brabander- Executive Vice President, Innovation, Regulatory, and Business Development; Dr. Ramiro Cabral- Executive Vice President, Elanco International; and Mr. Bobby Modi, Executive Vice President, U.S. Pet Health and Global Digital Transformation. |
For 2021, the CEO was our Chief Executive Officer Mr. Jeffrey Simmons, and the other NEOs were Mr. Todd Young- Executive Vice President and Chief Financial Officer; Mr. Aaron Schacht- Former Executive Vice President, Innovation, Regulatory, and Business Development; Ms. Joyce Lee- Former Executive Vice President, U.S. Pet Health and Commercial Operations; and Dr. Ramiro Cabral- Executive Vice President, Elanco International. For 2020, the CEO was our Chief Executive Officer Mr. Jeffrey Simmons, and the other NEOs were Mr. Todd Young- Executive Vice President and Chief Financial Officer; Mr. Aaron Schacht- Former Executive Vice President, Innovation, Regulatory, and Business Development; Sarena Lin- Former Executive Vice President, Transformation and Technology; and Michael Bryant-Hicks- Former Executive Vice President, General Counsel and Corporate Secretary. (2)
| A reconciliation of Total Compensation from the Summary Compensation Table to Compensation Actually Paid (“CAP”) to our CEO and the average of our Other NEOs is shown below. No dividends are paid on Elanco stock, so the table below does not include any reconciliation related to dividends paid in the years prior to vesting. We do not offer a pension plan, so the reconciliation below consists solely of the re-valuation of stock awards. |
| | Total Compensation from SCT | | | 12,713,632 | | | 2,782,450 | | | 12,060,015 | | | 3,202,470 | | | 8,958,820 | | | 2,151,684 | | | | Adjustments for stock and option awards: | | | | | | | | | | | | | | | | | | | | | | Deduct: Grant date fair value of awards granted during fiscal year | | | (10,200,031) | | | (1,639,529) | | | (9,261,019) | | | (1,597,526) | | | (6,860,048) | | | (1,255,531) | | | | Add: Fair value at year-end of awards granted during the covered fiscal year that are outstanding and unvested at year-end | | | 3,414,070 | | | 578,725 | | | 12,234,618 | | | 1,952,416 | | | 7,022,449 | | | 1,285,249 | | | | Add: Year-over-year change in fair value of awards granted in prior fiscal year(s) that are outstanding and unvested at year end | | | (7,402,134) | | | (722,112) | | | 1,267,444 | | | 177,458 | | | 19,891 | | | (10,569) | | | | Add: Change as of the vesting date (from the end of the prior fiscal year) in fair value of awards granted in any prior fiscal year for which vesting conditions were satisfied during such year | | | (542,631) | | | (135,647) | | | 224,899 | | | 18,833 | | | 178,925 | | | 5,139 | | | | Compensation Actually Paid (as calculated) | | | (2,017,094) | | | 863,887 | | | 16,525,957 | | | 3,753,652 | | | 9,320,037 | | | 2,175,973 | |
a)
| All equity awards used to determine compensation actually paid to NEOs were re-valued according to FASB ASC Topic 718 and use other similar methodologies and assumptions as those used for purposes of grant date fair values reported in the Summary Compensation Table. |
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| | | Pay Versus Performance
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(3)
| Total shareholder return (“TSR”) is calculated based on a fixed investment of one hundred dollars measured from the market close on December 31, 2019 (the last trading day of 2019) through and including the end of the fiscal year for each year reported in the table. |
(4)
| The peer group used for the TSR calculations reflects the specific peer groups disclosed in the “Compensation Discussion and Analysis” for relevant years. |
For 2020, the peer group consists of Agilent Technologies, Inc.; Alexion Pharmaceuticals, Inc.; BioMarin Pharmaceutical Inc.; Bio-Rad Laboratories, Inc.; DENTSPLY SIRONA Inc.; Edwards Lifesciences Corporation; Endo International plc; Hologic, Inc.; IDEXX Laboratories, Inc.; Incyte Corporation; Jazz Pharmaceuticals plc; Mettler-Toledo International Inc.; PerkinElmer, Inc.; Perrigo Company plc; STERIS plc; United Therapeutics Corporation; Varian Medical Systems, Inc.; West Pharmaceutical Services, Inc.; and Zoetis Inc. For 2021, the peer group consists of Agilent Technologies, Inc.; Alexion Pharmaceuticals, Inc.; Baxter International Inc.; Boston Scientific Corporation; Charles River Laboratories International, Inc.; DENTSPLY SIRONA Inc.; Edwards Lifesciences Corporation; Endo International plc; Hologic, Inc.; IDEXX Laboratories, Inc.; Incyte Corporation; Jazz Pharmaceuticals plc; Perrigo Company plc; Regeneron Pharmaceuticals, Inc.; STERIS plc; Varian Medical Systems, Inc.; Zimmer Biomet Holdings, Inc.; and Zoetis Inc. For 2022, the peer group consists of Agilent Technologies, Inc.; Alexion Pharmaceuticals, Inc.; Baxter International Inc.; Boston Scientific Corporation; Charles River Laboratories International, Inc.; DENTSPLY SIRONA Inc.; Edwards Lifesciences Corporation; Endo International plc; Hologic, Inc.; IDEXX Laboratories, Inc.; Incyte Corporation; Jazz Pharmaceuticals plc; Perrigo Company plc; Regeneron Pharmaceuticals, Inc.; STERIS plc; Varian Medical Systems, Inc.; Vertex Pharmaceuticals, Inc.; Zimmer Biomet Holdings, Inc.; and Zoetis Inc. The return for 2020 reflects the 2020 peer group; the return for 2021 reflects the return of the 2021 peer group, and the return for 2022 reflects the return of the 2022 peer group. Returns for the 2020 peer group over the 3-year period would have been $132, $156, and $113, for 2020, 2021, and 2022, respectively. Returns for the 2021 peer group over the 3-year period would have been $118, $133, and $106, for 2020, 2021, and 2022, respectively. Returns for the 2022 peer group over the 3-year period would have been $115, $139, and $117, for 2020, 2021, and 2022, respectively. (5)
| For 2022, the most important metric in determining compensation actually paid to our executive officers was our TSR, as headwinds to our share price was the primary driver in our year-over-year change in compensation actually paid. Because approximately 70% of our named executive officer’s compensation is at-risk stock-based compensation, our executives’ compensation actually paid is closely aligned with the returns of our shareholders. However, because TSR is already reported in the table, we have identified our Company Selected Measure as Adjusted Net Income. This measure was selected because it was the performance metric for our 2021 PAs, which comprised 75% of our 2021 executive equity awards and had a performance period that included our 2022 fiscal year. The full reconciliation between our GAAP and Adjusted Net Income can be found in Appendix A: “Reconciliation of GAAP Information to Non-GAAP Information.” |
Relationship between Pay and Performance CAP and TSR versus Peer Group The chart below compares our TSR, peer group TSR, and CAP to our CEO and other NEOs (averaged) for the three-year period from 2020 to 2022. The graph compares the return on Elanco’s common stock with that of our market cap-weighted peer group used for executive compensation benchmarking from 2020, 2021, and 2022, respectively, as described in footnote 4 from our Pay Versus Performance Table. The graph assumes a person invested $100 at market close on December 31, 2019 (the last trading day of 2019) in both Elanco and the relevant year’s peer group, and measures TSR, through and including the end of the fiscal year, for each year shown below, adjusted for each year’s respective peer group. This TSR calculation includes both stock price and dividends. It assumes that dividends paid by a company are reinvested in that company’s stock. 74 2023 Proxy Statement | | | |
TABLE OF CONTENTS CAP and GAAP Net Income (Loss) The charts shown below present a graphical comparison of CAP to our CEO and the average compensation actually paid to our other NEOs set forth in the Pay Versus Performance Table above, as compared against the following performance measures: (1) GAAP Net Income, and (2) Adjusted Net Income. Executive pay is not linked to GAAP Net Income; therefore, there is a limited relationship between this metric and compensation actually paid. CAP and Adjusted Net Income (Loss) Tabular List of Important Financial Performance Measures The following table lists the most important financial measures the Company used to link compensation actually paid to the NEOs for fiscal year 2022 to our performance: | | Total Shareholder Return
| | | | Adjusted Net Income
| | | | Elanco Cash Earnings
| | | | Adjusted EBITDAR
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| | | Proposal No. 4:
Approval of the Amended and Restated Elanco
Animal Health
Incorporated Employee Stock Purchase Plan | |
We are asking our shareholders to approve the adoption of the Amended and Restated Elanco Animal Health Incorporated Employee Stock Purchase Plan (the “ESPP”). The ESPP was adopted, subject to shareholder approval,initially approved by our Boardshareholders at the 2022 Annual Meeting, and the first offering period commenced in February 2022.late 2022 for employees of Elanco domestic subsidiaries only. The Compensation and Human Capital Committee and our Board believe that the ESPP will help encourageencourages our employees to acquire shares of our common stock, which will help fosterfostering an ownership mentality among our employees and better alignaligning their interests with those of our shareholders. The Compensation Committeeshareholders, and our Board also believe that the ESPP will help us attract, retain and motivate talent in an increasingly competitive employment market. IfNow that the ESPP is approved by our shareholders at the Annual Meeting, we expect that the first offering period will commencein operation in the third quarterU.S., the Compensation and Human Capital Committee and our Board have determined that it is in Elanco’s best interests to expand the ESPP to employees outside the U.S. We anticipate that such international expansion will be phased over several years, beginning with countries in which Elanco has the most employees. Accordingly, the Board approved the amended and restated ESPP on March 31, 2023 to increase the number of 2022.shares authorized for issuance under the plan and to provide for employees in any designated Elanco subsidiary, including non-U.S. subsidiaries, as determined by the ESPP administrator, to be eligible to participate in the ESPP. If shareholders approve this proposal, the amended and restated ESPP as presented in this Proxy Statement will become effective as of that date. If the amended and restated ESPP is not approved by our shareholders, then the ESPP will not become effective.have an increased share reserve and it will not be offered to employees outside the U.S.
The following is a summary of the principal features of the ESPP, as amended and restated, which we believe supports the deliveryapproval of aan expanded plan that values compliance and good governance while maximizing shareholder value andto provide competitive employee compensation opportunities. This summary does not purport to be a complete description of the ESPP and is qualified in its entirety by reference to the full text of the ESPP,amended and restated plan, which is included as Appendix B to this Proxy Statement. Administration.The ESPP may be administered, at our expense, by our Board or a committee thereof, and is expected to initially be administered by the Compensation Committee.and Human Capital Committee and, by delegation, Elanco’s Executive Vice President, Human Resources, Corporate Communications and Administration (the “ESPP Administrator”). The Compensation CommitteeESPP Administrator may delegate its duties under the ESPP to ourElanco employees or to outside firms, banks or other financial institutions. All questions of interpretation or application of the ESPP are determined in the sole discretion of the plan administrator,ESPP Administrator, and its decisions are final, conclusive, and binding upon all persons. Share Reserve.If shareholders approve this Proposal No. 4, 625,0006,000,000 shares of our common stock will be authorized for issuance under the ESPP. This number includes the 625,000 shares that were initially approved for issuance under the ESPP, and the increased number is recommended to ensure that sufficient shares are available to facilitate expansion of the ESPP to employees outside the U.S. Eligibility.Any natural person who is regularly employed by us or any of our designated subsidiaries is eligible to participate in the ESPP, excluding employees whose customary employment is (a) fewer than twenty hours per week, (b) as a student or intern, or (c) is not for more than five months in a calendar year. Participation is subject to certain limitations imposed by Section 423(b) of the Code, including (i) the requirement that no person may be granted rights under this ESPP (and all plans qualified under Code Section 423(b) of the Code maintained by us or any of our subsidiaries) to purchase more than $25,000 worth of shares of our common stock (valued at the time each right is granted) for each calendar year in which rights are outstanding, and (ii) the requirement that no person who owns or holds options to purchase, or who as a result of participation in the ESPP would own or hold options to purchase, five percent or more of our or any of our subsidiaries’ outstanding stock is eligible to participate in the ESPP. Non-Employee Directors are not eligible to participate in the ESPP. The plan administratorESPP Administrator may exclude additional categories of employees from the ESPP, including highly compensated employees, Section 16 reporting officers, non-U.S. employees, orand employees with fewer than two years of service with us. As of February 28, 2022,March 31, 2023, approximately 2,6002,500 of our employees were eligible to participate in the ESPP, of which eightten were executive officers. Our proposed next phase of ESPP expansion is expected to add approximately 2,200 additional eligible employees during the coming year, and we hope to eventually broaden the ESPP in the next several years. 76 2023 Proxy Statement | | | |
TABLE OF CONTENTS Participation in an Offering.While the plan administratorESPP Administrator has discretion to establish different offering periods, shares generally will be offered under the ESPP through consecutive offering periods of approximately three months that generally begin with the first business day of each fiscal quarter of each year. Under the ESPP, in no event may an offering period exceed 27 months. To participate in the ESPP, eligible employees must authorize payroll deductions in whole dollar amounts up to the greater of ten percent of base salary or $15,000. Generally, the maximum number of shares that may be purchased in an offering period will be 2,000 shares of our stock.salary. Once an eligible employee becomes a participant in the ESPP, the employee willmay affirmatively elect to participate automatically participate in each successive offering period until such time as the employee withdraws from, or is no longer eligible to participate in, the ESPP. 68 2022 Proxy Statement
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Purchase Price.The purchase price per share of our common stock under the ESPP will be determined by the plan administratorESPP Administrator but will not be less than 85% of the fair market value of our common stock on the last day of the relevant offering period. The fair market value of a share of our common stock on these measurement dates will be equal to the closing price per share as reported on the NYSE. Shares Purchased.The number of shares of our common stock a participant purchases during each offering period is determined by dividing the total amount of payroll deductions withheld from the participant’s paychecks during the offering period by the purchase price per share. In the event that the ESPP’s available share reserve limits the number of shares of our common stock that may be issued and sold during any offering period, the number of shares that each participant purchases in that offering period will be reduced in proportion to the respective amounts whichthat otherwise would otherwise have been purchasable by each such participant if enough shares had been available to enable all participants to purchase the full amount thatthey elected. Any cash not applied to the purchase of fractional shares will be returned to the participant in onea cash lump sum payment within thirty (30) days after the purchase date, without any interest thereon. Withdrawal. A participant may withdraw from an offering under the ESPP at any time, subject to applicable procedural requirements, without affecting his or herthe participant’s eligibility to participate in future offerings. However, once a participant withdraws from an offering, that participant may not subsequently participate in the same offering. A participant will automatically be withdrawn from an offering under the ESPP upon a termination of employment with usElanco or aour designated subsidiary of ours and, in certain cases, following a leave of absence or a temporary period of ineligibility. Transferability.No option grants under the ESPP will be transferable by the participant, except by will or the laws of inheritance following a participant’s death. Adjustments. In the eventIf any change is made in our capitalization during an offering period, such as a stock split or stock dividend, that results in an increase or a decrease in the number of shares of common stock outstanding without receipt of consideration by us, appropriate adjustments will be made to the purchase price, the number of shares subject to purchase under the ESPP, the number of shares authorized for issuance under the ESPP, and the maximum number of shares that may be purchased by a participant during any offering period, in each case as determined by the plan administratorESPP Administrator, to preserve the economic incentive provided by the ESPP and the offering. Corporate Transactions. In the event thatIf all or substantially all of our assets or outstanding voting stock are disposed of by means of a sale or merger in which we will not be the surviving corporation, all outstanding options will be assumed or substituted by the successor corporation. InIf the event that options are not assumed or substituted, or in the event thatif we are liquidated, all outstanding options will automatically be exercised immediately prior to the effective date of suchthe transaction. Unless otherwise provided by the plan administrator,ESPP Administrator, the purchase price generally will generally be equal to 85% of the lesser of the fair market value of our common stock on (i) the first day of the relevant offering period or (ii) the date immediately prior to consummation of the transaction.transaction, whichever is lower. Amendments, Suspension, and Termination.Our Board may, at any time, amend, suspend, or terminate the ESPP; however, such amendment, suspension, or termination may not make any change in an option previously granted that would adversely affect the rights of any participant. No amendment may be made to the ESPP without the approval or ratification of our shareholders if such amendment would require shareholder approval under Code Section 423 of the Code or any other applicable law or regulation, such as an amendment to increase the maximum number of shares under the plan or to change the classes of employees eligible to participate in the ESPP. Upon termination of the ESPP, the remaining balance, if any, in each participant’s account under the ESPP will be refunded to the participant as soon as practicable thereafter. 77 2023 Proxy Statement | | | |
TABLE OF CONTENTS U.S. Federal Income Tax ConsequencesFEDERAL INCOME TAX CONSEQUENCES The following summary is intended only as a general guide as to federal income tax consequences, under current U.S. tax law, of participation in the ESPP, and does not attempt to describe all potential tax consequences. This discussion is intended for the information of our shareholders considering how to vote at the Annual Meeting and not as tax guidance to individuals who participate in the ESPP. The following is not intended or written to be used, and cannot be used, for the purposes of avoiding taxpayer penalties. Tax consequences are subject to change, and a taxpayer’s particular situation may be such that some variation in application of the desired rules is applicable. Furthermore, ESPP participants who are not subject to U.S. tax law will be subject to the tax rules of their respective jurisdictions, which are not described here. Accordingly, participants are advised to consult their own tax advisors with respect to the tax consequences of participating in the ESPP. 69 2022 Proxy Statement
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The ESPP is intended to be an “employee stock purchase plan” within the meaning of Section 423 of the Code Section 423. Under this type of plan,for ESPP participants who are subject to U.S. tax law. With respect to these participants, no taxable income will be reportable by a participant, and no deductions will be allowable to us, due to the grant of the option at the beginning of the offering or at the purchase of shares at the end of an offering. A participant subject to U.S. tax law will, however, recognize taxable income in the year in which the shares purchased under the ESPP are sold or otherwise made the subject of disposition. A sale or other disposition of shares purchased under the ESPP will be a “disqualifying disposition” for a participant subject to U.S. tax law if such sale or disposition occurs prior to the later of (i) two years after the date the option is granted (i.e., the commencement date of the offering period to which the option pertains) and (ii) one year fromafter the date of the purchase of the applicable shares. If the participant makes a disqualifying disposition of shares purchased under the ESPP, the excess of the fair market value of the shares on the date of purchase over the purchase price will be treated as ordinary income to the participant at the time of such disposition, and any additional gain (or loss) on the disposition (after adding the amount treated as ordinary income to the participant’s basis in the shares) will be a capital gain (or loss) to the participant. We will be entitled to an income tax deduction for the amount treated as ordinary income to the participant for the taxable year in which the disposition occurs, although the income tax deduction may be limited by the deductibility of compensation paid to certain of our officers under Code Section 162(m). of the Code. In no other instance will we be allowed a deduction with respect to the participant’s disposition of the purchased shares.shares based on current U.S. tax law. If the participant subject to U.S. tax law sells or otherwise disposes of shares purchased under the ESPP after satisfying the holding period outlined above (i.e., a qualifying disposition), then the participant will realize ordinary income in the year of disposition equal to the excess of the lesser of (i) the fair market value of the shares on the date of disposition over the purchase price for the shares, or (ii) the greater of (a) the fair market value of the shares on the date the option relating to the disposed shares was first granted over the purchase price and (b) the fair market value of the shares on the day immediately prior to the consummation of the transaction over the purchase price. Any additional gain (or loss) on the disposition (after adding the amount treated as ordinary income to the participant’s basis in the shares) will be long-term capital gain (or loss) to the participant. We will not be entitled to an income tax deduction for any amount with respect to the issuance or exercise of the option or the sale of the underlying shares. Specific BenefitsSPECIFIC BENEFITS
The benefits that will be received or allocatedprovided to eligible employees under the ESPP cannot be determined at this time because the amount of contributions set aside to purchase shares of our common stock under the ESPP (subject to the limitations discussed above) is entirely within the discretion of each participant.participant and the value of such stock is subject to change. As of March 31, 2022,2023, the fair market value of a share of our common stock based on the closing stock price on the NYSE was $•.$9.40. 78 2023 Proxy Statement | | | |
TABLE OF CONTENTS AWARDS PREVIOUSLY MADE UNDER THE ESPP | | Jeffrey Simmons - President and CEO | | | 2,045 | | | | Todd Young - Executive Vice President and Chief Financial Officer | | | — | | | | Ellen de Brabander(1) - Executive Vice President, Innovation, Regulatory, and Business Development | | | — | | | | Ramiro Cabral - Executive Vice President, Elanco International | | | — | | | | Bobby Modi - Executive Vice President, U.S. Pet Health and Global Digital Transformation | | | 1,263 | | | | All current eligible executive officers as a group | | | 4,007 | | | | All eligible employees, including all current officers who are not executive officers, as a group (594 persons)(2) | | | 148,327 | |
1)
| Dr. de Brabander was not eligible to participate in the ESPP because she is not a U.S.-based employee. |
2)
| Eligible employees, including all current officers who are not executive officers, who have made purchases from the inception of the plan until the end of the last offering period on December 31, 2022. |
| | Recommendation of the Board
The Board unanimously recommends a vote “FOR” the approval of the Amended and Restated Elanco Animal Health Incorporated Employee Stock Purchase Plan. | |
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| | | Management Proposal to Amend Elanco’s ArticlesApproval of Incorporation to Eliminate Supermajority Votingthe Amended and Restated Elanco Animal Health Incorporated 2018 Stock Plan
| |
UnderWe are seeking shareholder approval to amend and restate our current Articles2018 Elanco Stock Plan, as amended and restated (the “2018 Plan” or the “Plan”) to increase the number of Incorporation and Bylaws,shares of common stock reserved for issuance under the affirmative vote of at least 66 2/3%2018 Plan by an additional 20,000,000 shares, extend the term of the votes entitled2018 Plan, and make design changes to the 2018 Plan. Our continuing ability to offer equity incentive awards under the 2018 Plan is critical to our ability to attract, motivate and retain qualified personnel, particularly as we grow and in light of the highly competitive market for employee talent in which we operate. If shareholders approve this proposal, the Amended and Restated 2018 Elanco Stock Plan (the “Amended 2018 Plan”) will become effective as of the date of shareholder approval. If shareholders do not approve this proposal, the Amended 2018 Plan described in this proposal will not take effect and our 2018 Plan, as previously amended, will continue to be cast byadministered in its current form.
On March 31, 2023, the holders of our outstanding capital stock is required to amend certain provisions of the Articles of Incorporation relating to the removal of directors and the amendment of Article 9 of the Articles of Incorporation. For Proposal No. 5, the proposed amendments to the Articles of Incorporation would eliminate all provisions that require a supermajority (66 2/3%) vote. Our Board, has approved certain conforming changes to our Bylaws, contingent on the effectiveness of this proposed amendment to our Articles of Incorporation.
With respect to Proposal No. 5, the proposed amendments to the Articles of Incorporation are included with this proxy statement as Appendix C.
In proposing these amendments to the Articles of Incorporation and seeking to evolve our governance structure, our Board considered shareholder feedback and evolving governance practices, as well as the terms of our existing supermajority provisions, which require only a 66 2/3% vote rather than an 80% vote or higher as some companies’ supermajority provisions do. Our Board also considered that we only recently became an independent publicly-held corporation with a widely dispersed shareholder base. Notwithstanding these factors, our Board unanimously concluded, onat the recommendation of our Compensation and Human Capital Committee (the “Committee”), approved the Nominating and Corporate Governance Committee, that the proposed changes contemplatedAmended 2018 Plan, subject to approval by this Proposal No. 5 should be made.
If this Proposal No. 5 is approved by the requisite vote of our shareholders at the Annual Meeting, the proposed amendments to the Articles of Incorporation wouldMeeting. The Amended 2018 Plan will become effective uponon the filing of the amended and restated Articles of Incorporation with the Secretary of State of the State of Indiana, which we would file promptly following the Annual Meeting if our shareholders approve the amendments. If this Proposal No. 5 is not approved by the requisite votes of our shareholders at the Annual Meeting, the amendments to the Articles of Incorporation would not become effective and the provisions that require a supermajority vote would continue to apply.
The affirmative vote of at least 66 2/3% of the votes entitled to be cast by holders of all the outstanding shares of Voting Stock (as defined in the Articles of Incorporation), voting together as a single class, is required to approve the elimination of the supermajority provisions of the Articles of Incorporation.
As noted below, we are also submitting a proposal (Proposal No. 6) to amend our Articles of Incorporation to eliminate certain provisions applicable to Lilly, our former parent company. Approval of this Proposal No. 5 is not contingent on approval of Proposal No. 6. If Proposal No. 5date it is approved by our shareholders.
As of March 31, 2023, a total of 7,889,297 shares were subject to outstanding awards under the requisite voteCompany’s existing 2018 Plan, of which 1,827,082 shares were subject to outstanding stock options with a weighted average exercise price of $17.98 per share and a weighted average remaining contractual term of 9.2 years and 6,062,165 shares were subject to unvested full value stock awards, of which 4,093,607 shares were subject to unvested restricted stock units and 1,968,558 shares were subject to unvested performance-based awards. As of the same date, 6,560,507 shares were available for future awards under the 2018 Plan. KEY CHANGES If approved, in addition to increasing the number of shares available under the 2018 Plan, if the Amended 2018 Plan is approved by our shareholders, but Proposal No. 6 isthe following material changes would be made: Clarify the 2018 Plan to reflect the Company’s current share recycling practice of providing that the following shares will be counted against, and will not then we would promptly file an amended and restated Articlesbe added back to, the maximum number of Incorporation withshares available for issuance under the Secretary of State of the State of Indiana following the Annual Meeting solely reflecting the amendments in Appendix C (but not Appendix D). Plan: ○ | RecommendationShares tendered by the participant or withheld by the Company in payment of the Board
The Board unanimously recommendsexercise price of a vote “FOR”stock option issued under the management proposal2018 Plan or to eliminatesatisfy tax withholding obligations with respect to an award under the supermajority voting provisions from our ArticlesPlan; or
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| ○ | Shares that we repurchase using option exercise proceeds and shares subject to a stock appreciation award (“SAR”) that are not issued in connection with the stock settlement of Incorporation. | that award upon its exercise. |
Establish the existing Directors’ Deferral Plan, as amended from time to time, as a subplan to the 2018 Plan. Grant authority to the Committee to: Establish subplans to the 2018 Plan for the purpose of granting certain types of awards or granting awards to certain populations of eligible individuals; Permit an award (other than an incentive stock option) to be transferred pursuant to a domestic relations order or by gift to a family member; and Permit or require the deferral by a participant of shares or cash in settlement of a full value award. 71 202280 2023 Proxy Statement
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| | | Management Proposal to Amend Elanco’s Articles of Incorporation to Eliminate Legacy
Parent Provisions
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Modify the definition of “Change in Control” to exclude complete liquidation of the Company as well as any transaction which is not a change in control as defined by Section 409A of the Code. Remove the limit on the maximum number of shares subject to one or more performance-based awards that may be granted to any one participant during any calendar year. The term of the Amended 2018 Plan would extend ten years from the date of stockholder approval of the Amended 2018 Plan. KEY COMPENSATION PRACTICES The Amended 2018 Plan includes a number of features that we believe are consistent with the interests of our shareholders and sound corporate governance practices, including the following: No liberal share recycling. We may not add back to the Amended 2018 Plan’s share reserve shares that are delivered or withheld to pay the exercise price of an option award or to satisfy a tax withholding obligation in connection with any awards, shares that we repurchase using option exercise proceeds and shares subject to a SAR award that are not issued in connection with the stock settlement of that award upon its exercise. Minimum vesting/performance period. The 2018 Plan includes a minimum vesting period of one year for awards, except as related to a change in control and other limited exceptions. Limits on dividends and dividend equivalents. The 2018 Plan prohibits the payment of dividend equivalents on stock options and SARs and requires that any dividends and dividend equivalents payable or credited on unvested full value awards must be subject to the same restrictions and risk of forfeiture as the underlying shares or share equivalents. Limits on transfer. Awards under the 2018 Plan may not be pledged, encumbered or hypothecated to or in favor of any party other than Elanco or its affiliates, or shall be subject to any lien, obligation, or liability of such participant to another party other than Elanco or an affiliate thereof, except with regard to a domestic relations order or by gift to a family member. No repricing of underwater options or SARs without shareholder approval. The 2018 Plan prohibits, without shareholder approval, actions to reprice or cash out underwater options or SARs. No tax gross-ups. The 2018 Plan does not provide for any gross-up payments to offset any tax expenses. No discounted option or SAR grants. The 2018 Plan requires that the exercise price of stock options or SARs be at least equal to the fair market value of our common stock on the date of grant (except in the limited case of “substitute awards” as described below). No liberal definition of “change in control.” No change in control would be triggered by shareholder approval of a business combination transaction, the announcement or commencement of a tender offer, or any Board assessment that a change in control may be imminent. Clawback. The 2018 Plan requires the recapture or clawback of all or a portion of awards in connection with financial restatements and other events for officers. Annual limit on compensation to non-employee directors. The 2018 Plan contains an annual limit on the aggregate value of all awards granted during a calendar year to any non-employee director together with any cash fees or retainers paid to such non-employee director during the calendar year. DESCRIPTION OF THE AMENDED 2018 PLAN The Company previously adopted the 2018 Elanco Stock Plan, which was adopted by the Board on September 5, 2018 and approved by the Company’s shareholders on September 18, 2018, and then amended and restated effective May 19, 2021. The following are the material terms of the proposed Amended 2018 Plan. The following summary is qualified in its entirety by the full text of the proposed Amended 2018 Plan, which has been included as Appendix C to this Proxy Statement. 81 2023 Proxy Statement | | | |
TABLE OF CONTENTS Eligible Participants. Our current Articlesand prospective directors, officers and employees, as well as those of Incorporation includeour affiliates, are eligible to participate in the Amended 2018 Plan. As of March 31, 2023, there were approximately 6,300 employees, including officers, of the Company and its affiliates and 11 non-employee directors of the Company who would be eligible to receive awards under the Amended 2018 Plan. Incentive stock options may be granted only to our employees and to employees of any of our affiliates meeting the requirements of the Code. Awards other than incentive stock options may be granted to our non-employee directors and to employees of the Company and any of its affiliates. Administration. The Amended 2018 Plan will be administered by the Committee. The Committee has the sole authority to grant awards and sole and exclusive discretion to interpret and administer the Amended 2018 Plan. To the extent consistent with applicable law, the Board also may delegate to a committee of one or more members of the Board or one or more officers of the Company the authority to grant or amend awards to participants other than employees who are subject to Section 16 of the Exchange Act or officers or directors of the Company to whom authority to grant or amend awards has been delegated. The Committee has the authority to determine the persons to whom awards will be granted, the number, timing, and type of awards, the number of shares covered by each award, and the terms and conditions of the awards. The Committee may also establish and modify rules to administer the Amended 2018 Plan, adopt subplans applicable to certain legacy provisionsawards, interpret the Amended 2018 Plan and any related award agreement, cancel or cause the forfeiture or surrender of an award, accelerate the vesting and/or exercisability of an award and otherwise modify or amend the terms of outstanding awards to the extent permitted under the Amended 2018 Plan, and require or permit the deferral of the settlement of a full value award. Unless an amendment to the terms of an award is necessary to comply with applicable laws or stock exchange rules, a participant who would be adversely affected by such an amendment must consent to it. The Board has adopted the Directors’ Deferral Plan as a subplan of the 2018 Plan. Except in connection with certain events described below (Share Adjustment Provisions), the Amended 2018 Plan prohibits the Committee from repricing any outstanding “underwater” option or SAR awards without the prior approval of our shareholders. For these purposes, a “repricing” includes amending the terms of an underwater option or SAR award to lower the exercise price, canceling an underwater option or SAR award in conjunction with granting a replacement option or SAR award with a lower exercise price, canceling an underwater option or SAR award in exchange for cash, other property or grant of a new full value award, or otherwise making an underwater option or SAR award subject to any action that would be treated under accounting rules as a “repricing.” Available Shares and Limitations on Awards. Subject to adjustment in the event of specified capitalization events, the total number of shares of our common stock that will be authorized and available for issuance pursuant to awards granted under the Amended 2018 Plan will be 26,325,395 as of the date the Amended 2018 Plan is approved by the Company’s shareholders. Subject to adjustment in the event of specified capitalization events, no more than 26,325,395 shares may be issued pursuant to the exercise of incentive stock options. To the extent permitted by applicable law or any stock exchange rule, shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired in any form of combination by the Company or an affiliate (referred to as “substitute awards”) will not be counted against shares available for grant pursuant to the Amended 2018 Plan. The payment of a dividend equivalent right in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the Amended 2018 Plan. The following shares will be available for reissuance pursuant to the Plan: (i) shares that are specificnot issued as a result of the termination, expiration or lapsing of any award for any reason; and (ii) shares subject to Lilly,a full value award that are not issued because the award is settled in cash. The following shares will count against the maximum number of shares available for issuance and will not be returned to the Amended 2018 Plan: (i) shares that are tendered (either actually or by attestation) by the participant or withheld by the Company in payment of the exercise price of a stock option issued under the Plan; (ii) shares tendered (either actually or by attestation) by the participant or withheld by the Company to satisfy any tax withholding obligation with respect to an award under the Plan; (iii) shares repurchased by the Company with proceeds received from the exercise of a stock option issued under the Plan; and (iv) shares subject to a SAR award issued under the Plan that are not issued in connection with the stock settlement of that award upon its exercise. Non-Employee Directors will be eligible to receive all types of awards (except for incentive stock options) under the Amended 2018 Plan, including deferred shares pursuant to the Directors’ Deferral Plan. No Non-Employee Director may be granted awards, the grant date fair value of which, when aggregated with cash compensation payable to the director in any calendar year, exceeds $800,000 in any calendar year. 82 2023 Proxy Statement | | | |
TABLE OF CONTENTS Types of Awards. Under the Amended 2018 Plan, the following awards may be granted: stock options (including “incentive stock options” within the meaning of Section 422 of the Code), stock appreciation rights, restricted stock, restricted stock units, performance-based awards, and other share-based awards (all such grants are collectively referred to in this summary as “awards”). These types of awards are described in more detail below: Stock Options. The Amended 2018 Plan authorizes the grant of incentive stock options, which are intended to satisfy the requirements of Section 422 of the Code, and non-qualified stock options, which are stock options that are not intended to satisfy the requirements of Section 422 of the Code. The exercise price of stock options granted under the Amended 2018 Plan may not be less than 100% (or higher in the case of certain incentive stock options) of the fair market value of a share of our former parent company,common stock on the date of grant. For as long as the shares are traded on an established stock exchange, “fair market value” means, as of any given date, the closing price of a share as quoted on the principal exchange on which were implementedthe shares are listed for such date, or if no sale occurred on such date, the first trading date immediately prior to such date during which a sale occurred. Subject to the one-year minimum vesting requirement described below, stock options granted under the Amended 2018 Plan will vest at the rate specified by the Committee. No stock option will be exercisable for more than ten years after the date it is granted. The maximum number of shares with respect to which incentive stock options granted to any participant may first become exercisable during any calendar year may not exceed $100,000. Any incentive stock options that become exercisable in excess of this amount will be treated as non-qualified stock options. Until the shares are issued, no right to vote or receive dividends or dividend equivalents or any other rights as a shareholder will exist with respect to the shares subject to an option, notwithstanding the exercise of an option. If a participant ceases to provide services to the Company or any affiliate, the participant may exercise his or her option within such period of time as is specified in the award agreement to the extent that the option is vested on the date of termination (but in no event later than the expiration of the term of such option as set forth in the award agreement). Stock Appreciation Rights. Stock appreciation rights, or “SARs,” typically provide for payments to the holder based upon increases in the price of our shares from the date the SAR was granted to the date that the right is exercised. The exercise price of a SAR may not be less than the fair market value of a share on the date of grant of the SAR. The Committee may elect to settle exercised SARs in cash, in shares, or in a combination of cash and shares. Until the shares, if any, are issued, no right to vote or receive dividends or any other rights as a shareholder will exist with respect to the shares subject to a SAR, notwithstanding the exercise of the SAR. Subject to the one-year minimum vesting requirement described below, the Committee will generally determine when the SAR will vest and become exercisable. The vesting conditions, if any, may be based on, among other conditions, continued service, the attainment of performance conditions, or a combination of both. The Committee determines the term of a SAR, but no SAR will be exercisable more than ten years after the date it is granted. Unless otherwise provided in the Amended 2018 Plan or an award agreement, upon termination of a participant's employment or service, a SAR will generally be subject to the same conditions as apply to stock options. A SAR may be granted as a standalone right or in connection with an option granted under the Amended 2018 Plan. Restricted Stock Awards. An award of restricted stock is a direct grant of common stock, subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote the underlying shares or the right to receive dividends with respect to the underlying shares). The restrictions, if any, may be based on, among other conditions, continued service, the attainment of performance conditions, or a combination of both. These restrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the award or thereafter. Generally, any shares subject to restrictions are forfeited upon termination of employment. The price, if any, that participants are required to pay for each share of restricted stock will be set by the Committee and will be paid in a form approved by the Committee in its sole discretion, which may be cash, services rendered or to be rendered to the Company or an affiliate, or in another form of payment. To the extent that any dividends are payable with respect to a restricted stock award, the dividends will be accumulated and subject to any restrictions and risk of forfeiture to which the underlying restricted stock is subject. Restricted Stock Units. Restricted stock units are denominated in unit equivalents of shares and are typically awarded to participants without payment of consideration. Subject to the one-year minimum vesting requirement described below, restricted stock units may be subject to vesting conditions based upon continued service, the attainment of performance-based conditions, or both. Except as otherwise determined by the Committee at the time of the grant of the award or thereafter, any restricted stock units that are not vested as of the date of the participant's termination of service will be forfeited. 83 2023 Proxy Statement | | | |
TABLE OF CONTENTS Restricted stock units may be settled in shares, cash, or a combination of both. Unlike restricted stock, the stock underlying restricted stock units will not be issued until the restricted stock units have vested. In addition, recipients of restricted stock units generally have no voting or dividend rights until the vesting conditions are satisfied and the underlying shares are issued. On the vesting date (or such later date as determined by the Committee and set forth in the agreement evidencing the award), the participant will be issued one unrestricted, fully transferable share for each restricted stock unit scheduled to be paid out on such date and not previously forfeited. Alternatively, settlement of a restricted stock unit may be made in cash (in an amount reflecting the fair market value of shares that would have been issued) or any combination of cash and shares, as determined by the Committee, in its sole discretion. The Committee may authorize dividend equivalents to be paid on outstanding restricted stock units. If dividend equivalents are authorized to be paid, they may be payable in cash or shares, as determined in the discretion of the Committee, only to the extent the underlying restricted stock unit vests. Performance-Based Awards. The Committee may grant to eligible individuals the right to receive performance-based awards. Subject to the one-year minimum vesting requirement described below, performance-based awards vest upon the attainment of performance goals based on business criteria specified by the Committee pursuant to the Amended 2018 Plan over a specified performance period. In determining the amount earned by an eligible individual, the Committee has the right to adjust or eliminate the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the performance period. Other Share-Based Awards. The Committee is authorized under the Amended 2018 Plan to make any other award that is not inconsistent with the provisions of the Amended 2018 Plan and that involves or might involve the issuance of shares. Awards may be granted pursuant to one or more separate programs or subplans under the Plan for the purpose of issuing particular forms of awards to one or more classes of participants as determined by the Committee. This includes, but is not limited to, share awards granted or deferred under the Director Plan. Other share-based awards may be fully vested, or subject to vesting based on continued service, the attainment of performance conditions, or a combination of both. The Committee may elect to settle these awards in cash, in shares, or in a combination of cash and shares. The Committee may establish the exercise price, if any, of any other share-based awards granted under the Plan, except that the exercise price may not be less than the fair market value of a share on the date of grant for an award that is intended to be exempt from Section 409A of the Code. The Committee may authorize dividend equivalents to be paid with respect to a share-based award that is a full value award that are payable only to the extent the underlying award vests. The Committee determines the term of these awards, not to exceed ten years after the date it is granted. Minimum Vesting Requirements. No award may vest before the first anniversary of the date of grant, subject to certain accelerated vesting contemplated under the Amended 2018 Plan, with the exception of (i) up to five percent (5%) of the number of shares reserved for issuance under the Amended 2018 Plan, (ii) awards granted in connection with the assumption or substitution of awards as part of a transaction, (iii) awards granted to non-employee directors under the Director Plan, and (iv) awards that may be settled only in cash. Transferability of Awards. Except as otherwise provided by the Committee, no award granted under the Amended 2018 Plan may not be assigned, transferred, or otherwise disposed of by a participant other than by will or the laws of descent and distribution. The Committee may provide in an award agreement or otherwise that an award (other than an incentive stock option) may be transferred pursuant to a domestic relations order or by gift to the participant’s family member. Adjustments Upon Changes in Capitalization. In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, or other distribution (other than normal cash dividends) of the Company’s assets to our separation from Lillyshareholders, or any other similar event or other change related to a corporate event affecting our shares or the price of our shares other than certain equity restructurings identified in the Amended 2018 including: Establishing that no fiduciary duty shall be deemedPlan, the Committee has discretion to exist between Lillymake appropriate adjustments in the number and Elanco;
Regulatingtype of shares subject to the Amended 2018 Plan, the terms and definingconditions of any award outstanding under the conductAmended 2018 Plan, and the grant or exercise price of any such award. In the case of certain equity restructurings as specified in the Amended 2018 Plan, the number and type of securities subject to each outstanding award and the grant or exercise price will be equitably adjusted.
Change in Control. Unless precluded by any applicable award agreement, if a Change in Control of the businessCompany occurs, each award outstanding under the Amended 2018 Plan that vests solely on continued service that is not converted, assumed, substituted, or replaced by the successor or survivor corporation or its parent or subsidiary will vest and affairsbecome exercisable and/or all forfeiture restrictions will lapse immediately prior to the Change in Control, and following the Change in Control, the awards will immediately terminate. Awards that vest based on the attainment of Elancoperformance-based conditions will be subject to the award agreement provision governing the impact of a Change in relationControl, provided the award agreement may not permit vesting of awards at a rate greater than the actual level of attainment and/or will provide for pro-rated vesting based on any reduction to Lilly;the performance period Addressing certain agreements and transactions with Lilly; and84 2023 Proxy Statement | | | |
Regulating certain corporate opportunities.
TABLE OF CONTENTS resulting from the Change in Control. Where awards are assumed or continued after a Change in Control, the Committee may provide that the vesting of one or more awards will automatically accelerate upon an involuntary termination of the participant's employment or service without cause within a designated period following the change in control. “Change in Control” is defined as any of the following: The acquisition by a person or group of beneficial ownership of more than 20% of the voting power of our stock; Our incumbent directors ceasing to constitute a majority of our board; A merger, consolidation, or share exchange involving transfer of controlling voting power; or A sale of all or substantially more of the assets of the Company. In lightaddition, a Change in Control must constitute a change control the Company under Section 409A of our current ownership structure, our Board believes the Lilly provisions are no longer applicable or relevantInternal Revenue Code to us. Therefore, our Board unanimously concluded,be treated as a Change in Control under the Plan. Term of the Amended 2018 Plan. The Amended 2018 Plan will become effective on the recommendation of the Nominating and Corporate Governance Committee,date that the proposed changes contemplated by this Proposal No. 6 should be made. For Proposal No. 6, the proposed amendments to the Articles of Incorporation would eliminate all provisions that specifically relate to Lilly. These proposed amendments to the Articles of Incorporation are included with this proxy statement as Appendix D.
If this Proposal No. 6it is approved by the requisite votesCompany’s shareholders. The Plan will continue in effect until the tenth anniversary of the date that the shareholders approve the Amended 2018 Plan, unless earlier terminated by our Board. Any awards that are outstanding at the time the Amended 2018 Plan terminates will remain in force according to the terms of the Amended 2018 Plan and the applicable agreement evidencing the award.
Amendment and Termination of the Plan. The Board, or with the approval of our Board, the Committee, at any time may terminate, amend or modify the Amended 2018 Plan, except that our Board may not, without prior shareholder approval, amend or modify the Amended 2018 Plan in any manner that would require shareholder approval to comply with any applicable laws. Termination or amendment of the Amended 2018 Plan may not adversely affect any outstanding award without the consent of the affected participant, except for amendments necessary to comply with applicable laws. Furthermore, absent approval of our shareholders, atno option or SAR may be amended to reduce the Annual Meeting, the proposed amendments to the Articles of Incorporation would become effective upon the filingexercise price or grant price of the amendedshares subject to such option or SAR and restated Articles of Incorporation with(except as permitted under the Secretary of State of the State of Indiana, which we would file promptly following the Annual Meeting if our shareholders approve the amendments. If this Proposal No. 6 is not approved by the requisite votes of our shareholders at the Annual Meeting, the amendments to the Articles of Incorporation would not become effective and the provisions that relate to Lilly would continue to apply. The affirmative vote of a majority of the votes cast (more shares voted “For” than “Against”) is required to approve the elimination of the legacy provisions of the ArticlesAmended 2018 Plan dealing with certain capitalization adjustments, changes in control, and other events) no option or SAR may be cancelled in exchange for the grant of Incorporation specifican option or SAR having a lower per share exercise price or for a cash payment or another award at a time when the option or SAR has a per share exercise price that is higher than the fair market value of the shares.
Clawback/Recovery. Awards are subject to Lilly.recoupment under any “clawback” policy adopted by the Company providing for the recovery of awards, shares, proceeds, or payments to participants in the event of fraud or as required by applicable laws or governance considerations or in other similar circumstances. As noted above, weU.S. FEDERAL INCOME TAX CONSEQUENCES OF AWARDS
The following is a summary of U.S. federal income tax consequences of awards under the Amended 2018 Plan, based on current U.S. federal income tax laws. This summary does not constitute legal or tax advice and does not address municipal, state or foreign income tax consequences. Participants in the Amended 2018 Plan are urged to consult their own tax advisors with respect to the particular federal income tax consequences to them of participating in the Amended 2018 Plan, as well as with respect to any applicable municipal, state, or foreign income tax or other tax considerations. Non-Qualified Stock Options. The grant of a non-qualified stock option will not result in taxable income to the holder. The holder will recognize ordinary income at the time of exercise equal to the excess of the fair market value of the shares on the date of exercise over the exercise price, and the Company will be entitled to a corresponding deduction for tax purposes. Gains or losses realized by the holder upon the sale of the shares acquired on exercise will be treated as capital gains or losses. Incentive Stock Options. The grant of an incentive stock option will not result in taxable income to the holder. The exercise of an incentive stock option will not result in taxable income to the holder if, at the time of exercise, the holder has been employed by the Company or any of its affiliates at all times beginning on the grant date and ending not more than 90 days before the exercise date. However, the excess of the fair market value of the shares on the date of exercise over the exercise price is an adjustment that is included in the calculation of the holder’s alternative minimum tax liability for the year the shares are sold. 85 2023 Proxy Statement | | | |
TABLE OF CONTENTS If the holder does not sell the shares acquired on exercise of an incentive stock option within two years from the grant date and one year from the exercise date, then any gain or loss realized on the sales of the shares in excess of the exercise price will be taxed as capital gain or recognized as a capital loss. If these holding requirements are not met, then the holder will generally recognize ordinary income at the time the shares are sold in an amount equal to the lesser of (a) the excess of the fair market value of the shares on the date of exercise over the exercise price, or (b) the excess, if any, of the amount realized on the sale of the shares over the exercise price, and the Company will be entitled to a corresponding deduction. SARs. The grant of a SAR will not result in taxable income to the holder. The holder will recognize ordinary income on the exercise date equal to the aggregate amount of cash received or the fair market value of the shares received, and the Company will be entitled to a corresponding deduction. If the SARs are settled in shares and the holder later sells the shares, then the holder will recognize capital gain or loss on the difference between the sale price and the amount of income recognized at exercise. Whether the capital gain or loss is long-term or short-term depends on how long the shares are held. Restricted Stock. Unless the holder makes an election to accelerate the recognition of income to the grant date (as described below), the grant of restricted stock will not result in taxable income to the participant. When the restrictions lapse, the holder will recognize ordinary income on the excess of the fair market value of the shares on the vesting date over the amount paid for the shares, if any, and the Company will be entitled to a corresponding deduction. If the holder makes an election under Section 83(b) of the Code within 30 days after the grant date, the holder will recognize ordinary income as of the grant date equal to the fair market value of the shares on the grant date over the amount paid, if any, and the Company will be entitled to a corresponding deduction. Any future appreciation will be taxed as capital gain. However, if the shares are later forfeited, the holder will not be able to recover any taxes paid. Restricted Stock Units. The grant of a restricted stock unit will not result in taxable income to the holder. When the restricted stock unit is settled, the holder will recognize ordinary income equal to the fair market value of the shares received or the cash provided on settlement, and the Company will be entitled to a corresponding deduction. Any future appreciation with respect to shares received in settlement of a restricted stock unit will be taxed as capital gains. Section 409A. Section 409A of the Code imposes complex rules on nonqualified deferred compensation arrangements, including with respect to compensation deferral elections and the timing of deferred compensation payments. Certain equity awards may be subject to Section 409A of the Code, while others are exempt. If an award is subject to Section 409A of the Code and a violation occurs, the compensation is includible in income when it is no longer subject to a substantial risk of forfeiture, and the holder may be subject to a 20% penalty tax and, in some cases, interest penalties. The 2018 Plan and awards granted thereunder are intended to be exempt from or conform to the requirements of Section 409A of the Code. Section 162(m). Section 162(m) of the Code denies deductions to publicly held corporations for compensation paid to certain senior executives that exceeds $1,000,000. Withholding. The Company is entitled to satisfy all applicable income and employment taxes required by federal, state, municipal, or foreign law to be withheld by deducting from the payment or settlement of any award (whether made in shares or cash), withholding from wages, or other cash compensation payable to the participant, or requiring the participant to pay such withholding taxes to the Company as a condition of receiving payment or settlement of an award. AWARDS UNDER THE AMENDED PLAN Because all awards under the Amended 2018 Plan are discretionary with the Committee, neither the number nor types of future Plan awards to be received by or allocated to particular participants or groups of participants is presently determinable. However, on March 31, 2023, the Board approved the adoption of the Directors’ Deferral Plan as a subplan under the Amended 2018 Plan, contingent upon the effectiveness of the Amended 2018 Plan. The Directors’ Deferral Plan provides that Non-Employee Directors will be awarded annual grants of fully vested shares in the amount of the lesser of (i) 30,000 shares or (ii) the number of shares equal in value to $800,000 minus the director’s total cash compensation for the year (including any cash compensation deferred and paid in shares under the Directors’ Deferral Plan). Under the Directors’ Deferral Plan, Non-Employee Directors may also submittingdefer the receipt of some or all of their cash compensation into a proposal (Proposal No. 5)book entry deferred share account. Dividend equivalents will be paid on all deferred shares and deemed reinvested in additional deferred shares. Each Non-Employee Director may elect to amend our Articlesreceive accumulated deferred shares in a lump sum in the second year following the director’s separation from service, or in annual installments. Payment of Incorporationdeferred shares will be accelerated, and such shares will be paid in a lump sum, upon the Non-Employee Director’s death. 86 2023 Proxy Statement | | | |
TABLE OF CONTENTS Existing Plan Benefits. In accordance with SEC rules, the following table lists all awards granted to eliminate supermajority voting. Approvalthe individuals and groups indicated below since the adoption of the 2018 Plan through March 31, 2023 (all PA awards are reported based on the target number of shares). The awards listed below for the covered executives include the equity awards listed in the executive compensation tables beginning on page 64 of this Proposal No. 6 isProxy Statement and are not contingent on approval of Proposal No. 5. If Proposal No. 6 is approved by the requisite vote of our shareholders, but Proposal No. 5 is not, then we would promptly file an amended and restated Articles of Incorporation with the Secretary of State of the State of Indiana following the Annual Meeting solely reflecting the amendments in Appendix D (but not Appendix C).additional awards. | | Jeffrey Simmons - President and CEO | | | 3,063,446 | | | | Todd Young - Executive Vice President and Chief Financial Officer | | | 626,706 | | | | Ellen De Brabander - Executive Vice President, Innovation, Regulatory, and Business Development | | | 367,208 | | | | Ramiro Cabral - Executive Vice President, Elanco International | | | 432,184 | | | | Bobby Modi - Executive Vice President, U.S. Pet Health and Global Digital Transformation | | | 157,642 | | | | Current executive officers as a group | | | 5,774,189 | | | | Non-Employee Directors as a group | | | — | | | | All other employees (including all current officers who are not executive officers) as a group | | | 8,713,263 | |
| | Recommendation of the Board
The Board unanimously recommends a vote “FOR” the management proposal to eliminateapproval of the legacy parent provisions from our Articles of Incorporation.Amended and Restated 2018 Elanco Stock Plan. | |
72 202287 2023 Proxy Statement
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| | | Stock Ownership
Information | |
Security Ownership of Directors and Executive Officers The following table shows the shares of our common stock beneficially owned as of March 7, 202220, 2023 by each director and NEO individually and by all of our executive officers and directors as of such date as a group. Shares reported as beneficially owned include shares held indirectly. It also includes shares subject to stock options exercisable and RSUs subject to conversion in shares of common stock, within sixty days of March 7, 2022.20, 2023. As of such date, none of these shares were pledged as security. | | Kapila K. Anand | | | 3,200 | | | 28,925 | | | * | | | | John P. Bilbrey | | | 24,222(3) | | | 54,597 | | | * | | | | William F. Doyle | | | — | | | 7,307 | | | * | | | | Scott D. Ferguson | | | 27,835,500(4) | | | 27,842,807 | | | 5.9% | | | | Art A. Garcia | | | 3,525 | | | 23,772 | | | * | | | | Michael J. Harrington | | | 13,000 | | | 35,471 | | | * | | | | Paul Herendeen | | | — | | | 7,307 | | | * | | | | R. David Hoover | | | 145,920(5) | | | 190,582 | | | * | | | | Deborah T. Kochevar | | | 1,000 | | | 22,208 | | | * | | | | Lawrence E. Kurzius | | | 10,000 | | | 43,960 | | | * | | | | Kirk P. McDonald | | | — | | | 21,208 | | | * | | | | Denise Scots-Knight | | | — | | | 22,195 | | | * | | | | Jeffrey N. Simmons | | | 697,266 | | | 1,096,788 | | | * | | | | Todd S. Young | | | 88,286(6) | | | 155,429 | | | * | | | | Ramiro Cabral | | | 81,210 | | | 137,774 | | | * | | | | Joyce Lee | | | 12,134(6) | | | 12,134(6) | | | * | | | | Aaron L. Schacht | | | 112,774 | | | 112,774 | | | * | | | | All directors and executive officers as a group (21 persons) | | | 29,152,734(8) | | | 30,157,823 | | | 6.4% | |
| | Kapila Anand | | | 47,574 | | | * | | | | John Bilbrey | | | 96,066(2) | | | * | | | | William Doyle | | | 25,956 | | | * | | | | Art Garcia | | | 42,421 | | | * | | | | Michael Harrington | | | 54,120 | | | * | | | | Paul Herendeen | | | 35,956 | | | * | | | | R. David Hoover | | | 265,656(3) | | | * | | | | Deborah Kochevar | | | 40,857 | | | * | | | | Lawrence Kurzius | | | 68,131 | | | * | | | | Kirk McDonald | | | 39,857 | | | * | | | | Denise Scots-Knight | | | 40,844 | | | * | | | | Jeffrey Simmons | | | 1,374,483(4) | | | * | | | | Todd Young | | | 233,803(5) | | | * | | | | Ellen de Brabander | | | 104,518 | | | * | | | | Ramiro Cabral | | | 170,069 | | | * | | | | Bobby Modi | | | 66,355 | | | * | | | | All directors and executive officers as a group (22 persons) | | | 3,166,084 | | | * | |
*
| Less than 1% of the outstanding shares of common stock. |
(1)
| Includes the following shares not currently outstanding but deemed beneficially owned because of the right to acquire them pursuant to non-qualified stock options currently exercisable or that will become exercisable within 60 days: 109,642186,914 shares for Mr. Simmons, 49,33319,015 shares for Mr. Young, and 21,08612,712 shares for Dr. de Brabander, 32,222 shares for Dr. Cabral, 0 shares for Mr. Cabral.Modi and 72,610 shares for the Company’s other executive officers. |
(2)
| This column shows the individual’s total Elanco stock-based holdings, including securities shown in the “Shares Beneficially Owned” column (as described above), plus stock-based holdings that cannot be converted intoIncludes 41,722 shares of our common stock within 60 days, including,held indirectly through a revocable trust. |
(3)
| Includes 180,920 shares held indirectly through revocable trusts. |
(4)
| Includes 45,000 shares held indirectly through a revocable trust. |
(5)
| Includes 114,309 shares held indirectly through a Living Trust, 6,562 by an IRA, 4,000 as applicable, RSUs subject to time-based vesting conditionsUTMA custodian for minors, and DSUs held2,000 by directors. The number does not include (i) performance-based awards granted to executive officers that are subject to performance-based vesting conditions, or (ii) the annual award of DSUs to be credited to non-employee directors in November 2021 under the Directors’ Deferral Plan based on service during 2021.spouse IRA account. |
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(3)
| Includes 24,222 shares held indirectly through a revocable trust. |
(4)
| Mr. Ferguson has shared voting and investment power over all of the shares, which he shares with Sachem Head and Uncas GP LLC (each as to all shares reported) and with Sachem Head GP LLC (as to 11,000,000 of such shares). |
(5)
| Includes 130,920 shares held indirectly through revocable trusts. |
(6)
| Includes 7,000 shares held indirectly through a retirement account. |
(7)
| Based solely on our records as of December 31, 2021. |
(8)
| Includes the shares not currently outstanding but deemed beneficially owned because of the right to acquire them pursuant to non-qualified stock options currently exercisable or exercisable within 60 days held by Mr. Simmons, Mr. Cabral and Mr. Young as reported in footnote 2 above and with respect to non-qualified stock options to acquire 42,172 shares currently exercisable or that will become exercisable within 60 days held by two other executive officers. |
Security Ownership of Certain Beneficial Owners The following table shows all entities that are the beneficial owners of more than 5% of our common stock as of March 7, 2022.20, 2023. | | Name | | Number of
Shares | | Percent of
Class | | Name | | Number of
Shares | | Percent of
Class | | | | The Vanguard Group(1) | | 40,801,815 | | 8.6% | | Dodge & Cox(1) | | 84,775,075 | | 17.2 % | | | | T. Rowe Price Associates, Inc.(2) | | 34,674,308 | | 7.3% | | The Vanguard Group(2) | | 45,691,838 | | 9.3 % | | | | PRIMECAP Management Company(3) | | 30,158,966 | | 6.4% | | PRIMECAP Management Company(3) | | 32,983,562 | | 6.7 % | | | | Aristotle Capital Management, LLC(4) | | 29,210,842 | | 6.2% | | BlackRock, Inc.(4) | | 30,546,195 | | 6.2 % | | | | Sachem Head Capital Management(5) | | 27,835,500 | | 5.9% | | | | | BlackRock, Inc.(6) | | 26,187,956 | | 5.5% | | |
(1)
| As of December 31, 2021,2022, based on information set forth in a Schedule 13G/A filed with the SEC on February 14, 2023 by Dodge & Cox (“Dodge & Cox”). Dodge & Cox's business address is 555 California Street, 40th Floor, San Francisco, CA 94104. Represents (i) 84,775,075 shares for which Dodge & Cox has sole dispositive power; (ii) no shares for which Dodge & Cox has shared dispositive power; (iii) 80,123,275 shares for which Dodge & Cox has sole voting power; and (iv) no shares for which Dodge & Cox has shared voting power. |
(2)
| As of December 31, 2022, based on information set forth in a Schedule 13G/A filed with the SEC on February 9, 20222023 by The Vanguard Group (“Vanguard”). Vanguard’s business address is 100 Vanguard Blvd., Malvern, PA 19355. Represents (i) 39,866,93644,699,964 shares for which Vanguard has sole dispositive power, (ii) 934,879991,874 shares for which Vanguard has shared dispositive power, (iii) no shares for which Vanguard has sole voting power and (iv) 379,635380,591 shares for which Vanguard has shared voting power. |
(2)
(3)
| As of December 31, 2021,2022, based on information set forth in a Schedule 13G/A filed with the SEC on February 14, 2022 by T. Rowe Price Associates, Inc. (“T. Rowe Price”). T. Rowe Price’s business address is 100 E. Pratt Street, Baltimore, MD 21202. Represents (i) 34,674,308 shares for which T. Rowe Price has sole dispositive power, (ii) no shares for which T. Rowe Price has shared dispositive power, (iii) 17,586,994 shares for which T. Rowe Price has sole voting power, and (iv) no shares for which T. Rowe Price has shared voting power. |
(3)
| As of December 31, 2021, based on information set forth in a Schedule 13G/A filed with the SEC on February 10, 20229, 2023 by PRIMECAP Management Company (“PRIMECAP”). PRIMECAP’s business address is 177 E. Colorado Blvd., 11th Floor, Pasadena, CA 91105. Represents (i) 30,158,96632,983,562 shares for which PRIMECAP has sole dispositive power, (ii) no shares for which PRIMECAP has shared dispositive power, (iii) 29,127,36231,569,832 shares for which PRIMECAP has sole voting power and (iv) no shares for which PRIMECAP has shared voting power. |
(4)
| As of December 31, 2021,2022, based on information set forth in a Schedule 13G/A filed with the SEC on February 14, 2022 by Aristotle Capital Management, LLC (“Aristotle”). Aristotle’s business address is 11100 Santa Monica Blvd., Suite 1700, Los Angeles, CA 90025. Represents (i) 29,210,842 shares for which Aristotle has sole dispositive power, (ii) no shares for which Aristotle has shared dispositive power, (iii) 26,321,807 shares for which Aristotle has sole voting power, and (iv) no shares for which Aristotle has shared voting power. |
(5)
| As of December 31, 2021, based on information set forth in a Schedule 13D/A filed with the SEC on December 15, 2020 by Sachem Head. Sachem Head’s business address is 250 West 55th Street, 34th Floor, New York, NY 10019. Represents (i) no shares for which Sachem Head has sole dispositive power, (ii) 27,835,500 shares for which Sachem Head has shared dispositive power, (iii) no shares for which Sachem Head has sole voting power, and (iv) 27,835,500 shares for which Sachem Head has shared voting power. Uncas GP LLC has shared voting power and shared dispositive power over 27,835,500 shares, and Sachem Head GP LLC has shared voting power and shared dispositive power over 11,000,000 shares. Scott D. Ferguson has shared voting power and shared dispositive power over all of the shares reported. |
(6)
| As of December 31, 2021, based on information set forth in a Schedule 13G/A filed with the SEC on February 8, 202218, 2023 by BlackRock, Inc. (“BlackRock”). BlackRock’s business address is 55 East 52nd Street, New York, NY 10055. Represents (i) 26,187,95630,546,195 shares for which BlackRock has sole dispositive power, (ii) no shares for which BlackRock has shared dispositive power, (iii) 22,980,58327,293,571 shares for which BlackRock has sole voting power and (iv) no shares for which BlackRock has shared voting power. |
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Delinquent Section 16(a) Reports Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in beneficial ownership of such equity securities. To our knowledge, no executive officer or director of Elanco failed to file reports required by Section 16(a) on a timely basis, except as follows due to an administrative oversight: (i) for (i) oneMr. Meer, three late Form 4 filings reporting (a) one RSU grant, (b) one acquisition of shares from a PSU settlement and one forfeiture of shares for eachwithholding to cover taxes upon vesting, and (c) one RSU grant and two forfeitures of shares to cover taxes upon vesting; and (ii) for Mr. Bilbrey, Mr. Hoover and Mr. Kurzius to report the receipt of one DSU in connection with a deferral of cash retainer fees; (ii) one late Form 4 for Ms. Anand reporting the receipt of six DSUs in connection with deferrals of cash retainer fees; and (iii) one lateModi, his initial Form 3 reporting no holdings andwas filed one late Form 4 reporting an initial RSU grant for Dr. de Brabander.day late. 75 202290 2023 Proxy Statement
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| | | Equity Compensation Plan
Information | |
The following table shows information, as of December 31, 2021,2022, regarding shares of our common stock authorized for issuance under our equity compensation plans. As of such date, other than as described below, no equity securities were authorized for issuance under equity compensation plans not approved by shareholders. | | | | Number of securities
to be issued upon
exercise of outstanding
options and rights
(a) | | Weighted-average
exercise price of
outstanding options
and rights(1)
(b) | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c) | | | | Number of securities
to be issued upon
exercise of outstanding
options and rights
(a) | | Weighted-average
exercise price of
outstanding options
and rights(1)
(b) | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c) | | | | Equity Compensation Plans approved by security holders | | 3,517,576(2) | | $31.61 | | 14,405,911 | | Equity Compensation Plans approved by security holders | | 4,110,324(2) | | $29.77 | | 12,691,750 | |
(1)
| The weighted-average exercise price is calculated based solely on the exercise prices of the outstanding stock options and do not reflect the shares that will be issued upon the vesting of outstanding awards of RSUs, which have no exercise price. |
(2)
| This number includes 278,326662,930 stock options, 2,977,3872,961,015 shares underlying RSUs granted under the 2018 Stock Plan and 261,863486,379 DSUs, which includes 39,59158,968 DSUs earned by directors who have elected to defer their cash compensation into Elanco shares. These shares will be fully vested upon departure from our Board. |
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| | | General Information About the Annual Meeting | |
Online Meeting We will conduct the Annual Meeting solely via the Internet through a live audio webcast. We continue to use the virtual annual meeting format to facilitate shareholder attendance and participation, as we believe this format enables shareholders to participate fully from any location around the world, at no cost to them. You are entitled to attend and participate in the virtual Annual Meeting only if you held your shares as of the close of business on March 21, 202220, 2023 (the “Record Date”) or if you hold a valid proxy for the Annual Meeting. If you were not an Elanco shareholder as of such date, you may still view the meeting online. Applicable shareholders who wish to participate in the Annual Meeting, or other interested participants who wish to view but not participate in the Annual Meeting, may do so by visitingwww.virtualshareholder
meeting.com/ELAN2022.ELAN2023. To attend online and participate in the Annual Meeting, shareholders of record will need to use their control number on the Notice of Internet Availability of Proxy Materials (the “Notice of Internet Availability”) provided to them, or their proxy card, to log into www.virtualshareholdermeeting.com/ELAN2022. ELAN2023. If you are a beneficial shareholder and your voting instruction form or Notice of Internet Availability indicates that you may vote those shares through the www.proxyvote.com website, then you may access, participate in and vote at the Annual Meeting with the 16-digit access code indicated on that voting instruction form or Notice of Internet Availability. Otherwise, beneficial shareholders who do not have a control number or access code should contact their bank, broker, or other nominee (preferably at least 5 days before the Annual Meeting) and obtain a “legal proxy” in order to be able to attend, participate in, or vote at the Annual Meeting. We encourage you to access the meeting prior to the start time. Please allow ample time for online check-in, which will begin at 7:45 a.m. Eastern Time. If you have difficulties during the check-in time or during the Annual Meeting, we will have technicians ready to assist you with any difficulties you may have accessing the virtual meeting. If you encounter any difficulties accessing the virtual meeting during the check-in or meeting time, please call the technical support number that will be posted on the Virtual Shareholder Meeting log-in page. Shareholders have multiple opportunities to submit questions to us for the Annual Meeting. Shareholders who wish to submit a question in advance may do so at either www.proxyvote.comor on our Annual Meeting website at www.virtualshareholder
meeting.com/ELAN2022. ELAN2023. Shareholders also may submit questions live during the meeting. We reserve the right to eject an attendee or cut off speaking privileges for behavior likely to cause disruption or annoyance or for failure to comply with reasonable requests or the rules of conduct for the meeting, including time limits applicable to attendees who are permitted to speak. We also reserve the right to edit profanity or other inappropriate language and to exclude questions regarding topics that are not pertinent to meeting matters or Elanco business. If we receive substantially similar questions, we may group such questions together and provide a single response to avoid repetition. 77 202292 2023 Proxy Statement
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Who Can Vote You are entitled to vote at the Annual Meeting if our records show that you held your shares as of the Record Date. At the close of business on that date, a total of •492,047,948 shares of our common stock were outstanding and entitled to vote. In addition to shareholders of record of our common stock, “beneficial owners of shares held in street name” as of the Record Date can vote using the methods described below. Shareholders of Record.| • | Shareholders of Record. If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are the shareholder of record with respect to those shares. Beneficial Owners of Shares Held in Street Name. If your shares are held in an account at a bank, broker, or other organization, then you are the “beneficial owner of shares held in street name” (a “beneficial shareholder”). As a beneficial shareholder, you have the right to instruct the person or organization holding your shares how to vote your shares. Most individual shareholders are beneficial owners of shares held in street name.
|
| • | Beneficial Owners of Shares Held in Street Name. If your shares are held in an account at a bank, broker, or other organization, then you are the “beneficial owner of shares held in street name” (a “beneficial shareholder”). As a beneficial shareholder, you have the right to instruct the person or organization holding your shares how to vote your shares. Most individual shareholders are beneficial owners of shares held in street name. |
Voting Before or During the Annual Meeting There are four ways to vote: Online Prior to the Annual Meeting. You may vote by proxy by visiting www.proxyvote.com and entering the control number found in| • | Online Prior to the Annual Meeting. You may vote by proxy by visiting www.proxyvote.com and entering the control number found on your Notice of Internet Availability. The availability of online voting may depend on the voting procedures of the organization that holds your shares. Online During the Annual Meeting. You may vote online during the Annual Meeting by visiting www.virtualshareholder
meeting.com/ELAN2022, entering the control number found in your Notice of Internet Availability, and following the on-screen instructions. The availability of online voting may depend on the voting procedures of the organization that holds your shares. Voting online during the meeting will replace any previous votes.
Telephone. If you request printed copies of the proxy materials by mail, you will receive a proxy card or voting instruction form and you may vote by proxy by calling the toll-free number found on the card or form. The availability of telephone voting may depend on the voting procedures of the organization that holds your shares.
Mail. If you request printed copies of the proxy materials by mail, you will receive a proxy card or voting instruction form and you may vote by proxy by filling out the card or form and returning it in the envelope provided.
|
| • | Online During the Annual Meeting. You may vote online during the Annual Meeting by visiting www.virtualshareholder meeting.com/ELAN2023, entering the control number found on your Notice of Internet Availability and following the on-screen instructions. The availability of online voting may depend on the voting procedures of the organization that holds your shares. Voting online during the meeting will replace any previous votes. |
| • | Telephone. If you request printed copies of the proxy materials by mail, you will receive a proxy card or voting instruction form and you may vote by proxy by calling the toll-free number found on the card or form. The availability of telephone voting may depend on the voting procedures of the organization that holds your shares. |
| • | Mail. If you request printed copies of the proxy materials by mail, you will receive a proxy card or voting instruction form and you may vote by proxy by filling out the card or form and returning it in the envelope provided. |
Whether you are a shareholder of record or a beneficial shareholder, you may direct how your shares are voted without participating in the Annual Meeting. We encourage shareholders to vote well before the Annual Meeting, even if they plan to attend the virtual meeting, by completing proxies online or by telephone or, if they received printed copies of these materials, by mailing their proxy cards. The online polls will close at 11:59 p.m. Eastern Time on May 17, 2022.2023. Shareholders of record may revoke their proxy at any time before the electronic polls close by submitting a later-dated vote online during the Annual Meeting, via the Internet, by telephone, by mail, or by delivering instructions to our Corporate Secretary before the Annual Meeting begins. Beneficial shareholders may revoke any prior voting instructions by contacting the broker, bank, or other nominee that holds their shares or, if applicable, by voting online during the virtual Annual Meeting. Quorum for the Annual Meeting In order to have a quorum at the Annual Meeting, holders of a majority of the outstanding shares entitled to vote at the Annual Meeting must be present or represented by proxy for the transaction of business. Your shares will be counted for purposes of determining if there is a quorum if you are entitled to vote and you are present at the Annual Meeting, or if you have properly voted by proxy online, by phone, or by submitting a proxy card or voting instruction form by mail prior to the Annual Meeting. Broker non-votes (as described below) and abstentions are counted for purposes of determining whether a quorum is present. If a quorum is not present, we may propose to adjourn the Annual Meeting and reconvene the Annual Meeting at a later date. 78 202293 2023 Proxy Statement
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Voting Standards Each share of common stock is entitled to one vote at the Annual Meeting. To be elected (Proposal No. 1), the director nominees must receive a plurality of the votes cast by the holders of shares entitled to vote in the election at the meeting, provided a quorum is present. A “plurality of the votes cast” means that the individuals with the highest number of “for” votes are elected as directors up to the maximum number of directors to be elected. “Votes cast” excludes abstentions and any broker non-votes. Accordingly, abstentions and broker non-votes will have no effect on the election of directors. Brokers do not have discretionary authority with respect to the election of directors. For Proposal Nos. 2, 3, 4 and 6,5, each proposal will be approved if the votes cast for the proposal exceed those cast against the proposal at the meeting. Abstentions or broker non-votes with respect to these proposals, if any, and will have no effect on the outcome of the vote. Brokers have discretionary authority with respect to Proposal No. 2 and Proposal No. 6.2. Brokers do not have discretionary authority with respect to Proposal No.Proposals Nos. 1, 3, 4 and Proposal No. 4. For Proposal No. 5, the management proposal to eliminate supermajority voting, approval requires the affirmative vote of at least 66 2/3% of the votes entitled to be cast by holders of all of the outstanding shares of our common stock entitled to vote generally in the election of directors pursuant to our Articles of Incorporation. Accordingly, abstentions and broker non-votes have the same effect as “against” votes. Brokers do not have discretionary authority with respect to Proposal No. 5.
The following chart describes the proposals to be considered at the Annual Meeting, the vote required to elect directors and to adopt each other proposal and the manner in which votes will be counted. | | No. 1 – Election
of Directors | | | For, against, or
abstain on each
nominee. | | | Plurality of votes cast. | | | No effect. | | | No effect. No broker discretion to vote. | | | | No. 2 – Ratification
of Independent
Auditor | | | For, against, or
abstain. | | | More votes “for” than “against.” | | | No effect. | | | Brokers have
discretion to vote. | | | | No. 3 – Advisory
Vote on
Executive
Compensation | | | For, against, or
abstain. | | | More votes “for” than “against.” | | | No effect. | | | No effect. No broker discretion to vote. | | | | No. 4 – Approval of
Amended and
Restated ESPP | | | For, against, or
abstain. | | | More votes “for” than “against.” | | | No effect. | | | No effect. No broker discretion to vote. | | | | No. 5 – Amendments to Eliminate Supermajority VotingApproval of
Amended and
Restated 2018
Plan | | | For, against, or abstain. | | | 66 2/3% of outstanding shares.*
| | | Same effect
as vote against.
| | | Same effect as vote against. No broker discretion to vote.
| | | No. 6 – Amendments to Eliminate Legacy Parent Provisions
| | | For, against, or
abstain. | | | More votes “for” than “against.” | | | Same effect
as vote against.No effect.
| | | Brokers have
No effect. No broker discretion to vote. | |
*
| The affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of all of the outstanding shares of our common stock entitled to vote generally in the election of directors. |
If you complete and submit your proxy voting instructions, the individuals named as proxies will follow your instructions. If you are a shareholder of record and you submit proxy voting instructions but do not direct how to vote on each item, the individuals named as proxies will vote as our Board recommends on each proposal and as they may determine in their best judgment with respect to any other matters properly presented for a vote at the Annual Meeting. If you are a beneficial shareholder and do not provide the broker that holds your shares with specific voting instructions, then such broker may generally vote your shares in their discretion on “routine” matters but cannot vote on “non-routine matters.” For the Annual Meeting, only Proposal No. 2 and Proposal No. 6 areis considered a routine matters.matter. 79 202294 2023 Proxy Statement
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Cost of Proxy Solicitation We are providing these proxy materials in connection with the solicitation by our Board of proxies to be voted on at the Annual Meeting. We will pay the cost of this proxy solicitation. In addition to soliciting proxies by mail, we expect that a number of our employees will solicit shareholders personally, electronically and by telephone. None of these employees will receive any additional compensation for doing this. We have retained Innisfree M&A Incorporated to assist in the solicitation of proxies for a fee of $20,000 plus reimbursement of expenses. We will, on request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial shareholders and obtaining their voting instructions. Shareholder List Our list of shareholders as of the Record Date will be available for inspection for five business days prior to the Annual Meeting. If you want to inspect the shareholder list, please contact our Investor Relations department at investor@elanco.com to schedule an appointment. In addition, the list of shareholders will also be available during the Annual Meeting through the meeting website for those shareholders who choose to attend. 80 202295 2023 Proxy Statement
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| | | Submission of Shareholder Proposals or Nominations | |
Rule 14a-8 Proposals for Inclusion in the Proxy Statement for the 20232024 Annual Meeting Pursuant to Rule 14a-8 under the Exchange Act (“Rule 14a-8”), some shareholder proposals may be eligible for inclusion in our proxy statementProxy Statement for the 20232024 Annual Meeting).Meeting. These proposals must be received by our Corporate Secretary at our principal offices, through one of the means discussed in the “Communicating Withwith Us” section below, by no later than the close of business (5:00 p.m. Eastern Time) on •, 2022.December 8, 2023. Proposals submitted for inclusion in our proxy statementProxy Statement for the 20232024 Annual Meeting must comply with all requirements of Rule 14a-8. Director Nominations (Including Proxy Access Nominations) or Other Proposals for Presentation at the 20232024 Annual Meeting Beginning with the 2023 Annual Meeting, weProxy Access. We have adopted proxy access, which permits a shareholder, or group of up to 20 shareholders, owning 3% or more of our outstanding common stock continuously for at least three years, to submit director nomineesnominations for up to two individuals or 20% of our Board (whichever is greater) for inclusion in our proxy statementProxy Statement if the shareholder(s) and the nominee(s) meet the requirements in our Bylaws.
In addition, underDirector Nominations and Other Proposals, Other Than Proxy Access and Rule 14a-8. Under our Bylaws, a shareholder may nominate a candidate for election to our Board (other than pursuant to the proxy access provisions of our Bylaws) or tomay propose any business for presentation at the 20232024 Annual Meeting (other than proposals presented under Rule 14a-8) pursuant to the advance notice provisions of the Bylaws.
Deadline for Notice.A shareholder who desires to nominate a candidate for election to our Board (whether pursuant to the proxy access provisions of our Bylaws or otherwise) or to propose any business for presentation at the 20232024 Annual Meeting (other than proposals presented under Rule 14a-8) pursuant to the advance notice provisions of the Bylaws, must give notice to our Corporate Secretary at our principal executive offices, through one of the means discussed in the “Communicating with Us” section below, by no earlier than January 18, 20232024 and no later than the close of business (5:00 p.m. Eastern Time) on February 17, 2023.2024. The notice must include the information specified in our Bylaws, including information concerning the nominee or proposal (as applicable) and information about the shareholder’s ownership of and agreements related to our stock. If the 20232024 Annual Meeting is advanced or delayed more than 30 days from the anniversary of the Annual Meeting, a shareholder seeking to nominate a candidate for election to our Board or propose any business at our 20232024 Annual Meeting pursuant to the advance notice provisions of the Bylaws must submit notice of any such nomination and of any such proposal that is not made pursuant to Rule 14a-8 by the close of business (5:00 p.m. Eastern Time) on the later of 120 days in advance of the 20232024 Annual Meeting or, if later, 10 days following the date on which public disclosure of the date of the meeting was first made. In addition to satisfying the foregoing requirements to comply with the universal proxy rules, shareholders who intend to solicit proxies in support of director nominees other than the Board’s nominees must provide notice that sets forth the information required by Rule 14a-19 under the Securities Exchange Act of 1934 no later than March 24, 2024. Requirements for Director Nominees and Other Proposals.All director nominations and shareholder proposals must comply with the requirements of our Bylaws, including, with respect to director nominations, the eligibility requirements contained therein. A copy of our Bylaws is available on our website at www.elanco.com/en-us/about-us/governance/corporate by clicking on the “Bylaws” link. The ChairChairman may refuse to acknowledge or introduce any such matter at the 20232024 Annual Meeting if notice of the matter is not received within the applicable deadlines or does not comply with our Bylaws. If a shareholder does not meet these deadlines or does not satisfy the requirements of Rule 14a-4 of the Exchange Act, the persons named as proxies will be allowed to use their discretionary voting authority when and if the matter is raised at the 20232024 Annual Meeting. 81 202296 2023 Proxy Statement
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TABLE OF CONTENTS Communicating Withwith Us To communicate with our Board (or any individual member), make a proposal or director nomination, introduce business at an annual meeting of shareholders, revoke a prior proxy instruction, or request copies of our governance-related documents, please contact us via e-mail to elanco_corporate_secretary@elancoah.com or by mail to Elanco Animal Health Incorporated, 2500 Innovation Way, Greenfield, IN 46140, Attention: Corporate Secretary. The Corporate Secretary regularly forwards to the addressee all correspondence other than mass mailings, advertisements and other materials not relevant to our business. However, we reserve the right not to forward to Board members any abusive, threatening, or otherwise inappropriate materials. Notice of Internet Availability We use the Internet as the primary means of furnishing proxy materials to shareholders. We are sending a Notice of Internet Availability to our shareholders with instructions on how to access the proxy materials online at www.proxyvote.com or request a printed copy of the materials. Our proxy materials are also available at https://investor.elanco.com/financials/annual-reports.annual-reports/. Shareholders may follow the instructions in the Notice of Internet Availability to elect to receive future proxy materials in print by mail or electronically by e-mail. We encourage shareholders to take advantage of the availability of the proxy materials online to help reduce the environmental impact of our annual meetings and reduce our printing and mailing costs. Householding of Proxy Materials The SEC has adopted rules that permit companies and intermediaries (such as brokers and banks) to satisfy the delivery requirements for proxy statementsProxy Statements with respect to two or more security holders sharing the same address by delivering a single Notice of Internet Availability or Proxy Statement addressed to those security holders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for security holders and cost savings for companies. Several brokers and banks with accountholders who are Elanco shareholders will be “householding” our proxy materials. As indicated in the notice provided by these brokers to Elanco shareholders, a single Proxy Statement will be delivered to multiple shareholders sharing an address unless contrary instructions have been received from an affected shareholder. Once you have received notice from your broker that it will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and you prefer to receive a separate Proxy Statement,proxy statement, please notify your broker, contact Broadridge Financial Solutions at 1-866-540-7095 or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717, or send a written request to Elanco Animal Health Incorporated, 2500 Innovation Way, Greenfield, IN 46140, Attention: Investor Relations or via e-mail at investor@elanco.com. Shareholders who currently receive multiple copies of the Proxy Statement at their address and would like to request “householding” of their communications should contact their broker or bank. 82 202297 2023 Proxy Statement
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TABLE OF CONTENTS Legal Matters This document includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our long-term financial targets and ESG goals and strategies. These statements involve risks and uncertainties. Actual results could differ materially from any future results expressed or implied by the forward-looking statements for a variety of reasons, including due to the risks and uncertainties that are discussed in our most recently filed periodic reports on Form 10-K and Form 10-Q and subsequent filings. We assume no obligation to update any forward-looking statements or information, which speak only as of their respective dates. Information in “Proxy Statement Summary” and “Proposal No. 3: Advisory Vote to Approve Executive Compensation—Compensation Discussion and Analysis—2021 Performance and Results” is reproduced from our 2021 Annual Report and speaks as of February 28, 2022, the date we filed our 2021 Annual Report.
Website references and their hyperlinks throughout this document are provided for convenience only and the content on the referenced websites, including but not limited to the content contained in our 20202021 ESG Summary Report, is not incorporated herein by reference into this Proxy Statement, nor does it constitute a part of this Proxy Statement. Financial Matters Our financial statements for the year ended December 31, 20212022 are included in our 20212022 Annual Report, which we provide to our shareholders at the same time as this Proxy Statement. Our 20212022 Annual Report and this Proxy Statement are also posted on our website at https://investor.elanco.com/financials/annual-reports.annual-reports/. If you have not received or do not have access to the 20212022 Annual Report, please send a written request to Elanco Animal Health Incorporated, 2500 Innovation Way, Greenfield, IN 46140, Attention: Investor Relations. Matters to be Presented We know of no other matters to be submitted to shareholders at the Annual Meeting, other than the proposals identified in this Proxy Statement. If any other matters properly come before shareholders at the Annual Meeting, it is the intention of the persons named on the proxy to vote the shares represented thereby on such matters in accordance with their best judgment. If the meeting is adjourned or postponed, the persons named on the proxy can vote such shares at the adjournment or postponement as well. By order of the Board of Directors,
Marcela A. Kirberger
Executive Vice President, General Counsel and
Corporate Secretary 83 202298 2023 Proxy Statement
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TABLE OF CONTENTS | |
| | | Reconciliation of GAAP Information to Non-GAAP Information | |
In this Proxy Statement, we use non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted gross margin and net debt. We believe these non-GAAP financial measures are useful to investors because they provide greater transparency regarding our operating performance. Reconciliation of non-GAAP financial measures and reported GAAP financial measures are included in this Appendix A and are posted on our website at www.elanco.com. The primary material limitations associated with the use of such non-GAAP measures as compared to U.S. GAAP results include the following: (i) they may not be comparable to similarly titled measures used by other companies, including those in our industry, (ii) they exclude financial information and events, such as the effects of an acquisition or amortization of intangible assets, that some may consider important in evaluating our performance, value or prospects for the future, (iii) they exclude items or types of items that may continue to occur from period to period in the future and (iv) they may not exclude all unusual or non-recurring items, which could increase or decrease these measures, which investors may consider to be unrelated to our long-term operations. These non-GAAP measures are not and should not be viewed as, substitutes for U.S. GAAP reported measures. We encourage investors to review our unaudited condensed consolidated and combined financial statements in their entirety and caution investors to use U.S. GAAP measures as the primary means of evaluating our performance, value and prospects for the future and non-GAAP measures as supplemental measures. Pro Forma Combined Company Revenue
Due to the significant impact of the inclusion in our full year 2021 results of the legacy Bayer Animal Health portfolio, which we acquired in 2020, we will, from time to time, present year-over-year revenue growth on a pro forma combined company basis. The following calculation of 2020 pro forma combined company revenue represents a good faith summary to provide better financial context about our historical performance.
2020 Reference Base(1)
| A-1 2023 Proxy Statement | | | ($ in millions)
| | | Elanco Reported Revenue
| | | 3,273
| | | Bayer Animal Health (Prior to Close)(2)
| | | 1,249
| | | Less: Divestitures from Combined Company(3)
| | | (82)
| | | Pro Forma Combined Company Revenue
| | | 4,441
| |
(1)
| This reference base is materially correct based on the public filings of Elanco and Bayer AG; however, due to certain data limitations, including foreign exchange rates, these numbers may have some non-material differences to actuals. This reference base is a good faith summary to provide better financial context to investors about our performance in 2021. The reference base assumes that the Bayer Animal Health acquisition and related divestitures closed on January 1, 2020 and that accounting reclassifications were completed. Numbers may not add due to rounding. |
(2)
| Includes revenue from Bayer Animal Health for the first seven months of 2020, which has been adjusted for differences in accounting methodologies between GAAP and International Financial Reporting Standards (IFRS), and for foreign exchange rates less revenue from products that were included in Elanco and Bayer AG reported revenue prior to being divested, in most cases, as of August 1, 2020. |
(3)
| Divestitures from legacy Elanco include: Osumia, Capstar, StandGuard, Vecoxan, Itrafungol, and Clomicalm. Divestitures from legacy Bayer Animal Health include: Drontal (in certain markets), Profender, Avenge, Maggo, and Zapp Encore. |
A-1 2022 Proxy Statement
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TABLE OF CONTENTS GAAP Net Income (Loss) to Adjusted Net Income We define adjusted net income as net income (loss) excluding amortization of intangible assets, purchase accounting adjustments to inventory, integration costs of acquisitions, severance, asset impairment, gain on sale of assets, facility exit costs, tax valuation allowances and other specified significant items, such as unusual or non-recurring items that are unrelated to our long-term operations adjusted for income tax expense associated with the excluded financial items. The following is a reconciliation of GAAP Revised for the year ended December 31, 2022 and 2021 to Selected Non-GAAP Adjusted information: | | Cost of sales(1) | | | $1,913 | | | $— | | | $1,913 | | | $2,132 | | | $64 | | | $2,068 | | | | Amortization of intangible assets | | | $528 | | | $528 | | | $— | | | $556 | | | $556 | | | $— | | | | Asset impairment, restructuring and other special charges(2)(3) | | | $183 | | | $183 | | | $— | | | $634 | | | $634 | | | $— | | | | Interest expense, net of capitalized interest(4) | | | $241 | | | $20 | | | $221 | | | $236 | | | $— | | | $236 | | | | Other (income) expense, net(5)(6) | | | $32 | | | $2 | | | $30 | | | $5 | | | $(14) | | | $19 | | | | Income (loss) before taxes | | | $(72) | | | $733 | | | $662 | | | $(571) | | | $1,240 | | | $669 | | | | Provision for taxes(7)(8) | | | $6 | | | $(111) | | | $117 | | | $(88) | | | $(236) | | | $147 | | | | Net income (loss) | | | $(78) | | | $622 | | | $544 | | | $(483) | | | $1,004 | | | $522 | | | | Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | basic | | | $(0.16) | | | $1.27 | | | $1.11 | | | $(0.99) | | | $2.06 | | | $1.07 | | | | diluted | | | $(0.16) | | | $1.26 | | | $1.11 | | | $(0.99) | | | $2.06 | | | $1.07 | | | | Adjusted weighted average shares outstanding : | | | | | | | | | | | | | | | | | | | | | | basic | | | 488.3 | | | 488.3 | | | 488.3 | | | 487.2 | | | 487.2 | | | 487.2 | | | | diluted(9) | | | 488.3 | | | 492.2 | | | 492.2 | | | 487.2 | | | 488.9 | | | 488.9 | |
Numbers may not add due to rounding. The table above reflects only line items with non-GAAP adjustments. (a)
| GAAP Revised amounts for the years ended December 31, 2022 and 2021 represent GAAP reported results that have been revised for certain immaterial items, as described in “Revision of Prior Period Financial Statements Primarily Relating to Tax Valuation Allowance Adjustment” in the Company's February 21, 2023 earnings release and additional revisions as noted in the Form 8-K/A. |
(b)
| The company uses non-GAAP financial measures that differ from financial statements reported in conformity with U.S. generally accepted accounting principles (GAAP). The company believes that these non-GAAP measures provide useful information to investors. Among other things, they may help investors evaluate the company’s ongoing operations. They can assist in making meaningful period-over-period comparisons and in identifying operating trends that would otherwise be masked or distorted by the items subject to the adjustments. Management uses these non-GAAP measures internally to evaluate the performance of the business, including to allocate resources. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. |
(c)
| Adjustments to certain GAAP measures for the year ended December 31, 2022 and 2021 include the following: |
(1)
| 2021 excludes amortization of inventory fair value adjustments recorded from the acquisition of Bayer Animal Health ($64 million). |
(2)
| 2022 excludes charges associated with integration efforts and external costs related to the acquisitions of Bayer Animal Health and KindredBio ($105 million), a nonrecurring charge for acquired IPR&D with no alternative future use that we recorded upon the initial consolidation of a variable interest entity that is not a business ($59 million), the finalization of a write-down charge associated with the sale of our manufacturing site in Speke, U.K. ($22 million), a measurement period adjustment to the consideration transferred and charge associated with the settlement of a liability for future royalty and milestone payments that was triggered in connection with the acquisition of KindredBio ($2 million), facility exit costs ($2 million), asset impairments ($2 million), and the write-off of a receivable associated with a previous R&D collaboration arrangement ($1 million), partially offset by adjustments resulting from the reversal of severance accruals ($9 million) and an adjustment related to asset write-downs ($1 million). |
A-2 2023 Proxy Statement | | | |
TABLE OF CONTENTS (3)
| 2021 excludes charges associated with integration efforts and external costs related to the acquisitions of Bayer Animal Health and KindredBio, and charges primarily related to independent stand-up costs and other related activities ($162 million), a charge associated with the settlement of a liability for future royalty and milestone payments triggered in connection with our acquisition of KindredBio ($26 million), costs associated with the sale of our manufacturing sites in Shawnee, Kansas and Speke, U.K. and other business development transactions ($5 million), severance accruals net of reversals ($110 million), asset impairments ($66 million), asset write-downs ($284 million), and the settlement of legal matters ($10 million), partially offset by curtailment gains recognized due to the remeasurement our pension benefit obligations resulting from workforce reductions associated with our recent restructuring programs ($29 million). |
(4)
| 2022 excludes the debt extinguishment losses recorded in connection with the early repayment of our 4.272% Senior Notes due August 28, 2023 and our Term Loan B ($20 million). |
(5)
| 2022 excludes a contribution to The Elanco Foundation ($3 million) and the impact of hyperinflationary accounting related to Turkey ($4 million), partially offset by the gain recognized on the disposal of the microbiome R&D platform ($3 million) and up-front payments received in relation to license and asset assignment agreements ($2 million). |
(6)
| 2021 excludes up-front payments received and equity issued to us in relation to license and asset assignment agreements ($9 million), the gain recorded on the sale of certain equine assets ($4 million), and the impact of a decrease in the fair value of the Prevtec contingent consideration ($1 million). |
(7)
| 2022 represents the income tax expense associated with the adjusted items, the reversal of tax expense that was previously stranded in accumulated other comprehensive income due to the interest rate swap settlement ($17 million), and a net tax benefit associated with the sale of the Speke manufacturing site ($12 million), partially offset by a net increase in the valuation allowance recorded against our deferred tax assets during the period ($62 million). |
(8)
| 2021 represents the income tax expense associated with the adjusted items, partially offset by a net increase in the valuation allowance recorded against our deferred tax assets during the period ($56 million). |
(9)
| During the years ended December 31, 2022 and 2021, we reported a GAAP net loss and thus potential dilutive common shares were not assumed to have been issued since their effect is anti-dilutive. During the same periods, we reported adjusted net income. As a result, potential dilutive common shares would not have an anti-dilutive effect, and diluted weighted average shares outstanding for purposes of calculating Adjusted EPS include 3.9 million and 1.7 million, respectively, of common stock equivalents. |
The following is a reconciliation of GAAP Revised for the year ended December 31, 2020 to Selected Non-GAAP Adjusted information: | | Cost of sales(1) | | | $1,667 | | | $96 | | | $1,571 | | | | Amortization of intangible assets | | | $360 | | | $360 | | | $— | | | | Asset impairment, restructuring and other special charges(2) | | | $623 | | | $623 | | | $— | | | | Interest expense, net of capitalized interest(3) | | | $150 | | | $3 | | | $147 | | | | Other income, net(4) | | | $(178) | | | $(169) | | | $(9) | | | | Income (loss) before taxes | | | $(677) | | | $914 | | | $237 | | | | Provision for taxes(5) | | | $(103) | | | $(142) | | | $39 | | | | Net income (loss) | | | $(574) | | | $773 | | | $199 | | | | Earnings (loss) per share: | | | | | | | | | | | | | basic | | | $(1.30) | | | $1.75 | | | $0.45 | | | | diluted | | | $(1.30) | | | $1.75 | | | $0.45 | | | | Adjusted weighted average shares outstanding: | | | | | | | | | | | | | basic | | | 441.4 | | | 441.4 | | | 441.4 | | | | diluted(6) | | | 441.4 | | | 442.6 | | | 442.6 | |
Numbers may not add due to rounding. The table above reflects only line items with non-GAAP adjustments. (a)
| GAAP Revised amounts for the year ended December 31, 2020 represent GAAP reported results that have been revised for certain immaterial items, as described in “Revisions of Prior Period Financial Statements Primarily Relating to Tax Valuation Allowance Adjustment” in the Company’s February 21, 2023 earnings release and additional revisions as noted in the Form 8-K/A from March 1, 2023. |
A-3 2023 Proxy Statement | | | |
TABLE OF CONTENTS (b)
| The company uses non-GAAP financial measures that differ from financial statements reported in conformity with U.S. generally accepted accounting principles (GAAP). The company believes that these non-GAAP measures provide useful information to investors. Among other things, they may help investors evaluate the company’s ongoing operations. They can assist in making meaningful period-over-period comparisons and in identifying operating trends that would otherwise be masked or distorted by the items subject to the adjustments. Management uses these non-GAAP measures internally to evaluate the performance of the business, including to allocate resources. Investors should consider these non-GAAP measures in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. |
(c)
| Adjustments to certain GAAP reported measures for the year ended December 31, 2020 include the following: |
(1)
| 2020 excludes amortization of inventory fair value adjustments recorded from the acquisition of Bayer Animal Health ($90 million), charges associated with the write-off of marketing inventory recorded from the acquisition of Bayer Animal Health ($2 million), and a one-time payment to settle outstanding obligations to a contract manufacturing organization in connection with a divestiture ($4 million). |
(2)
| 2020 excludes charges associated with integration efforts and external costs related to the acquisition of businesses, including the acquisition of the animal health business of Bayer, and charges primarily related to independent stand-up costs and other related activities ($424 million), severance ($155 million), asset impairments ($17 million), facility exit costs and asset write-downs ($17 million), a one-time payment associated with our agreement to build a new corporate headquarters ($9 million), the settlement of a legal matter ($3 million), registration fees for Elanco common shares sold by Bayer AG during the quarter ($1 million), and a payment for acquired IPR&D from a collaboration arrangement ($1 million), partially offset by adjustments to write-downs of assets held for sale ($1 million) and the gain on the sale of our R&D facility in Prince Edward Island, Canada ($4 million). |
(3)
| 2020 excludes the debt extinguishment losses recorded in connection with the repayments of our existing term loan facilities ($3 million). |
(4)
| 2020 excludes the gains recorded in relation to the divestiture of several products as required as a result of the acquisition of the animal health business of Bayer ($157 million), a hedging gain related to the closing of the acquisition of the animal health business of Bayer ($6 million), the gain on our sale of land and buildings in New South Wales, Australia ($45 million) and the impact of a decrease in the fair value of the Prevtec contingent consideration ($4 million), partially offset by financing commitment and advisory fees associated with the Bayer Animal Health acquisition ($36 million) and a loss recorded in relation to the divestiture of products ($7 million). |
(5)
| 2020 represents the income tax expense associated with the adjusted items, partially offset by the impact of the valuation allowance recorded against our deferred tax assets during the period ($81 million). |
(6)
| During the year ended December 31, 2020, we reported a GAAP net loss and thus potential dilutive common shares were not assumed to have been issued since their effect is anti-dilutive. During the same period, we reported non-GAAP net income. As a result, potential dilutive common shares would not have an anti-dilutive effect, and diluted weighted average shares outstanding for purposes of calculating Adjusted EPS include 1.2 million of common stock equivalents. |
Adjusted EBITDA / Adjusted EBITDA Margin We define adjusted EBITDA as net income (loss) adjusted for interest expense (income), income tax expense (benefit), tax valuation allowances and depreciation and amortization, further adjusted to exclude purchase accounting adjustments to inventory, integration costs of acquisitions, severance, asset impairment, gain on sale of assets, facility exit costs and other specified significant items, such as unusual or non-recurring items that are unrelated to our long-term operations adjusted for income tax expense associated with the excluded financial items. We define adjusted EBITDA margin as adjusted EBITDA divided by total revenue. The following is a reconciliation of U.S. GAAP Net IncomeLoss to EBITDA and adjusted EBITDA and a calculation of adjusted EBITDA margin for the year ended December 31, 20212022 and 2020.2021. | | Reported net loss | | | (472) | | | (560) | | | | Net interest expense | | | 236 | | | 150 | | | | Income tax benefit | | | (95) | | | (112) | | | | Depreciation and amortization | | | 716 | | | 517 | | | | EBITDA | | | 385 | | | (5) | | | | Non-GAAP Adjustments: | | | | | | | | | | Cost of sales | | | 64 | | | 96 | | | | Asset impairment, restructuring and other special charges | | | 628 | | | 623 | | | | Accelerated depreciation(1) | | | (6) | | | (17) | | | | Other income, net | | | (14) | | | (168) | | | | Adjusted EBITDA | | | 1,057 | | | 529 | | | | Adjusted EBITDA Margin | | | 22.2% | | | 16.1% | |
A-4 2023 Proxy Statement | | | |
TABLE OF CONTENTS | | Revised net loss(1) | | | $(78) | | | $(483) | | | | Net interest expense | | | 241 | | | 236 | | | | Income tax expense (benefit) | | | 6 | | | (88) | | | | Depreciation and amortization | | | 682 | | | 716 | | | | EBITDA | | | $851 | | | $381 | | | | Non-GAAP Adjustments: | | | | | | | | | | Cost of sales | | | $— | | | $64 | | | | Asset impairment, restructuring and other special charges | | | 183 | | | 634 | | | | Accelerated depreciation(2) | | | (19) | | | (6) | | | | Other (income) expense, net | | | 2 | | | (14) | | | | Adjusted EBITDA | | | $ 1,017 | | | $ 1,059 | | | | Adjusted EBITDA Margin | | | 23.1% | | | 22.2% | |
Numbers may not add due to rounding. (1)
| Net loss for the years ended December 31, 2022 and 2021 reflect revisions recorded to prior period financial statement amounts, as described in “Revision of Prior Period Financial Statements Primarily Relating to Tax Valuation Allowance Adjustment” in the Company's February 21, 2023 earnings release and additional revisions as noted in the Form 8-K/A. |
(2)
| Represents depreciation of certain assets that was accelerated during the periods presented. This amount must be added back to arrive at Adjusted EBITDA because it is included in Asset impairment, restructuring, and other special charges but it has already been excluded from EBITDA in the “Depreciation and amortization” row above. |
Net Debt We define net debt as gross debt less cash and cash equivalents on our balance sheet. We define gross debt as the sum of the current portion of long-term debt and long-term debt excluding unamortized debt issuance costs. We define the net leverage ratio as gross debt less cash and cash equivalents divided by adjusted EBITDA. This calculation does not include Term Loan B covenant-related adjustments that reduce this leverage ratio. The following is a reconciliation of gross debt to net debt for the year ended December 31, 2021:2022: | | Long-term debt | | | 6,2585,448
| | | | Current portion of long-term debt | | | 61388
| | | | Less: Unamortized debt issuance costs | | | (82)(64)
| | | | Total gross debt | | | 6,4015,900
| | | | Less: Cash and cash equivalents | | | 638345
| | | | Net Debt | | | 5,7635,555
| | | | Net Debt Leverage Ratio | | | 5.5x5.5x
| |
Adjusted Gross Margin We define adjusted gross margin as adjusted gross profit divided by total revenue and adjusted gross profit as total revenue less adjusted cost of sales. A-2 2022A-5 2023 Proxy Statement
| | | |
TABLE OF CONTENTS | |
| | | Amended and Restated
Elanco Animal Health Incorporated
Employee Stock Purchase Plan | |
ARTICLE i.I. PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN The purpose of the Elanco Animal Health Incorporated Employee Stock Purchase Plan, as it may be amended from time to time (the “Plan”), is to assist employees of Elanco Animal Health Incorporated, an Indiana corporation, and any successor corporation thereto (the “Company”), and its Designated Subsidiaries in acquiring a stock ownership interest in the Company pursuant to a plan that is intended to qualify as an “employee stock purchase plan” under Code Section 423 (for employees in the United States), and to help such employees provide for their future security and encourage them to remain in the employment of the Company and its Subsidiaries. ARTICLE ii.II. DEFINITIONS WhereverWhenever the following terms are used in the Plan, they shall have the meaningsmeaning specified below unless the context clearly indicates otherwise.to the contrary. The singular pronoun shall include the plural where the context so indicates.
2.1
| “Agent” means the brokerage firm, bank or other financial institution, entity or person(s), if any, engaged, retained, appointed or authorized to act as the agent of the Company or an Employee with regard to the Plan. |
2.2
| “Administrator” means the Committee, or such individualsindividual(s) to whom authority to administer the Plan has been delegated under Section 7.1. |
2.3
| “Board” means the Board of Directors of the Company. |
2.4
| “Code” means the Internal Revenue Code of 1986, as amended. |
2.5
| “Committee” means the committee of the Board (or any successor committee) appointed or designated to administer the Plan. |
2.6
| “Common Stock” means the common stock of the Company, no par value. |
2.7
| “Company” has the meaning set forth in Article I. |
2.8
| “Designated Subsidiary” means each Subsidiary that has been designated by the Board or CommitteeAdministrator from time to time in its sole discretion as eligible to participate in the Plan. As of the Restatement Effective Date, Designated Subsidiaries include the U.S. Subsidiaries of the Company that employ Employees. AfterEmployees and other Subsidiaries designated by the Effective Date, Designated Subsidiaries also shall include any new U.S. Subsidiary that is established or acquired and employs Employees.Administrator. |
2.9
| “Effective Date” means February 22, 2022, the date the Plan was initially approved by the Board. |
2.10
| “Eligible Employee” means an Employee who, after the grant of an Option, would not be deemed for purposes of Code Section 423(b)(3) to possess five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary. The rules of Code Section 424(d) with regard to the attribution of stock ownership shall apply in determining the stock ownership of an individual, and stock that an Employee may purchase under outstanding options shall be treated as stock owned by the Employee. An Eligible Employee shall not include an Employee whose |
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TABLE OF CONTENTS options shall be treated as stock owned by the Employee. An Eligible Employee shall not include an Employee whose customary employment is fewer than twenty (20) hours per week, or an Employee whose customary employment is as a student or intern or for not more than five months in a calendar year.year, or an Employee whose wages and benefits are determined by collective bargaining that does not provide for Plan participation.
Notwithstanding the foregoing, the Administrator may exclude from participation in the Plan as an Eligible Employee (x) any Employee who is a “highly compensated employee” of the Company or any Designated Subsidiary (within the meaning of Code Section 414(q)), or a “highly compensated employee” (A) with compensation above a specified level, (B) who is an officer and/or (C) who is subject to the disclosure requirements of Section 16(a) of the Exchange Act; and/or (y) any Employee who is a citizen or resident of a foreign jurisdiction (without regard to whether such Employee also is a citizen of the United States or a resident alien (within the meaning of Code Section 7701(b)(1)(A))) if either (A) the grant of the Option is prohibited under the laws of the jurisdiction governing such Employee, or (B) compliance with the laws of the foreign jurisdiction would cause the Plan or the Option to violate the requirements of Code Section 423;423 (with respect to an Employee who is a U.S. taxpayer); and/or (z) any Employee who has been employed by the Company or a Designated Subsidiary for less than a period specified by the Administrator (such period not to exceed two years); provided that any exclusion in clause (x), (y) and/or (z) shall be applied in an identical manner for each Offering Period commencing after the date of the Administrator’s action to all Employees of the Company and all Designated Subsidiaries, in accordance with Treasury Regulation Section 1.423-2(e). to the extent applicable. 2.11
| “Employee” means any person who renders services to the Company or a Designated Subsidiary in the status of an employee within the meaning of Code Section 3401(c) or applicable local law and is treated as an employee in the personnel records of the Company or a Designated Subsidiary. The term “Employee” shall not include any director of the Company or a Designated Subsidiary who does not render services to the Company or a Designated Subsidiary in the status of an employee within the meaning of Code Section 3401(c). or applicable local law. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on military leave, sick leave or other leave of absence approved by the Company or Designated Subsidiary and meeting the requirements of Treasury Regulation Section 1.421-1(h)(2). or applicable local law. Where the period of leave exceeds three (3) months, or such other period specified in Treasury Regulation Section 1.421-1(h)(2), or applicable local law, and the individual’s right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the first day immediately following such three (3)-month period, or such other period specified in Treasury Regulation Section 1.421-1(h)(2). or applicable local law. |
2.12
| “Enrollment Date” means the first date of each Offering Period. |
2.13
| “Enrollment Period” means the time period established by the Administrator leading up to an Enrollment Date during which Eligible Employees may elect to participate in an Offering Period. |
2.14
| “Exercise Date” means the last Trading Day of each Offering Period, except as provided in Section 5.2. |
2.15
| “Exchange Act” means the Securities Exchange Act of 1934, as amended. |
2.16
| “Fair Market Value” means, as of any date, the value of Common Stock determined as follows: |
(a)
| If the Common Stock is (i) listed on any established securities exchange (such as the New York Stock Exchange, the NASDAQ Global Market and the NASDAQ Global Select Market), (ii) listed on any national market system, or (iii) listed, quoted or traded on any automated quotation system, its Fair Market Value shall be: |
(A)
| if the Common Stock is purchased on the open market, the price paid for such Common Stock; or |
(B)
| if the Common Stock is not purchased on the open market, the closing sale price for a share of Common Stock as quoted on such exchange or system for such date or, if there is no closing sale price for a share of Common Stock on the date in question, the closing sale price for a share of Stock on the last preceding date for which such quotation exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable for such purposes; |
(b)
| If the Common Stock is not listed on an established securities exchange, national market system or automated quotation system, but the Common Stock is regularly quoted by a recognized securities dealer, its Fair Market Value shall be the mean of the high bid and low asked prices for such date or, if there are no high bid and low asked prices |
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TABLE OF CONTENTS for a share of Common Stock on such date, the high bid and low asked prices for a share of Common Stock on the last preceding date for which such information exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable for such purposes; or (c)
| If the Common Stock is neither listed on an established securities exchange, national market system or automated quotation system nor regularly quoted by a recognized securities dealer, its Fair Market Value shall be determined by the Company in accordance with uniform and nondiscriminatory standards adopted by it from time to time. |
2.17
| “Grant Date” means the first Trading Day of an Offering Period. |
2.18
| “New Exercise Date” has such meaning as set forth in Section 5.2(b). |
2.19
| “Offering Period” means the three (3)-month period as determined by the Board or the Committee;Administrator; provided, however, that the duration and timing of Offering Periods may be changed by the Board or Committee,Administrator, in its sole discretion. In no event may an Offering Period exceed twenty-seven (27) months. |
2.20
| “Option” means the right to purchase shares of Common Stock pursuant to the Plan during each Offering Period. |
2.21
| “Option Price” means the purchase price of a share of Common Stock hereunder as provided in Section 4.2. |
2.22
| “Parent” means any entity that is a parent corporation of the Company within the meaning of Code Section 424 and the Treasury Regulations thereunder. |
2.23
| “Participant” means any Eligible Employee who elects to participate in the Plan. |
2.24
| “Payday” means the regular and recurring established day for payment of compensation to an Employee of the Company or any Designated Subsidiary. |
2.25
| “Plan” has the meaning set forth in Article I. |
2.26
| “Plan Account” means a bookkeeping account established and maintained by the Company in the name of each Participant. |
2.27
| “Restatement Effective Date” means March 31, 2023, the date this restatement of the Plan was approved by the Board. |
2.28
| “Section 423 Option” has the meaning set forth in Section 3.1(b). |
2.28
2.29
| “Subsidiary” means any domestic corporation, that is a subsidiarypartnership, joint venture, business trust, or other entity of which fifty percent (50%) or more of the Company withinvoting equity or control is owned, directly or indirectly, by the meaning of Code Section 424 and the Treasury Regulations thereunder.Company. |
2.29
2.30
| “Trading Day” means a day on which the principal securities exchange on which the Common Stock is listed is open for trading or, if the Common Stock is not listed on a securities exchange, a business day, as determined by the Administrator in good faith. |
2.30
2.31
| “Withdrawal Election” has the meaning set forth in Section 6.1(a). |
ARTICLE III. PARTICIPATION 3.1
| Eligibility.
Eligibility. |
(a)
| Any Eligible Employee who is employed before the first day of the month containing an Enrollment Period, elects during ansuch Enrollment Period to participate in the Plan for an Offering Period, and is employed by the Company or a Designated Subsidiary on the Enrollment Date for the Offering Period shall be eligible to participate in the Plan during such Offering Period, subject to the requirements of Articles IV and V and(and the limitations imposed by Code Section 423(b) and the Treasury Regulations thereunder.thereunder, to the extent applicable). |
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TABLE OF CONTENTS (b)
| No Eligible Employee shall be granted an Option under the Plan that permits the Participant’s rights to purchase shares of Common Stock under the Plan, and to purchase stock under all other employee stock purchase plans of the |
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Company, any Parent or any Subsidiary subject to Code Section 423 (any such Option or other option, a “Section 423 Option”), to accrue at a rate that exceeds $25,000 of fair market value of such stock (determined at the time the Section 423 Option is granted) for each calendar year in which any Section 423 Option granted to the Participant is outstanding at any time. The limitation under this Section 3.1(b) shall be applied in accordance with Code Section 423(b)(8) and the Treasury Regulations thereunder. No Eligible Employee may purchase in any calendar year shares of Common Stock having an aggregate Fair Market Value in excess of $25,000 (determined at the time the Section 423 Option is granted). Notwithstanding any other provision of the Plan, unless otherwise determined by the Committee prior to an Offering Period, the maximum number of shares of Common Stock that may be purchased by each participating employee during any one Offering Period shall be 2,000 shares of Common Stock.
3.2
| Election to Participate; Payroll Deductions Deductions. |
(a)
| Except as provided in Section 3.3, an Eligible Employee may become a Participant in the Plan only by means of payroll deduction. Each individual who is an Eligible Employee as of an Offering Period Enrollment Dateand satisfies the requirements set forth in Section 3.1(a) may elect to participate in such Offering Period and the Plan by delivering to the Company or its designee a payroll deduction authorization no later than the Enrollment Period deadline determined by the Administrator in its sole discretion. |
(b)
| Subject to Section 3.1(b), and unless alternative contribution limits are set by the Administrator prior to any Offering Period, payroll deductions for each Offering Period shall not exceed the greater of (i) ten percent (10%) of the Participant’s base compensation during the Offering Period, or (ii) $15,000; and are to be expressed as a whole number dollar amount.Period. In addition, the Administrator may establish for any calendar year a contribution limit per Participant that is less than the annual dollar limit set forth in Section 3.1(b) hereof. Amounts deducted from a Participant’s base compensation with respect to an Offering Period pursuant to this Section 3.2 shall be deducted each Payday through payroll deduction and credited to the Participant’s Plan Account. |
(c)
| Following at least one (1) payroll deduction during an Offering Period, a Participant may cancel the Participant’s payroll deduction for such Offering Period upon at least ten (10) calendar days’ prior written notice to the Administrator or its designee. The change will be reflected in payroll deductions as soon as administratively practicable after the notice is received. |
(d)
| Notwithstanding the foregoing, upon the termination of an Offering Period, eachA Participant may affirmatively elect, in such Offering Period shallaccordance with applicable Plan administrative procedures, to automatically participate in the immediately followingsubsequent Offering PeriodPeriods at the same payroll deduction percentage as in effect at the termination of the prior Offering Period, unless such Participant delivers to the Company a different election with respect to the successive Offering Period in accordance with Section 3.1(a), or unless such Participant becomes ineligible to participate in the Plan.Plan, or unless applicable local law imposes other requirements. |
3.3
| Leave of Absence.Absence. Payroll deductions for shares that a Participant has an option to purchase may be suspended during any leave of absence approved by the Company meeting the requirements of Treasury Regulation Section 1.421-1(h)(2), or applicable local law, or, if the Participant so elects, periodic payments for such shares may continue to be made in cash.cash if permitted by applicable law. If such Participant returns to active service prior to the last day of the Offering Period, the Participant’s payroll deductions will be resumed and, if the Participant did not make periodic cash payments during the Participant’s period of absence, the Participant shall, by written notice to the Administrator within ten (10) days after the Participant’s return to active service, but not later than the last day of the Offering Period, elect: (a) to make up any deficiency in the Participant’s Plan Account resulting from a suspension of payroll deductions by making an immediate cash payment or through increased payroll deductions; (b) not to make up such deficiency, in which event the number of shares to be purchased by the Participant shall be reduced to the number of whole shares which may be purchased with the amount, if any, then credited to the Participant’s Plan Account plus the aggregate amount, if any, of all payroll deductions to be made thereafter; or (c) withdraw the amount in the Participant’s Plan Account and terminate the Participant’s option to purchase. If any Participant fails to deliver the written notice described above within ten (10) days after the Participant’s return to active service or by the last day of the Offering Period, whichever is earlier, the Participant shall be deemed to have elected the approach described in clause (b) of this Section 3.3. |
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TABLE OF CONTENTS ARTICLE iv.IV. PURCHASE OF SHARES 4.1
| Grant of Option.Option. Each Participant shall be granted an Option with respect to an Offering Period on the applicable Grant Date. Subject to the limitations described in Section 3.1(b), the number of shares of Common Stock subject to a Participant’s Option shall be determined by dividing (a) such Participant’s payroll deductions accumulated prior to such Exercise Date and retained in the Participant’s Plan Account on such Exercise Date by (b) the applicable Option Price; provided, however, that |
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the maximum number of shares of Common Stock that may be purchased by a Participant in an Offering Period shall be determined by dividing such Participant’s Plan Account balance on such Exercise Date by eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the Grant Date. The Administrator may, for future Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of Common Stock that a Participant may purchase during such future Offering Periods. Each Option shall expire on the Exercise Date for the applicable Offering Period immediately after the automatic exercise of the Option in accordance with Section 4.3, unless such Option terminates earlier in accordance with Article 6. |
