•Other services: The committeeAudit Committee may approve other services to be provided by the independent auditor if (i) the services are permissible under SEC and PCAOB rules, (ii) the committeeAudit Committee believes the provision of the services would not impair the independence of the auditor, and (iii) management believes that the auditor is the best choice to provide the services.
•Approval process:At the beginning of each audit year, management requests prior committee approvalpre-approval from the Audit Committee of the annual audit, statutory audits, and quarterly reviews for the upcoming audit year as well as any other services known at that time. Management will also present at that time an estimate of all fees for the upcoming audit year.year and known services. As specific engagements are identified thereafter that were not initially approved, they are brought forward to the committeeAudit
Committee for approval. To the extent approvals are required between regularly scheduled committeeAudit Committee meetings, preapprovalpre-approval authority is delegated to the committee chair.
For each engagement, management provides the committeeAudit Committee with information about the services and fees, sufficiently detailed to allow the committee to make an informed judgment about the nature and scope of the services and the potential for the services to impair the independence of the auditor.
After the end of the audit year, management provides the committee with a summary of the actual fees incurred for the completed audit year.
Independent Auditor Fees
The following table shows the fees incurred for services rendered on a worldwide basis by Ernst & YoungEY in 20172020 and 2016.2019. All such services were pre-approved by the committeeAudit Committee in accordance with the pre-approval policy.
| | | | | | | | | | | | | | |
| 2020 ($ millions) | 2019 ($ millions) |
Audit Fees | | | $13.7 | $14.2 |
| Annual audit of consolidated and subsidiary financial statements, including Sarbanes-Oxley 404 attestation | | |
| Reviews of quarterly financial statements | | |
Audit-Related Fees | | $0.9 | $0.7 |
| Primarily related to assurance and related services reasonably related to the performance of the audit or reviews of the financial statements primarily related to employee benefit plan and other ancillary audits, and due diligence services on potential acquisitions | | |
| | |
Tax Fees | | | $2.7 | $2.7 |
| Tax compliance services, tax planning, tax advice Primarily related to consulting and compliance services | | |
Total | | | $17.3 | $17.6 |
Numbers may not add due to rounding
|
|
| | | | |
| 2017 ($ millions) | 2016 ($ millions) |
Audit Fees | | | $14.8 | $12.8 |
| Annual audit of consolidated and subsidiary financial statements, including Sarbanes-Oxley 404 attestation | | |
| Reviews of quarterly financial statements | | |
| Other services normally provided by the auditor in connection with statutory and regulatory filings | | |
Audit-Related Fees | | $0.5 | $0.6 |
| Primarily related to assurance and related services reasonably related to the performance of the audit or reviews of the financial statements primarily related to employee benefit plan and other ancillary audits, and due diligence services on potential acquisitions | | |
| | |
Tax Fees | | | $4.8 | $6.7 |
|
Tax compliance services, tax planning, tax advice Primarily related to consulting and compliance services | | |
Total | | | $20.1 | $20.2 |
*Numbers may not add due to rounding
| | |
Management Proposals
Item 4. Proposal to Amend the Company'sCompany’s Articles of Incorporation to Eliminate the Classified Board Structure
The company’s articles of incorporation provide that the board of directors is divided into three classes, with each class elected every three years. On the recommendation of theThe board, after review by its Directors and Corporate Governance Committee, the board has approved, and recommends that the shareholders approve, amendments to eliminate the classified board structure in order to provide for the declassificationannual election of all directors (the Declassification Amendments). From 2010 through 2012 and again from 2018 through 2020, the company's board. Thisboard submitted this management proposal was brought beforeto shareholders each year between 2007 and 2012, receivingseeking approval to eliminate the votecompany’s classified board structure; however, under the company’s articles of a strong majority of the outstanding shares at each meeting; however,incorporation, the proposal requires the vote of 80 percent of the outstanding shares to pass.be approved and on each prior occasion failed to receive the required vote.
If approved, this proposalthe company would become effective uponpromptly make the filingrequired filings of amended and restated articles of incorporationthe Declassification Amendments with the Secretary of State of Indiana, at which time the companyDeclassification Amendments would do promptly after shareholder approval is obtained.become effective. Directors elected prior to the effectiveness of the amendmentsDeclassification Amendments would stand for election forserve out their remaining three-year term and each Director elected after the Annual Meeting would serve a one-year terms once their then-current terms expire. This means that directors whose terms expireterm, ending at the 2019 and 2020next annual meetingsmeeting of shareholders, and thereafter, the company’s classified board structure would be elected for one-year terms, and beginningfully eliminated starting with the 20212024 annual meeting all directors would be elected for one-year terms at each annual meeting.of shareholders. In the case of any vacancy on the board occurring after the 2018 annual meetingAnnual Meeting created by an increase in the number of directors, the vacancy would be filled through an interim electionappointment by the board, with the new director to serve a term ending at the next annual meeting.meeting of shareholders. Vacancies created by resignation, removal, or death would be filled by interim election ofappointment by the board forof a termnew director to serve until the end of the term of the director being replaced. This proposal would not change the present number of directors or the board’s authority to change that number and to fill any vacancies or newly-creatednewly created directorships.
Background of Proposal
As part of its ongoing review of corporate governance matters, the board, assisted bytaking into account the input of the Directors and Corporate Governance Committee, considered the advantages and disadvantages of maintaining the classified board structure and eliminating the supermajority voting provisions ofin the company’s articles of incorporation (see Item 5 below). The board
considered the view of somecertain shareholders who believe that classified boards have the effect of reducing the accountability of directors to shareholders because shareholders are unable to evaluate and electconsider all directors for election on an annual basis. The board gave considerable weight to the approval at the 2006 annual meeting of a shareholder proposal requesting that the board take all necessary steps to elect the directors annually, and to the favorable votes of a strong majority of the outstanding shares for management’s proposals in each of the following sixprevious three years.
The board also considered benefits of retaining the classified board structure, which has a long history in corporate law.structure. A classified structure may providepromote shareholder value by providing continuity and stability in the management of the business and affairs of the company, becauseas a majority of directorsthe board always has prior experience as directors of the company. In someaddition, under certain circumstances, classified boards may enhance shareholder value by forcing an entity seeking control of the company to initiate discussions at arm’s lengtharm’s-length with the board of the company, because the entity cannot replace the entiremajority of the board in a single election. The board also considered that even without a classified board (and without the supermajority voting requirements, which the board also recommends eliminating), the company has defenses that work togetherappropriate safeguards to protect the interests of all shareholders and discourage a would-be acquirer from proceeding with a proposal that undervalues the company and to assist the board in responding to such proposals.or is opportunistic. These defenses include other provisions of the company’s articles of incorporation and bylaws, as well as certain provisions of Indiana corporation law.
The board believes it is important to maintain appropriate defenses to inadequate takeover bids, but also important to retain shareholder confidence by demonstrating that the board is accountable and responsive to shareholders. After balancing these interests, the board has decided to resubmit this proposal to eliminate the classified board structure.
Text of the Amendments
Article 9(b) of the company’s amended articles of incorporation contains the provisions that will be affected if this proposal is adopted. The amendments to the company's amended articles of incorporation,This article, set forth in Appendix B to this proxy statement, shows the proposed changes, with deletions indicated by strike-outsstrikeouts and additions indicated by underlining. The board has also adopted conforming amendments to the company’s bylaws, to be effective immediately upon the effectiveness of the amendments to the amended articles of incorporation.
Vote Required
The affirmative vote of at least 80 percent of the outstanding shares of common sharesstock is needed to passapprove this proposal. Unless such vote is received, the present classification of the board will continue.
Board Recommendation on Item 4
The Board of Directorsboard recommends that you vote FOR amending the company'scompany’s articles of incorporation to eliminate the classified board structure.
Item 5. Proposal to Amend the Company'sCompany’s Articles of Incorporation to Eliminate Supermajority Voting Provisions
Under theThe company’s articles of incorporation provide nearly all matters submitted to a vote of shareholders can be adopted by a majority of the votes cast. However, ourthe company’s articles of incorporation require a fewcertain fundamental corporate actions to be approved by the holders of 80 percent of the outstanding shares of common stock (a “supermajority vote”).stock. Those actions are:
•amending certain provisions of the articles of incorporation that relate to the number and terms of office of directors:
◦the company’s classified board structure (as described under Item 4)
◦a provision that the number of directors shall be specified solely by resolution of the board
•removing directors prior to the end of their elected term
•entering into mergers, consolidations, recapitalizations, or certain other business combinations with a "related person"—a party who has acquired at least five percent of the company’s stock (other than the Endowment or a company benefit plan) — without the prior approval of such action or transaction by the directors not affiliated with such shareholder
•modifying or eliminating any of the above supermajority voting requirements.
|
| | | | |
• | | amending certain provisions of the articles of incorporation that relate to the number and terms of office of directors: |
| | —the company's classified board structure (as described under
Item 4, above)
|
| | —a provision that the number of directors shall be specified solely by resolution of the board of directors |
• | | removing directors prior to the end of their elected term |
• | | entering into mergers, consolidations, recapitalizations, or certain other business combinations with a "related person"—a party who has acquired at least five percent of the company's stock (other than the Lilly Endowment or a company benefit plan) without the prior approval of the board of directors |
• | | modifying or eliminating any of the above supermajority voting requirements. |
The board, after review by its Directors and Corporate Governance Committee, has approved, and recommends that the shareholders approve, amendments to eliminate the supermajority voting requirements. From 2010 through 2012 and again from 2018 through 2020, the board submitted this management proposal to shareholders seeking approval to eliminate these supermajority voting requirements; however, under the company’s articles of incorporation the proposal requires the vote of 80 percent of the outstanding shares to be approved and on each prior occasion failed to receive the required vote.
Background of Proposal
This proposal is the resultAs part of the board’sits ongoing review of corporate governance matters. In 2007 through 2009, shareholder proposals requesting thatmatters, the board, take action to eliminate all supermajority voting provisions were supported by a majoritytaking into account the input of votes cast. In 2010 through 2012, the board responded by submitting proposals seeking shareholder approval to eliminate the provisions. In all three years, the proposal received the votes of a strong majority of the outstanding shares, but fell short of the required 80 percent.
Assisted by the Directors and Corporate Governance Committee, the board considered the advantages and disadvantages of maintaining the supermajority voting requirements. The board considered that under certain circumstances, supermajority voting provisionsrequirements can provide benefits to the company. The provisions can makecompany and all its shareholders by making it more difficult for one or a few large shareholders to take overfacilitate a takeover of the company or restructureimplement certain significant changes to the company without negotiating with the board. In the event of an unsolicited bid to take over or restructure the company, supermajority voting provisions may encourage bidders to negotiate with the board and increase the board’s negotiating leverage on behalf of the shareholders. They can also give the board time to consider alternatives that might provide greater value for all shareholders.more widespread shareholder support.
The board also considered the potential benefitsadverse consequences of eliminatingmaintaining the supermajority voting provisions. Whilerequirements. The board believes it is important to the company’s long-term success for the board to maintain appropriate defenses against inadequate takeover bids, it is also important for the board to maintain shareholder confidence by demonstrating that itthe board is responsive and accountable to shareholders and committed to strong corporate governance. This requires the board to carefully balance sometimes competing interests. In this regard, the board gave considerable weight to the fact thatfavorable votes of a substantialstrong majority of the outstanding shares voted have supported eliminatingfor management’s proposal in the supermajority voting provisions.previous three years. Many shareholders believe that supermajority voting provisionsrequirements impede accountability to shareholders and contribute to board and management entrenchment.
The board also considered that, even without the supermajority vote (and without the classified board, which the board also recommends eliminating), the company has defenses that work togetherappropriate safeguards to protect the interests of all shareholders and to discourage a would-be acquirer from proceeding with a proposal that undervalues the company or is opportunistic and to assist the board in responding to such proposals. These defenses include other provisions of the company’s articles of incorporation and bylaws as well as certain provisions of Indiana corporation law.
Therefore,After balancing these interests, the board believes the balance of interests is best served by recommendinghas decided to shareholders that the articles of incorporation be amendedresubmit this proposal to eliminate the supermajority voting provisions. By recommending these amendments, the board is demonstrating its accountability and willingness to take steps that address shareholder-expressed concerns.requirements.
Text of Amendments
Articles 9(c), 9(d), and 13 of the company’s amended articles of incorporation contain the provisions that will be affected if this proposal is adopted. The amendments to the company’s amendedThese articles, of incorporation set forth in Appendix B to this proxy statement, show the proposed changes with deletions indicated by strike-outsstrikeouts and additions indicated by underlining. The board has also adopted conforming amendments to the company’s bylaws, to be effective immediately upon the effectiveness of the amendments to the articles of incorporation.
Vote Required
The affirmative vote of at least 80 percent of the outstanding shares of common sharesstock is needed to passapprove this proposal. Unless such vote is received, the supermajority voting requirements will continue to be in effect.
Board Recommendation on Item 5
The Board of Directorsboard recommends that you vote FOR amending the company's articles of incorporation to eliminate supermajority voting provisions.requirements.
Item 6. Proposal to Approve the AmendedDisclose Direct and Restated 2002 Lilly Stock PlanIndirect Lobbying Activities and Expenditures
BackgroundService Employees International Union Pension Plans Master Trust, 1800 Massachusetts Ave NW, Suite 301, Washington DC 20036-1202, beneficial owner of Proposal
As the 2002 Lilly Stock Plan (the “2002 Plan”) nears its April 20, 2020 expiration date, we are asking our shareholders to approve an amendment and restatement of the 2002 Plan (the “Amended 2002 Plan”). The Amended 2002 Plan provides for a decrease – not an increase – in the number of shares of common stock available for issuance. Further, the Amended 2002 Plan eliminates certain provisions related to Section 162(m) of the Internal Revenue Code that are no longer applicable in light of tax legislation that was recently enacted while retaining a framework to continue to grant performance-based awards.
As of February 16, 2018, there were no options outstanding under the 2002 Plan, and 11,753,977full value awards that were unvested and outstanding.
Material Changes to the 2002 Plan
The following summary highlights the proposed material changes to the 2002 Plan.
53,000,000 shares of common stock would be available for issuance pursuant to future awards granted on or following the effective date of the Amended 2002 Plan. This represents a decrease in the number of shares reserved for issuance under the plan:
|
| | |
| Immediately Prior to Shareholder Approval | After Shareholder Approval |
Authorized Shares | 119,000,000* | 75,657,296* |
Shares Available to Grant | 96,342,704
| 53,000,000 |
*plus shares available for issuance from prior plans, as approved by shareholders at the inception of the 2002 Plan
Amendments have been made to improve our corporate governance and to comply with some of the policies recommended by shareholder advisors, including:
| |
o | Provisions to preclude the payment of dividends or dividend equivalents on unvested restricted stock, restricted stock units or other share-based awards that are full-value awards; and |
| |
o | Imposition of a minimum one-year vesting period for all awards other than a carve-out for up to 5% of the shares that are available for issuance as of the effective date of the Amended 2002 Plan. |
In light of the tax legislation that was recently enacted by Congress eliminating the performance-based exception from the deductibility limitations under Section 162(m) of the Internal Revenue Code, the requirements applicable to equity awards that were intended to constitute “qualified performance-based compensation” under Section 162(m) of the Internal Revenue Code have been eliminated. However, the Amended 2002 Plan retains a framework to grant performance-based awards that provides for requirements similar to those previously imposed on awards intended to constitute qualified performance-based compensation under Section 162(m).
An annual limit has been imposed on the size of equity awards that may be granted to any non-employee director during a calendar year. The accounting value of equity awards, when aggregated with cash compensation, granted to a non-employee director in any calendar year may not exceed $800,000.
A “clawback” provision has been added, permitting us to recover awards or payments from participants, including as may be required under the Dodd-Frank Act.
To achieve consistency with our other change in control arrangements, the “Change in Control” definition has been revised to reflect a definition that is more consistent with the definition in the Eli Lilly and Company Change in Control Severance Pay Plan.
The single-trigger change in control vesting acceleration provision applicable to time-based awards has been eliminated. The Amended 2002 Plan now provides that time-based awards will not vest in connection with a Change in Control unless they are not assumed, substituted or otherwise replaced.
The change in control treatment applicable to performance-based awards has been revised to provide that the vesting of performance-based awards upon a Change in Control will not occur at a rate that is greater than the actual level of attainment and/or provide for pro-rated vesting of the award based on any reduction to the performance period.
An amendment to add the authority to grant other share-based awards, which would include other potential types of awards denominated or based on the stock of the Company that may not fall into the category of awards that currently may be granted.
An amendment to eliminate the automatic expiration date. Instead, the Amended 2002 Plan provides that it will continue in effect until it is terminated by our Board of Directors.
Key Terms of the Amended 2002 Plan at a Glance
The following is a summary of the key provisions of the Amended 2002 Plan, as set forth and stated herein.
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| |
Plan Term: | The Amended 2002 Plan was adopted by the Board of Directors on February 20, 2018, subject to obtaining shareholder approval and will continue in effect until terminated by the Board of Directors. Shares available under the Amended 2002 Plan are expected to last at least five years.
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Eligible Participants: | Employees and directors of the Company and its affiliates generally are eligible to receive non-qualified stock options, restricted stock, stock appreciation rights, restricted stock units and other share-based awards under the Amended 2002 Plan.
Only employees of the Company or a subsidiary meeting the requirements of the Internal Revenue Code are eligible to receive “incentive stock options,” within the meaning of Section 422 of the Internal Revenue Code (ISOs) under the Amended 2002 Plan.
|
Shares Available for Awards: | 53,000,000 shares would be available for future awards granted on or following the effective date of the Amended 2002 Plan. The Amended 2002 Plan provides for a decrease in the number of shares of common stock reserved for issuance under the plan (including previously granted awards) to 75,657,296 shares plus shares available for issuance under prior plans immediately prior to the effective date of the 2002 Plan.
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Award Types: | (1) Non-Qualified Stock Options and Incentive Stock Options
(2) Restricted Stock
(3) Stock Appreciation Rights
(4) Restricted Stock Units
(5) Dividend Equivalent Rights
(6) Other Share-Based Awards
(7) Performance-Based Awards
|
|
| |
Award Terms
(Exercisability Period):
| Options, Stock Appreciation Rights (SARs), and Other Share-Based Awards have a term of no longer than 10 years.
ISOs granted to ten percent owners will have a term of no longer than five years.
|
ISO Limits: | No more than 30,000,000 shares reserved for issuance may be issued upon the exercise of ISOs granted under the Amended 2002 Plan.
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Minimum Vesting: | Vesting is generally determined by the Compensation Committee within limits set forth in the Amended 2002 Plan, except that no award may fully vest before the first anniversary of the grant date other than a carve-out for up to 5% of the number of shares that are reserved for issuance pursuant to future awards as of the effective date of the Amended 2002 Plan.
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Not Permitted: | 1) Repricing or reducing the exercise price of a share option or SAR below the per share exercise price as of the date of grant without shareholder approval.
2) Canceling, surrendering or substituting any outstanding option or SAR in exchange for (i) the grant of a new option or SAR with a lower exercise price, or (ii) other awards or a cash payment at a time when the exercise price of the option or SAR is greater than the fair market value of a share.
3) Adding shares back to the number of shares available for issuance when shares are repurchased on the open market with the proceeds of the exercise of an option.
4) Single-trigger change in control vesting acceleration.
5) Payment of dividend or dividend equivalent rights prior to the vesting of the underlying awards.
|
Summary of the Amended 2002 Plan
The following summary of certain material features of the Amended 2002 Plan is qualified in its entirety by reference to the Amended 2002 Plan, which is attached to this proxy statement as Appendix C.
Purpose of the Amended 2002 Plan
The purpose of the Amended 2002 Plan is to benefit the Company’s shareholders by allowing the Company to attract, motivate and retain the best available employees and directors and by providing those employees and directors stock-based incentives to strengthen the alignment of interests between those persons and the Company’s shareholders.
Shares Reserved for Issuance under Amended 2002 Plan
Shares Reserved. As proposed, the total number of27,486 shares of our common stock that are authorized and available for issuance pursuant to awards granted under the Amended 2002 Plan is 75,657,296shares plus shares available for issuance under prior plans immediately prior to the effective date of the 2002 Plan, subject to adjustment in the event of certain changes in the capitalization of the Company. However, only 53,000,000 shares would be available for future awards as of the effective date of the Amended 2002 Plan. As of February 16, 2018, 96,342,704 shares of common stock were available for the grant of future awards under the 2002 Plan. The Amended 2002 Plan provides for a decrease – rather than an increase – in the number of shares of common stock reserved for issuance under the plan.
Shares Reissuable Under Amended 2002 Plan. The following shares are reissuable pursuant to new awards granted under the Amended 2002 Plan: shares that are not issued as a result of the termination, expiration or lapsing of an award for any reason; shares subject to a full value award that are not issued because the award is settled in cash; shares covered by an option surrendered in payment of the exercise or purchase price or in satisfaction of any tax-related items incident to the exercise of an option; or shares that are surrendered in satisfaction of obligations for tax-related items incident to the vesting or settlement of a full value award.
Shares Not Reissuable Under Amended 2002 Plan. Shares repurchased by the Company on the open market with the proceeds of the exercise price from options will be deducted from the aggregate number of shares available for future awards.
Shares Not Counted Against Share Reserve Pool Under Amended 2002 Plan. 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 will not be counted against shares available for grant pursuant to the Amended 2002 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 2002 Plan.
Award Limits
In any calendar year, the maximum number of shares that may be granted to any one participant under the Amended 2002 Plan is 1,500,000 shares, subject to adjustment in the event of specified capitalization events of our company.
Awards
Under the Amended 2002 Plan, the following awards may be granted: stock options (including “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code), restricted stock, stock appreciation rights, restricted stock units, dividend equivalent rights, other share-based awards, and performance-based awards.
Eligibility
Incentive stock options may be granted only to our employees and to employees of any of our subsidiaries meeting the requirements of the Internal Revenue 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. As of February 16, 2018,13 non-employee directors and 31,531 employees were eligible to participate in the 2002 Plan.
Administration
The Amended 2002 Plan provides that it will be administered by our Board of Directors, unless the Board of Directors elects to delegate administration responsibilities to a committee. (In this Proxy Statement, we will refer to the Board of Directors or the committee to which administration of the Amended 2002 Plan has been delegated as the “Committee”). The Committee has the sole authority to grant awards, and sole and exclusive discretion to interpret and administer the Amended 2002 Plan. The Committee determines the eligible individuals who will receive grants and the precise terms of the grants (including accelerations or waivers of any restrictions, and the conditions under which such accelerated vesting or waivers occur, such as in connection with a participant’s death). The Committee has the authority to amend or modify the terms of an outstanding award, except that an amendment that materially and adversely impacts the rights under an outstanding award will require prior written consent from the participant, unless the amendment is necessary or desirable to facilitate compliance with applicable law or to avoid adverse tax consequences under Section 409A of the Internal Revenue Code. The decisions of the Committee will be final and binding on all holders of awards. To the extent permitted by applicable law, our Board of Directors also may delegate to a committee of one or more members of our Board of Directors or one or more officers of our company the authority to grant or amend awards to participants other than employees who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, or officers or directors of our company to whom authority to grant or amend awards has been delegated.
Stock Options
The Amended 2002 Plan authorizes the grant of incentive stock options, which are intended to satisfy the requirements of Section 422 of the Internal Revenue Code, and non-qualified stock options, which do not satisfy the requirements of Section 422 of the Code. The exercise price of stock options granted under the Amended 2002 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 common stock on the date of grant. As of February 16, 2018, the fair market value of a share of our common stock was $78.97. Options granted under the Amended 2002 Plan will vest at the rate specified by the Committee. No stock option will be exercisable more than ten years after the date it is granted.
The Committee determines the methods by which the exercise price of options is paid, including the following: in cash or check, in shares, through a broker-dealer sale and remittance procedure pursuant to which the participant effects a same-day exercise of the option and sale of the purchased shares in order to cover the exercise price for the purchased shares and the applicable withholding taxes, a “net exercise” arrangement pursuant to which the number of shares issuable upon exercise of the option is reduced by a number of shares having a fair market value that would cover the exercise price and tax withholding. In addition, the Committee may provide financial assistance
to a participant who wishes to exercise his or her outstanding options, provided that the participant is not an executive officer or member of the Board of Directors, by allowing the participant to deliver an interest-bearing full recourse promissory note or through a third-party loan guaranteed by the Company in the amount of the exercise price and any associated withholding taxes.
Until the shares 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 an option, notwithstanding the exercise of the option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the shares are issued, except in the case of a capitalization event of the Company as provided under the terms of the Amended 2002 Plan.
Restricted Stock Unit
A restricted stock unit represents the equivalent of one share and this type of award is typically awarded to participants without payment of consideration. Restricted stock units may be subject to vesting conditions based upon the passage of time or the attainment of performance-based conditions as determined in the discretion of the Committee. 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. 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. Restricted stock units may be settled in shares, cash or a combination of both. The Committee may authorize dividend equivalents to be granted with respect to restricted stock units.
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). 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. Restrictions may be based on the passage of time or the attainment of performance-based conditions. 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, which may be cash, services rendered or to be rendered to our company or an affiliate of our company, or in another form of payment.
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 Committee will generally determine when the SAR will vest and become exercisable. The grant 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 determines the term of a SAR, but no SAR will be exercisable more than ten years after the date it is granted.
A SAR may be granted in connection with an option, either at the time of grant or at any time thereafter during the term of the option. Upon exercise, a SAR granted in connection with an option will entitle the holder to surrender the option or any portion thereof to the extent unexercised, with respect to the number of shares as to which such SAR is exercised. The option will, to the extent and when surrendered, cease to be exercisable. If a related option is exercised in whole or in part, then the SAR related to the shares purchased terminates as of the date of such exercise.
The Committee may elect to settle exercised SARs in cash, in shares, or in a combination of cash and shares. Until the shares 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. No adjustment will be made for a dividend or other right for which the record date is prior to the date the shares are issued, except in the case of a capitalization event as provided under the terms of the Amended 2002 Plan.
Other Share-Based Awards
The Committee is authorized under the Amended 2002 Plan to make any other award that is not inconsistent with the provisions of the Amended 2002 Plan and that by its terms involves or might involve the issuance of shares, or of a right vesting based on the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or the issuance of any other security with the value derived from the value
of the shares. 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 Internal Revenue Code. The Committee may establish the term of other share-based awards, but it may not exceed ten years. The Committee may authorize dividend equivalents to be paid on other share-based awards.
Performance-Based Awards
The Committee may grant to eligible participants awards that are paid, vest or become exercisable upon the attainment of company performance goals which include, but are not limited to, one or more of the following performance criteria: cash flow (including, without limitation, operating cash flow and free cash flow), earnings per share, gross or net profit margin, net income (either before or after interest, taxes, amortization, and/or depreciation), operating income (either before or after restructuring and amortization charges), return on capital or return on invested capital, return on equity, return on operating assets or net assets, return on sales, sales or revenue, stock price goals or total shareholder return. The Committee intends to define objectively the manner of calculating the performance criteria it selects to use for any applicable performance period.
At the time of grant, the Committee may specify one or more objectively determinable adjustments to one or more of the performance goals. For all performance-based awards, the Committee intends that such determinations shall be made within the first twenty-five percent (25%) of the applicable performance period. No performance-based award may have a performance period with a duration that is less than twelve (12) months.
Notwithstanding the foregoing, while the Committee intends to grant performance-based awards subject to the conditions and procedures outlined above, the Committee may in its discretion grant awards that do not meet such conditions and procedures.
Transferability of Awards
Except as otherwise provided by the Committee, no award granted under the Amended 2002 Plan may be assigned, transferred, or otherwise disposed of by a participant other than by will or the laws of descent and distribution.
Minimum One-Year Vesting Requirement
No award may vest before the first anniversary of the date of grant with the exception of (i) up to five percent (5%) of the number of shares reserved under the Amended 2002 Plan for future awards as of the date the Amended 2002 Plan becomes effective, (ii) awards granted in connection with the assumption or substitution of awards as part of a transaction, and (iii) awards that may be settled only in cash.
Dividends/Dividend Equivalents
To the extent that any dividends or dividend equivalents are payable with respect to a full value award, the dividend or dividend equivalents, as applicable, will not be paid unless the underlying award vests.
Changes in Control
Provided that any applicable award agreement does not preclude the following from applying, in the event of a change in control of our company, each outstanding award that vests solely on the passage of time under the Amended 2002 Plan will immediately vest in the event the award is not converted, assumed, substituted or replaced by the successor corporation, and following the change in control, the awards will immediately terminate. Awards that vest based on the attainment of performance-based conditions shall be subject to the change in control provisions in the applicable award agreement, provided that the agreement does not permit vesting at a rate that is greater than the actual level of attainment and/or provide for pro-rated vesting based on any reduction to the performance period resulting from the change in control. Where awards are assumed, substituted or otherwise continued after a change in control of our company, the Committee may provide that one or more awards will automatically accelerate upon an involuntary termination of the participant’s employment or service within a designated period in connection with the change of control. “Change in control” has a special meaning that is defined in the Amended 2002 Plan.
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 assets to our shareholders or any other similar event or change in capitalization affecting our shares other than certain equity restructurings identified in the Amended 2002 Plan, the
Committee has discretion to make appropriate adjustments in the number and type of shares subject to the Amended 2002 Plan, the terms and conditions of any award outstanding under the Amended 2002 Plan, and the grant or exercise price of any such award. In the case of certain equity restructurings as specified in the Amended 2002 Plan, the number and type of securities subject to each outstanding award and the grant or exercise price, if applicable, will be equitably adjusted.
Amendment and Termination of Plan
With the approval of our Board of Directors, at any time and from time to time, the Committee may terminate, amend or modify the Amended 2002 Plan, except that the Board may not, without prior shareholder approval, amend the Amended 2002 Plan in any manner that would require shareholder approval to comply with any applicable laws, rules or regulations. Except as may be required to avoid adverse tax consequences under Section 409A of the Internal Revenue Code or as may be required or desirable to facilitate compliance with applicable law, no termination, amendment or modification of the Amended 2002 Plan may adversely affect in any material way any award granted under the Amended 2002 Plan without the consent of the participant.
Furthermore, absent approval of our shareholders and except as permitted under the provisions of the Amended 2002 Plan dealing with certain capitalization adjustments and change in control, no option or SAR may be amended to reduce the exercise price or grant price of the shares subject to such option or SAR and no option or SAR may be cancelled in exchange for the grant of an 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 recoupment under any “clawback” policy that the Company adopts for the recovery of awards or payments thereunder in the event of fraud or as required by applicable law or governance considerations or in other similar circumstances.
Plan Term
The Amended 2002 Plan will continue in effect until terminated by our Board of Directors, but no incentive stock options may be granted under the Amended 2002 Plan after the tenth anniversary of the date the amendments to the Amended 2002 Plan were approved by our Board of Directors. Any awards that are outstanding at the time the Amended 2002 Plan terminates will remain in force according to the terms of the Amended 2002 Plan and the applicable agreement evidencing the award.
Federal Income Tax Consequences
The following is a summary of the U.S. federal income tax consequences applicable to equity awards under the Amended 2002 Plan based on current U.S. federal income tax laws. The Amended 2002 Plan is not qualified under Section 401(a) of the Internal Revenue Code. The summary is general in nature and is not intended to cover all tax consequences that may apply to a particular employee, director or to our company. The provisions of the Internal Revenue Code and regulations thereunder relating to these matters are complicated, may change and their impact in any one case may depend upon the particular circumstances. Further, this summary does not discuss the tax consequences of a participant’s death or the provisions of any income tax laws of any municipality, state or foreign country in which a participant may reside.
Nonqualified Stock Options. With respect to nonqualified stock options: (i) no income is recognized by the participant at the time the nonqualified stock option is granted; (ii) generally, at exercise, ordinary income is recognized by the participant in an amount equal to the difference between the option exercise price paid for the shares and the fair market value of the shares on the date of exercise and we are entitled to a tax deduction in the same amount (subject to the restrictions on deductibility described under “Section 162(m) Limitation” below); and (iii) upon disposition of the shares, any gain or loss is treated as capital gain or loss. If the options are exercised and the shares acquired are sold on the same date, generally, the difference between the option exercise price paid for the shares and the sale price is recognized as ordinary income and no capital gain or loss is reported. If required, income tax must be withheld from the participant on the income recognized by the participant upon exercise of a nonqualified stock option.
Incentive Stock Options. The grant of an incentive stock option under the Amended 2002 Plan will not result in any federal income tax consequences to the participant or to our company. A participant recognizes no federal taxable income upon exercising an incentive stock option (subject to the alternative minimum tax rules discussed below), and we receive no deduction at the time of exercise. In the event of a disposition of common stock acquired upon
exercise of an incentive stock option, the tax consequences depend upon how long the participant has held the shares of common stock. If the participant does not dispose of the shares within two years after the incentive stock option was granted, nor within one year after the incentive stock option was exercised, the participant will recognize a long-term capital gain (or loss) equal to the difference between the sale price of the shares and the exercise price. We are not entitled to any deduction under these circumstances.
If the participant fails to satisfy either of these holding periods, he or she must recognize ordinary income in the year of the disposition (referred to as a “disqualifying disposition”). The amount of such ordinary income generally is the lesser of (A) the difference between the amount realized on the disposition and the exercise price or (B) the difference between the fair market value of the common stock on the exercise date and the exercise price. Any gain in excess of the amount taxed as ordinary income will be treated as a long- or short-term capital gain, depending on whether the common stock was held for more than one year. In the year of the disqualifying disposition, we are entitled to a deduction equal to the amount of ordinary income recognized by the participant, subject to possible limitations imposed by Section 162(m) of the Internal Revenue Code.
The “spread” under an incentive stock option (i.e., the difference between the fair market value of the shares at exercise and the exercise price) is classified as an item of adjustment in the year of exercise for purposes of the alternative minimum tax. If a participant’s alternative minimum tax liability exceeds such participant’s regular income tax liability, the participant will owe the larger amount of taxes. The alternative minimum tax will not apply with respect to incentive stock options if the participant sells the shares within the same calendar year in which the incentive stock options are exercised. However, such a sale of shares within the same year of exercise will constitute a disqualifying disposition, as described above.
Stock Appreciation Rights. Upon exercise of a SAR, the participant will recognize ordinary income (treated as compensation) in an amount equal to the excess of the aggregate fair market value of the shares on the date the SAR is exercised over the aggregate exercise price of the SAR. We generally will be entitled to a business expense deduction in the same amount and at the same time as the participant recognizes ordinary compensation income (subject to the limits of Section 162(m) of the Internal Revenue Code). If required, income tax will be withheld from the participant on the income recognized by the participant upon exercise of a SAR.
Restricted Stock. In the absence of a Section 83(b) election (as described below), a participant who receives restricted stock will recognize no income at the time of grant. When the restrictions lapse, a participant will recognize ordinary income (treated as compensation) equal to the excess of the fair market value of the stock when the restrictions lapse over the amount paid (if any) for the stock. As the restrictions applicable to a grant of restricted stock lapse (for example, if the restrictions on 20% of a grant lapse on each anniversary of the grant date), the participant will include the applicable portion of the shares that vests as ordinary income (treated as compensation). The participant’s basis in the common stock is equal to the amount included in income on the expiration of the restrictions and the amount paid (if any), and the holding period will begin when the restrictions end. Any disposition of the restricted stock will result in a long- or short-term capital gain or loss, depending on the time the common stock is held after the restrictions end. We generally will be entitled to a deduction equal to the fair market value of the common stock when it is included in the participant’s income, and will also be entitled to a business expense deduction for dividends paid to the participant (if any) on common stock that remains subject to restrictions (in each case subject to the limits of Section 162(m) of the Internal Revenue Code).
If a Section 83(b) election is made within 30 days of the grant of the award, the participant must recognize the fair market value of the restricted stock on the date of grant as ordinary income (treated as compensation) as of the date of grant, and the holding period would begin at the time the restricted stock is granted. We generally would be entitled to a corresponding business expense deduction for the grant, but dividends on the stock would not be deductible. Any subsequent disposition of the stock by the participant, other than by forfeiture, would result in capital gain or loss, which would be long- or short-term, depending on the length of the holding period. Upon a subsequent forfeiture of restricted stock with respect to which a Section 83(b) election has been made, no deduction will be allowed in respect of the amount included as income at the time the Section 83(b) election was made; however, the participant will generally be allowed a loss deduction equal to the amount (if any) the participant paid for the restricted stock over the amount (if any) we paid the participant for the restricted stock at the time it is forfeited.
If required, income tax will be withheld from the participant on the income recognized by the participant at the time the restrictions on the restricted stock lapse (or grant of the restricted stock, in the event the participant makes a Section 83(b) election).
Restricted Stock Units. A participant will not recognize any income at the time a restricted stock unit is granted, nor will we be entitled to a deduction at that time. When payment on a restricted stock unit is made, the participant will recognize ordinary income in an amount equal to the difference between the fair market value of the common stock received (or if the restricted stock unit is settled in cash, the cash amount) and the amount paid as consideration for the units, which will typically be nil. If required, income tax will be withheld on the income recognized by the participant. We will receive a deduction for federal income tax purposes equal to the ordinary income recognized by the participant, subject to the limits of Section 162(m) of the Code.
Performance-Based Awards. A participant will generally not recognize income at the time an award based on achievement of performance objectives is granted, nor will we be entitled to a deduction at that time. When payment on the performance award is made, the participant generally will recognize ordinary income in an amount equal to the fair market value of the common stock received (or if the award is settled in cash, the cash amount). If required, income tax must be withheld on the income recognized by the participant. We will receive a deduction for federal income tax purposes equal to the ordinary income recognized by the participant, subject to the limits of Section 162(m) of the Code.
Dividend Equivalents. A recipient of dividend equivalents generally will recognize ordinary income at the time the dividend equivalent is paid. If required, income tax will be withheld on the income recognized by the participant. We will receive a deduction for federal income tax purposes equal to the ordinary income recognized by the participant, subject to the limits of Section 162(m) of the Code.
Section 162(m) Limitation. Under Section 162(m) of the Internal Revenue Code, income tax deductions of publicly-held corporations are generally limited to the extent total compensation (including base salary, annual bonus, stock option exercises and non-qualified benefits paid) for specified executive officers exceeds $1 million (less the amount of any “excess parachute payments” as defined in Section 280G of the Internal Revenue Code) in any one year.
Section 409A. Section 409A of the Code imposes certain requirements on non-qualified deferred compensation arrangements. These include requirements on an individual’s election to defer compensation and the individual’s selection of the timing and form of distribution of the deferred compensation. If an award under the Amended 2002 Plan is subject to and fails to satisfy the requirements of Section 409A, the recipient of that award may recognize ordinary income on the amounts deferred under the award, to the extent vested, which may be prior to when the compensation is actually or constructively received. Also, if an award that is subject to Section 409A fails to comply with the requirements of Section 409A, Section 409A imposes an additional 20% federal penalty tax on compensation recognized as ordinary income, as well as interest on such deferred compensation.
Future Plan Benefits
Future awards to employees, officers, and directors under the Amended 2002 Plan are generally made at the discretion of the Committee. Therefore, the benefits and amounts that will be received or allocated under the Amended 2002 Plan, as amended, in the future are not determinable at this time.
Past Grants under the 2002 Plan
As of February 16, 2018, awards covering 44,257,285 shares of the common stock had been granted under the 2002 Plan. The following table shows information regarding the grants of those awards among the persons and groups identified below.
PRIOR GRANTS UNDER THE 2002 PLAN
|
| | | | | |
| Options | Restricted Stock
| RSUs | Performance RSUs |
No. of Shares | No. of Shares | No. of Shares | Target No. of Shares | Maximum No. of Shares |
David A. Ricks Chairman, President, and CEO
| 17,779 | — | 20,466 | 590,166 | 877,744 |
Enrique A. Conterno Senior VP and President, Lilly Diabetes and President, Lilly USA
| 35,429 | 11,000 | 76,837 | 524,315 | 783,226 |
Derica W. Rice (retired) Executive VP, Global Services and Chief Financial Officer
| 116,385 | — | — | 993,511 | 1,518,504 |
Jan M. Lundberg, Ph.D. Executive VP, Science and Technology and President, Lilly Research Laboratories
| — | — | 127,871 | 620,024 | 901,590 |
Michael Harrington Senior VP and General Counsel
| 17,746 | 5,000 | 22,778 | 313,188 | 466,151 |
Current Executive Officers, as a Group | 392,978 | 30,000 | 443,736 | 4,053,170 | 6,045,121 |
Non-Employee Directors, as a Group
| 19,600 | — | — | — | — |
All current employees who are not executive officers, as a group | 9,201,253 | 55,700 | 10,760,750 | 18,190,202 | 29,334,005 |
Vote Required
The affirmative vote of at least a majority of the outstanding common shares present in person or by proxy at the annual meeting is needed to pass this proposal.
Board Recommendation on Item 6
The Board of Directors recommends that you vote FOR approving the Amended and Restated 2002 Lilly Stock Plan.
Shareholder Proposals
Item 7. Shareholder Proposal Seeking Support for the Descheduling of Cannabis
Fred Pfenninger, 9247 N. Meridian Street, Suite 219, Indianapolis, Indiana, beneficial owner of 79 shares of common stock of Eli Lilly and Company,November 13, 2020, has submitted the following proposal:
Shareholder Proposal
The proponent requests that the Company announce its support for the descheduling of cannabis.
Supporting Statement
Eli Lilly, who was the Third President of Lilly from 1932 to 1948, graduated from the Philadelphia College of Pharmacy in 1907 and wrote his Doctoral Thesis on "The Comparative Physiological Effects of Several Varieties of Cannabis Sativa." Lilly was a world leader in cannabis based pharmaceutical products in the early 1900s. Lilly sold 23 different cannabis entries in its medical catalog in 1935 before the 1937 Marijuana Tax Act and Reefer Madness halted sales. Parke Davis worked with Lilly to create its own strain Cannabis Americana which Lilly grew in Greenfield, Indiana.
Federal prohibitions outlawing cannabis recreational, industrial and therapeutic use were first imposed by Congress under the Marijuana Tax Act of 1937 and later reaffirmed by federal lawmakers' decision to "temporarily" classify marijuana as well as the plant's organic compounds known as cannabinoids as a Schedule I substance under the Controlled Substances Act of 1970. This classification, which categorizes the plant by statute alongside heroin, defines cannabis and its cannabinoids as possessing a high potential for abuse, no currently accepted medical use and a lack of accepted safety for the use of the drug.
The Controlled Substances Act of 1970 called for the creation of a special federal commission appointed by Congress and President Nixon to study all aspects of cannabis and report their findings. After 2 years of scientific study the National Commission on Marijuana and Drug Abuse ("Schafer Commission") report "Marijuana: A Signal of Misunderstanding" reported that there was little proven danger of physical or psychological harm, it does not lead to physical dependence, it is not a gateway drug, and no one should go to jail for the private possession of cannabis.
Despite the US Government's nearly century long prohibition of the plant, cannabis is one of the most investigated therapeutically active substances in history. To date there are approximately 22,000 published studies or reviews in the scientific literature referencing the cannabis plant and its cannabinoids, nearly half of which were published within 10 years according to a key work search on the search engine PubMed Central.
The late 1980s discovery of the endogenous cannabinoid system, with specific receptors and ligands, has progressed our understanding of the therapeutic actions of cannabis. The cannabinoid system evolved with our species and is intricately involved in normal physiology -control of movement; pain, reproduction, memory, appetite.
Cannabis oil kills cancer, prevents and reverses dementia, prevents epileptic seizures, and extends longevity among other things. Cannabis is the most medicinal plant on the planet.
Statement in Opposition to the Shareholder Proposal Regarding Support for the Descheduling of Cannabis
The Public Policy and Compliance Committee has reviewed and recommends a vote against this proposal. We have finite resources for advocacy, which we must limit and focus to be effective, and descheduling of cannabis is not one of our core priorities. We focus our resources to support organizations that champion public policies that contribute to pharmaceutical innovation, healthy patients, and a healthy business climate. The company is also actively engaged in public policy discussions that relate to our current products and other important topics related to drug pricing.
Board Recommendation on Item 7
The Board of Directors recommends a vote AGAINST the proposal.
Item 8. Shareholder Proposal Requesting Report Regarding Direct and Indirect Political Contributions
The Comptroller of the State of New York, Thomas P. DiNapoli, trustee of the New York State Common Retirement Fund and the administrative head of the New York State and Local Retirement System, beneficial owner of 2,967,282 shares, has submitted the following proposal:
Shareholder Proposal
The proponent seeks a report from the company regarding its direct and indirect political contributions.
Supporting Statement
Whereas, WHEREAS, we believe in full disclosure of Eli Lilly and Company's ("Lilly")Lilly’s direct and indirect lobbying activities and expenditures to assess whether Lilly'sLilly’s lobbying is consistent with its expressed goals and in the best interests of shareholders.
Resolved, RESOLVED, the shareholders of Lilly request the preparation of a report, updated annually, disclosing:
| |
1. | Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications. |
| |
2. | Payments by Lilly used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case including the amount of the payment and the recipient. |
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3. | Lilly's membership in and payments to any tax-exempt organization that writes and endorses model legislation. |
| |
4. | Description of the decision making process and oversight by management and the Board for making payments described in section 2 and 3 above. |
1.Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications.
2.Payments by Lilly used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case including the amount of the payment and the recipient.
3.Lilly’s membership in and payments to any tax-exempt organization that writes and endorses model legislation.
4.Description of management’s and the Board’s decision-making process and oversight for making payments described in sections 2 and 3 above.
For purposes of this proposal, a "grassroots"grassroots lobbying communication"communication" is a communication directed to the general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages the recipient of the communication to take action with respect to the legislation or regulation. "Indirect lobbying""Indirect lobbying" is lobbying engaged in by a trade association or other organization of which Lilly is a member.
Both "direct"direct and indirect lobbying”lobbying" and "grassroots"grassroots lobbying communications"communications" include efforts at the local, state and federal levels.
The report shall be presented to the Audit Committee or other relevant oversight committees and posted on Lilly's website.
Supporting Statement
We encourage transparency in the use of corporate funds to influence legislation and regulation, both directly and indirectly. Since 2010, Lilly has spent over $64 million on federal lobbying (opensecrets.org). This figure does not include lobbying expenditures to influence legislation in states, where Lilly also lobbies in 48 states ("Amid Federal Gridlock, Lobbying Rises in the States," Center for Public Integrity, February 11, 2016), but disclosure is uneven or absent.
Lilly is a member of the Pharmaceutical Research and Manufacturers of America (PhRMA), which spent over $100 million fighting a California drug pricing initiative ("Big Pharma Fights 'Tooth and Nail' against California Drug Vote," Bloomberg, October 25, 2016), and belongs to the Chamber of Commerce, which has spent over $1.3 billion on lobbying since 1998. Lilly does not disclose its payments to trade associations, or the amounts used for lobbying. We are concerned that Lilly's lack of trade association lobbying disclosure presents reputational risks. For example, Lilly believes in providing affordable medicines, yet helps fund PhRMA's opposition to lower drug price initiatives, and Lilly supports smoking cessation, yet the Chamber works to block global smoking laws.
And Lilly does not disclose its contributions to tax-exempt organizations that write and endorse model legislation, such as its membership in the American Legislative Exchange Council (ALEC). Lilly's ALEC membership has drawn media scrutiny ("Kendall: Businesses Should Cut Ties with Union-busting Lobbyists," Indianapolis Star, July 27, 2016). Over 100 companies have publicly left ALEC, including Allergan, Amgen, AstraZeneca, GlaxoSmithKline, Medtronic and Merck.
Statement in Opposition to the Shareholder Proposal Requesting Report Regarding Direct and Indirect Political Contributions
The Public Policy and Compliance Committee of the board has reviewed this proposal and recommends a vote against it, as we currently publish most of the information requested by the shareholder. The additional reporting requirements are unnecessary, as the information requested is publicly available and this reporting would place an undue administrative burdenposted on the company.
Lilly’s website.
Beginning in 2005, the company has published the following information on our website (www.lilly.com) for both direct company contributions and employee political action committee (PAC) contributions to support candidates for political office, political parties, officials, or committees in the U.S.:
policies and procedures for company and PAC contributions
contributions to candidates, including information about the candidate's office (for example, state, local, or federal; House or Senate), party affiliation, and state
contributions to political organizations and Section 527 organizations reported by state.
This information is updated annually. In addition to the information available on our website, detailed corporate contributions, PAC contribution data, and the company’s direct lobbying expenses are available to the public on the Federal Election Committee website (https://www.fec.gov/data/) and through individual state agencies. The company’s direct lobbying expenses are also available to the public on the Lobbying Disclosure page of the U.S. House website (http://disclosures.house.gov/ld/ldsearch.aspx) and through individual state agencies.
In addition to direct political contributions, Lilly maintains memberships in certain 501(c)(6)s - trade associations that report lobbying activity to the U.S. government. We maintain memberships in trade associations and other tax-exempt organizations specific to business and pharmaceutical industry interests, such as PhRMA (Pharmaceutical Research and Manufacturers Association), BIO (Biotechnology Association), and the National Association of Manufacturers. We support organizations that champion public policies that contribute to pharmaceutical innovation, healthy patients, and a healthy business climate.
Information relating to Lilly’s memberships in trade associations to which we contribute $50,000 per year or more, and any such organizations where Lilly has a board seat can be found at https://www.lilly.com/LillyPAC.
These tax exempt organizations are also required to disclose their lobbying expenditures under the Lobbying Act of 1995: they report their lobbying expenditures to the U.S. Senate.
As we do not control what portion of the organization’s budget is spent on lobbying, it is the fact of company membership in and support for the trade association, and the trade association’s total lobbying expenditure, that reveals the most about Lilly's political activities. As a result, the board of directors does not believe any value provided by the requested additional disclosures merits the resources required to produce such a report.
Board Recommendation on Item 8
The Board of Directors recommends a vote AGAINST the proposal.
Item 9. Shareholder Proposal Requesting Report on Policies and Practices Regarding Contract Animal Laboratories
People for the Ethical Treatment of Animals (PETA), 1536 16th Street N.W., Washington, D.C., beneficial owner of 56 shares of common stock of Eli Lilly and Company, has submitted the following proposal:
Establish Accountability for Animal Welfare
RESOLVED, in light of disturbing mistreatment of animals at external research organizations with which our Company has conducted business, the Board should strengthen our Company's policy and practices regarding contract animal laboratories and issue a report to shareholders.
Supporting Statement
In spiteLilly spent $82,532,000 from 2010 - 2019 on federal lobbying. This does not include state lobbying in the 48 states where Lilly lobbies1 but disclosure is uneven or absent. Lilly also lobbies abroad, spending between €700,000-799,000 on lobbying in Europe for 2019 and attracting scrutiny for "using shifty lobbying tactics to dodge regulations and get medicines approved" in Australia.2
Lilly sits on the board of its "commitmentthe Pharmaceutical Research and Manufacturers of America (PhRMA) and belongs to the ethical treatmentChamber of animals,"Commerce, which extendstogether have spent over $2.0 billion on lobbying since 1998. Lilly does not disclose its payments to external laboratories, our Companytrade associations and social welfare organizations, or the amounts used for lobbying, including grassroots. Grassroots lobbying does not get reported at the federal level under the Lobbying Disclosure Act, and disclosure is uneven or absent in states.
We are concerned Lilly’s payments to third party groups are potentially being used for undisclosed grassroots lobbying. For example, PhRMA, which brought in $459 million in revenue for 2018, has repeatedly conducted business with contract laboratories where substandard animal care practices have been documentedgiven millions to "dark money" social welfare groups which then "advocated policies favored by government agencies.
Our Company's animal care policy states that “animals used in research shall be treated humanely, with pain or distress eliminated or minimized." Additionally, our Company requires all contract research organizations "to adhere to [its animal welfare] policies and principles." Yet our Company has paid for services conducted at and purchased animals from at least three contract laboratories—Liberty Research, Inc. (Liberty), Professional Laboratory and Research Services (PLRS), and Covance—with serious violations of federal animal welfare laws.
A 2017 exposé of Liberty conducted by People for the Ethical Treatment of Animals (PETA) documented, including on video, living and dying conditions for dogs and cats marked by pain and misery. Workers failed to provide adequate anesthesia to dogs whose skulls were opened during invasive surgery and failed to administer humane euthanasia. Liberty used animals in multiple tests despite the long-term effects of experimental compounds and possible interactions with other medications. Cats were forced to live in severely crowded, barren, windowless pens where recently, some suffocated under litter pans; and dogs suffered severe injuries after being confined with incompatible cagemates.
drugmakers.3
Our
We are also concerned Lilly’s lack of disclosure presents reputational risk when its lobbying contradicts company also contracts with Covance, which was cited and fined bypublic positions. For example, Lilly states it works to makes medicine more affordable, yet funds PhRMA’s opposition to lower drug price initiatives.4 Lilly publicly supported COVID-19 efforts, but the U.S. DepartmentChamber directly lobbied against using the Defense Production Act for production of Agriculture (USDA) in 2016 when negligence resulted in thirteen monkeys dying of hyperthermia.personal protective equipment for workers.15 According to recent federal inspections, beagles and monkeys at Covance were denied adequate veterinary care for numerous ailments: monkeys sustained limb fractures and beagles were not adequately treated for inflamed and painful skin. A rabbit was euthanized after she was found with a bell stuck in her mouth. Another rabbit was euthanized after she sustained a spinal injury.And Lilly’s ALEC membership has drawn negative scrutiny.6
Apparent carelessness in choosing outside laboratories is a long-standing issue for our Company. A 2010 PETA video exposé of PLRS documented repeated violations of federal laws. Workers yelled profanities at cowering, frightened dogs and cats. Employees kicked, threw, dropped, and dragged dogs, and violently threw cats into cages. Animals at PLRS were forced to live in their own feces and urine and suffered constantly from burns and sores-but received no veterinary care for their wounds. Following the release of the video, and inspection by the USDA, this laboratory was forced to close.
Shareholders cannot monitor what goes on inside animal testing laboratories, but our Company can and must review federal records and conduct frequent and extensive visits to contract laboratories. The Board must ensure that animal welfare measures are an integral part of our Company's corporate stewardship.
We urge shareholders to vote in favor of this socially and ethically important proposal.
1http://www.mediapeta.com/peta/PDF/Covance_Research_Products.Stip.July2016.pdf
Statement in Opposition to the Shareholder Proposal Requesting Report on Policiesto Disclose Direct and Practices Regarding Contract Animal LaboratoriesIndirect Lobbying Activities and Expenditures
We share the concerns raised in this shareholder proposal. We abhor mistreatment of animalsThe board, after review by its Directors and we are committed to the appropriate treatment of animals in research. However, for reasons stated below, the Public PolicyCorporate Governance Committee and Ethics and Compliance Committee, of the board has reviewed this proposal and recommends a vote against it.this proposal.
OfLilly already publishes a substantial amount of the violations citedinformation requested by PETAthe shareholder. Requiring us to prepare a separate report with this information would place an undue administrative burden on the company and would not provide meaningful additional information to shareholders, given our transparency with respect to lobbying activities and the governance and risk mitigation procedures we have in theirplace regarding such activities. Moreover, Lilly’s shareholders have decidedly rejected the substantially same proposal submitted at each of our last four annual meetings.
Since 2005, the company has published the following information, which is updated annually on our website (lilly.com/policies-reports/public-policy/transparency) for both direct company contributions and employee political action committee (PAC) contributions to support candidates for political office, political parties, officials, or committees in the U.S.:
•policies and procedures for company and PAC contributions;
•contributions to candidates, including information about the candidate's office (for example, state, local, or federal; House or Senate) and party affiliation; and
•contributions to political organizations and Section 527 organizations reported by state.
Moreover, detailed corporate contributions, PAC contribution data, and the company’s direct lobbying expenses are available to the public on the Federal Election Committee website (fec.gov/data/) and through individual state agencies. The company’s direct lobbying expenses are also available to the public on the Lobbying Disclosure page of the U.S. House website (disclosures.house.gov/ld/ldsearch) and through individual state agencies.
1https://publicintegrity.org/state-politics/amid-federal-gridlock-lobbying-rises-in-the-states/
2https://www.aap.com.au/hunt-calls-out-big-pharmas-dodgy-lobbying/.
3https://www.opensecrets.org/news/2019/11/big-pharma-bankrolled-conservative-groups-tax-returns-show/.
4https://www.cnn.com/2019/01/23/health/phrma-lobbying-costs-bn/index.html
5 https://www.nytimes.com/2020/03/22/us/politics/coronavirus-trump-defense-production-act.html.
6https://www.commoncause.org/wp-content/uploads/2020/05/Eli-Lilly-ALEC-COVID-letter-FINAL.pdf.
In addition to direct political contributions, Lilly maintains memberships in certain 501(c)(6)s-trade associations that report lobbying activity to the U.S. government. We maintain memberships in trade associations and other tax-exempt organizations specific to business and pharmaceutical industry interests, such as PhRMA, BIO (Biotechnology Association), and the National Association of Manufacturers. We support organizations that champion public policies that contribute to pharmaceutical innovation, healthy patients, and a healthy business climate. Information relating to Lilly’s memberships in trade associations to which we contribute $50,000 per year or more, and any such organizations where Lilly has terminated relationships with one of the three laboratories. For the second laboratory, work has been curtailed and confined to a single site with additional oversight and remediation. The third laboratory self-reported the incidents and took immediate action to address the cited issues. We do not condone, in any form, the mistreatment of research animals, and we recognize our fundamental ethical and scientific obligation to ensure the appropriate treatment of animals used in research. We have processes and procedures in place to ensure humane treatment of animals, including programs for oversight by an internal corporate Animal Welfare Board, Institutional Animal Care and Use Committees, or an equivalent ethical review board as well as veterinary oversight at every site—both ours and contract laboratories. We are committed to quality research-animal care and use, the responsible use of animals in medical research, and the use of alternative methods whenever possible and appropriate.
We adhere to standards set forth in the U.S. Animal Welfare Act. We have been accredited by the Association for Assessment and Accreditation of Laboratory Animal Care (AAALAC). AAALAC accreditation rules and standardsseat can be found on our website (lilly.com/policies-reports/public-policy/transparency). These tax-exempt organizations are also required to disclose their lobbying expenditures under the AAALAC website (www.aaalac.org). This accreditation is a voluntary processLobbying Act of 1995, under which they report their lobbying expenditures to the U.S. Senate. Because the company does not direct the lobbying of trade associations or other groups, attempting to quantify indirect lobbying would be difficult to estimate and potentially misleading to shareholders.
The board also exercises oversight of Lilly’s political expenditures and lobbying activities to ensure that includes a detailed, comprehensive review of our research-animal program including animal care and use policies and procedures, animal environment, housing and management, veterinary medical care, and physical plant operations. We consider our policies and practices to be very much in line with leading industry standards as evidenced by our engagement in industry consortia and professional societies focused on the use of animals in biomedical research (National Association of Biomedical Research, IQ Consortium, Foundation of Biomedical Research). We currently
publish information detailingwe fulfill our commitment to responsible animal research as well as an overviewstewardship of our policiescorporate funds and procedures on our website (www.lilly.com).risk minimization with respect to such activities.
For safe and effective medicinesWe do not believe any potential value provided by the requested additional disclosures merits the resources required to be available to patients, U.S. and foreign regulatory agencies have mandated that a defined amount of research be performed in animals. Where animals must be used,provide the report requested by the proposal; for these reasons, we take every measure to assurebelieve that the lowest numberproposal is not in the best interests of animals is usedthe company and that discomfort and distress are either eliminated or minimized.its shareholders.
As a global company, we develop contractual relationships with select laboratory-animal research and animal-supply companies inside and outside the U.S. We seek to do business only with those companies that share our commitment to animal welfare. We require these companies to maintain a quality animal care and use program. To ensure animal welfare, we assess third-party organization adherence to these expectations. If events suggest a laboratory has failed to meet our standards, we promptly investigate and act upon the allegations. These actions may include termination of a business relationship.
Board Recommendation on Item 96
The Board of Directorsboard recommends athat you vote AGAINST thethis proposal.
Item 10. Shareholder7. Proposal Requesting Report onto Amend the ExtentBylaws to Which Risks Related to Public Concern Over Drug Pricing Strategies are Integrated into Incentive Compensation ArrangementsRequire an Independent Board Chair
Mercy Investment Services,IBVM Foundation of Canada, Inc., 2039 North Geyer Road,70 St. Louis, Missouri,Mary Street Toronto, ON M5S 1J3 CANADA, beneficial owner of 73400 shares of our common stock as of Eli Lilly and Company,November 2, 2020, has submitted the following proposal:
RESOLVED, Eli Lilly ("Lilly" or the "Company") shareholders request the Board of Directors adopt as policy (the "Policy"), and amend the bylaws as necessary, to require henceforth that the Chair of the Board of Directors, whenever possible, be an independent member of the board. The Policy shall apply prospectively so as not to violate any contractual obligations. If the board determines that a Chair who was independent when selected is no longer independent, the board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This policy would be phased in for the next CEO transition.
RESOLVED
Supporting Statement
In 2018, the Minnesota Attorney General sued three makers of synthetic insulin, including Lilly, alleging that the companies’ publication of "deceptive and misleading" list prices for insulin violates federal and state law. According to the complaint, substantial list price increases for insulin have imposed financial burdens on patients because list prices are used to determine the amount some patients and institutional purchasers must pay. Congressional hearings have been held on the rising cost of insulin, and media attention continues to focus on the effects of high insulin prices, including patient deaths.
The risk of lawsuits, sustained public controversy and regulatory intervention, whether ultimately found to be justified or not, are strong arguments for the need for continuous, effective and unconflicted board oversight of corporate management. The board is responsible for this oversight, but conflicts of interest may arise when one person holds both the Chair and CEO positions. In our view, shareholders are best served by an independent board Chair who can provide a balance of power between the CEO and the board. We believe that Lilly’s board should adopt best practice governance policies, including having an independent board chair.
We believe:
•The role of the CEO and management is to run the company;
•The role of the board is to provide independent oversight of management and the CEO;
•There is an inherent conflict of interest when the same person occupies both the role of CEO and Chair.
According to PWC’s 2019 survey of over 700 directors, 57% of directors surveyed who sit on a board with a combined Chair/CEO say it is difficult to voice dissent—a 37% higher result than on boards with an independent Chair.
33% of companies in the S&P 500 have an independent Chair. Numerous institutional investors recommend such a move. For example, California’s Retirement System CalPERS’ Principles & Guidelines encourage separation, even with a lead director in place. The Council of Institutional Investors’ corporate governance policies favor independent board chairs.
In order to ensure that our board can provide rigorous oversight for our Company and management with greater independence and accountability, we urge a vote FOR this shareholder proposal.
Statement in Opposition to the Shareholder Proposal to Amend the Bylaws to Require an Independent Board Chair
The board, after review by its Directors and Corporate Governance Committee and its Ethics and Compliance Committee, recommends a vote against this proposal.
If implemented, the proposal would lock in a mandatory board leadership structure that eliminates our board’s flexibility to evaluate and adopt what it believes to be the most effective leadership structure for Lilly under the relevant facts and circumstances at any given point in time. Unlike the proponent, the board believes, whether in the present or after the next CEO transition, that there is no "one-size-fits-all" approach to board leadership and recognizes that two of its key responsibilities are to evaluate and implement the leadership structure best suited to achieve the company’s objectives and to promote the long-term interests of its shareholders with due regard for all our stakeholders. In 2020, the board continued its ongoing assessment of its leadership structure in the context of our business, long-term strategy, and industry environment and developments in corporate governance, and believes that a combined chairman and CEO, coupled with a strong lead independent director position, continues to be in the best interest of the company and our shareholders.
Lilly’s board leadership structure is consistent with market practice and our flexible approach was strongly endorsed by Lilly’s shareholders last year.
There is no singular approach to independent board leadership across S&P 500 companies. As the proponent indicates, only 36 percent of the S&P 500 have independent chairs.7 Notably, like Lilly, as of December 31, 2020, 57 percent of S&P 500 companies instead have lead independent directors,8 and as of December 2, 2020, 61 of the S&P 100 companies9 and seven of the eight U.S.-incorporated companies from our peer group (see P47 for a list of our peer group companies)10 have a combined board chair and CEO. In addition, Lilly’s shareholdersdecidedly rejected a similar proposal seeking to mandate an independent board chair at our 2020 annual meeting of shareholders, with approximately two-thirds of the votes cast against the proposal, thus endorsing our flexible approach.
Lilly’s current board leadership structure and corporate governance practices provide effective, independent oversight of management.
Lilly has a strong independent board that operates under sound principles of corporate governance. (See P7–P8 and P32–P35 for a description of the board’s governance principles.) Although the chairman and CEO roles are combined, we ensure independent oversight of the company through a counterbalancing governance structure, which we have had since 2006 through either a lead independent director or presiding director. Further bolstering independent oversight, each of our current board members other than the CEO is independent (14 out of 15 directors), and all standing board committees are made up solely of independent directors and led by independent committee chairs.
Lilly’s lead independent director is appointed annually by the board, which conducts an assessment of his or her performance as part of the annual board assessment process. Our strong lead independent director is empowered with clearly defined responsibilities, including:
•leading the board’s processes for selecting the CEO;
•overseeing the independent directors’ annual performance evaluation of the chairman and CEO;
•serving as a liaison between the chairman and the independent directors;
•presiding at all meetings of the board at which the chairman is not present;
•presiding at executive sessions of the independent directors;
•calling meetings of the independent directors, as appropriate;
•approving meeting agendas and schedules and reviewing information to be provided to the board;
•being available for consultation and direct communication with shareholders, as appropriate;
•together with the chairman and the chair of the Directors and Corporate Governance Committee, conducting the annual board assessment process;
•together with the Directors and Corporate Governance Committee, leading the director succession planning process; and
•retaining advisors for the independent directors, as appropriate.
Furthermore, the board has instituted a number of governance best practices to ensure effective independent oversight, including:
•executive sessions of the independent directors held after every regular board meeting that are presided over by our lead independent director;
•an annual performance evaluation of the chairman and CEO conducted by the independent directors, the results of which are reviewed with the CEO and considered by the Compensation Committee and independent directors in establishing the CEO’s compensation for the next year;
7Source: EY Center for Board Matters, Corporate Governance by the Numbers. December 31, 2020.
8Id.
9Source: ISS Corporate Solutions.
10 Biogen Inc. has an independent board chair.
•independent director access to management whenever deemed necessary by the independent directors; and
•the ability of independent directors and all committees to retain their own independent advisors, at the company’s expense, whenever they deem it desirable to do so.
Lilly’s current governance structure provides effective, independent oversight over key matters that are important to our stakeholders, including drug pricing and access.
Our independent directors are deeply engaged in key matters important to Lilly and our stakeholders, including the oversight over the company’s approach to drug pricing and access. Guided by this active oversight, Lilly already has taken numerous steps to address drug pricing and access concerns. For example, Lilly introduced two additional lower-priced versions of branded insulin in January 2020 and added the Lilly Insulin Value Program to Lilly’s comprehensive suite of insulin affordability solutions in September 2020, which enables customers with commercial insurance or no insurance to purchase their monthly prescription of most Lilly insulins for $35. These examples, among others, demonstrate Lilly’s commitment to providing effective oversight over drug pricing and access.
Our board of directors believes that our shareholders are best served by preserving the flexibility to determine the appropriate leadership structure for the company in light of the circumstances at the relevant time.
We believe the proposal would unnecessarily restrict the board’s ability to exercise its fiduciary duty to determine the board leadership structure most appropriate for the company given the specific circumstances and leadership needs at any particular point in time. The company’s robust governance framework ensures that board leadership is balanced with independent participation given the extensive involvement of the lead independent director and his oversight. Our independent directors also collectively bring to the board vast leadership experience, industry expertise, and other critical skills, and individually have demonstrated the willingness to think and act independently on behalf of shareholders. Therefore, adopting a proposal that would limit the board’s ability to exercise decision making on the appropriate leadership is not in shareholders’ best interests.
We believe independence is essential to strong corporate governance. The combination of a chairman who is also the CEO and a strong lead independent director achieves the delivery of multiple balanced inputs to the board. Having one individual serve as both chairman and CEO provides the board with deep insights to drive long-term strategy and execution and allows consistent communication throughout the company. This is vital to our innovative research and development business with prolonged product development cycles. Further, the lead independent director, currently a sitting CEO, drives an outside analysis of company decisions and performance and leads our independent directors in their important oversight function. This leadership structure has served our shareholders well.
Lilly’s independent directors have determined that Mr. Ricks is eminently qualified to serve as both chairman and CEO, and the board believes that having him fill that combined role, complemented by Mr. Luciano, a strong lead independent director, strikes an appropriate balance between consistent leadership and independent and effective oversight that is optimal for the company and our shareholders. For additional information on the particular qualities of Mr. Ricks and why he is best suited to serve as chairman at this time, as well as information on the leadership provided by Mr. Luciano, the lead independent director, please see "Governance—Highlights of the Company’s Corporate Governance—Leadership Structure; Oversight of Chairman, CEO, and Senior Management" on P34–P35.
For these reasons, we believe a policy requiring an independent board chair is not necessary and not in the best interests of the company and its shareholders.
Board Recommendation on Item 7
The board recommends that you vote AGAINST this proposal.
Item 8. Proposal to Implement a Bonus Deferral Policy
UAW Retiree Medical Benefits Trust, 777 East Eisenhower Parkway, Suite 800, Ann Arbor, Michigan, 48108, beneficial owner of shares of our common stock having a market value in excess of $2000, has submitted the following proposal:
RESOLVED that shareholders of Eli Lilly and Company (“Eli Lilly”("Lilly") urge the Compensation Committee (the “Committee”"Committee") of the board to take the steps necessary to provide that the Committee may decline to pay in full an award (a "Bonus") to report annually to shareholdersa senior executive that is based on one or more financial measurements (a "Financial Metric") whose performance measurement period ("PMP") is one year or shorter for a period (the "Deferral Period") following the award, including developing a methodology for determining the length of the Deferral Period and adjusting the remainder of the Bonus over the Deferral Period.
The methodology referenced above should allow accurate assessment of risks taken during the PMP that could have affected performance on the extentFinancial Metric(s) and facilitate Lilly’s recoupment of Bonus compensation pursuant to which risks related to public concern over drug pricing strategies are integrated into Eli Lilly’s incentiveits recoupment policy.
The changes should be implemented in a way that does not violate any existing contractual obligation or the terms of any compensation policies, plans and programs (together, “arrangements”) for senior executives. The report should include, but need not be limited to, discussion of whether incentive compensation arrangements reward, or not penalize, senior executives for (i) adopting pricing strategies, or making and honoring commitments about pricing, that incorporate public concern regarding the level or rate of increasebenefit plan currently in prescription drug prices; and (ii) considering risks related to drug pricing when allocating capital.effect.
SUPPORTING STATEMENTSupporting Statement
As long-term investors,shareholders, we believesupport compensation policies that align senior executive incentive compensation arrangements should rewardexecutives’ incentives with the creation of sustainablecompany’s long-term value. To that end, it is important that those arrangements align with company strategy and encourage responsible risk management.
A key risk facing pharmaceutical companies is potential backlash against high drug prices. Public outrage over high prices and their impact on patient access may force price rollbacks and harm corporate reputation. Legislative or regulatory investigations regarding pricing of prescription medicines may bring about broader changes, with some favoring allowing Medicare to bargain over drug prices. (E.g., https://democrats-oversight.house.gov/news/press-releases/cummings-and-welch-launch-investigation-of-drug-companies-skyrocketing-prices; https://democrats-oversight.house.gov/news/press-releases/cummings-and-welch-propose-medicare-drug-negotiation-bill-in-meeting-with) An October 2017 report indicated that five states and federal prosecutors are investigating insulin makers, including Eli Lilly, for anticompetitive practices related to pricing. (https://medcitynews.com/2017/10/insulin-prices-soar/)
We applaud Eli Lilly for improving transparency on drug pricing and supporting alternative pricing approaches.success. We are concerned however, that theshort-term incentive compensation arrangements applicable to Eli Lilly’s senior executives may notplans can encourage senior executives to take actionson excessive risk.
In our view, reliance on price increases and anticompetitive practices can create significant risks for pharmaceutical firms. Lilly has come under fire for repeated increases in the price of its insulin products: Congress has held hearings on insulin pricing, and media attention has focused on the impact on patient access. The Minnesota and Kentucky Attorneys General have sued Lilly, claiming that resultit published "deceptive and misleading" list prices for insulin in lower short-termorder to pay larger rebates to pharmacy benefit managers. Congressional committees and other states are investigating Lilly’s insulin pricing and sale.
To foster a longer-term orientation, this proposal asks that the Committee take the steps necessary to authorize withholding some portion of Bonuses to allow adjustment of the unpaid portion during the Deferral Period. The Committee would have discretion to set the terms and mechanics of this process.
Bonus deferral is widely used in the banking industry, where overly risky behavior was widely viewed as contributing to the financial performance even whencrisis. In 2009, the Financial Stability Board ("FSB"), which coordinates national financial authorities in developing strong financial sector policies, adopted Principles for Sound Compensation Practices and implementation standards for those actionsprinciples, including bonus deferral. Deferral is "particularly important" because it allows "late-arriving information about risk-taking and outcomes" to alter payouts and reduces the need to claw back compensation already paid out, which may be"fac[e] legal barriers," in Eli Lilly’s best long-term financial interests.
the event of misconduct. Banking supervisors in 16 jurisdictions, including the US, have requirements or expectations regarding bonus deferral. (https://www.fsb.org/wp-content/uploads/P170619-1.pdf)
Eli
We urge shareholders to vote FOR this proposal.
Statement in Opposition to the Shareholder Proposal to Implement a Bonus Deferral Policy
The board, after review by its Directors and Corporate Governance Committee, Ethics and Compliance Committee and Compensation Committee, recommends a vote against this proposal.
Our Compensation Committee has structured Lilly’s executive officer compensation with a view toward appropriately focusing its executive officers on making decisions that are in the long-term best interest of the company. A majority of each executive officer’s compensation, which is reviewed annually by our Compensation Committee, is aligned to enhance shareholder value by promoting the delivery of sustainable business results and discouraging excessive risk-taking or other adverse behaviors. Notably, Lilly’s chief executive officer, Mr. Ricks, has a total target pay mix of 77 percent long-term equity, 14 percent annual bonus, and 9 percent base pay and Lilly’s remaining named executive officers have an average pay mix target of 63 percent long-term equity incentives, 18 percent annual bonus, and 19 percent base pay. All of Lilly’s equity awards to its executive officers are subject to performance goals measured over multiple years and significant vesting periods of three years during which the awards remain subject to forfeiture. Furthermore, any equity earned under the majority of executive officer long-term equity incentives are subject to an additional one-year holding requirement, after the three-year performance period, during which time the executives cannot realize any value from the awards and remain aligned with Lilly uses revenueshareholders. Additional risk is mitigated by the discretion afforded to our Compensation Committee to downward adjust award payouts on any basis it deems appropriate. Our robust stock ownership and earnings per share (EPS)retention guidelines for executive officers further align management with the long-term performance of the Company and discourage excessive risk-taking.
Further, the policy that the proposal requests is unnecessary as metricsLilly already has an effective and robust compensation recovery policy (otherwise referred to as our clawback policy) in place. Under our current clawback policy, the Compensation Committee is authorized to cancel any unpaid executive incentive compensation (including annual bonus payments and long-term equity incentive awards) and claw back any incentive compensation for up to three years following payment in the event of certain specified misconduct.
While the deferral of the annual bonus payment may appear to provide an easier mechanism to claw back bonus payments in the unlikely event it were to become necessary, as a practical matter, our existing clawback policy already provides an effective avenue for the company to claw back payments while at the same time maintaining a competitive executive compensation program that enables the company to recruit and EPS growthretain talent.
Contrary to the assertions in the proposal’s supporting statement, our board and management already effectively oversee the Company’s approach to the pricing of and access to drugs. For example, Lilly is committed to making medicines accessible to patients and our management has taken steps to reduce access barriers imposed by drug prices, including introducing two additional lower-priced versions of branded insulin in January 2020 and adding the Lilly Insulin Value Program to Lilly’s comprehensive suite of insulin affordability solutions in September 2020, which enables customers with commercial insurance or no insurance to purchase their monthly prescription of most Lilly insulins for $35.
For these reasons, we believe implementing a bonus deferral policy is not necessary and not in the best interests of the company and its shareholders.
Board Recommendation on Item 8
The board recommends that you vote AGAINST this proposal.
Item 9. Proposal to Disclose Clawbacks on Executive Incentive Compensation Due to Misconduct
Trinity Health, 766 Brady Avenue, Apt 635, Bronx, NY 10462, beneficial owner of 46,389 shares of our common stock as of November 16, 2020, has submitted the metric for performance awards. (2017 Proxy Statement, at 41-42) A recent Credit Suisse analyst report statedfollowing proposal:
RESOLVED, that “US drug price rises contributed 100%shareholders of industry EPS growth in 2016” and characterized that fact as “the most important issue for a Pharma investor today.” The report identified Eli Lilly and Company ("Lilly") urge the board of directors ("Board") to adopt a policy (the "Policy") that Lilly will disclose annually whether it, in the previous fiscal year, recouped any incentive compensation from any senior executive or caused a senior executive to forfeit all or part of an incentive compensation award (each, a "clawback") as a company where price increases accounted for at least 100%result of EPS growth in 2016. (applying Lilly's clawback provisions. "Senior executive" includes a former senior executive.
Global Pharma and Biotech Sector Review: Exploring Future US Pricing Pressure, Apr. 18, 2017, at 1)
In our view, excessive dependence on drug price increases is a risky and unsustainable strategy, especially when price hikes drive large senior executive payouts. For example, media coverageThe Policy should provide that the general circumstances of the skyrocketing costclawback will be described and that if no clawback of Mylan’s EpiPen notedthe kind described above occurred in the previous fiscal year, a statement to that a 600% rise in Mylan’s CEO’s total compensation accompanied the 400% EpiPen price increase. (See, e.g., https://www.nbcnews.com/business/consumer/mylan-execs-gave-themselves-raises-they-hiked-epipen-prices-n636591; https://www.wsj.com/articles/epipen-maker-dispenses-outsize-pay-1473786288; https://www.marketwatch.com/story/mylan-top-executive-pay-was-second-highest-in-industry-just-as-company-raised-epipen-prices-2016-09-13)
effect will be made. The disclosure requested in this proposal is intended to supplement, not supplant, any disclosure required by law, regulation or agreement and the Policy should not apply if disclosure would violate any law, regulation or agreement.
Supporting Statement
As long-term shareholders, we requestbelieve compensation practices should promote sustainable value creation. Lilly has mechanisms in place to claw back incentive compensation from senior executives in the event of misconduct causing significant harm to Lilly, a supervisory failure to prevent such misconduct by others, and in the event of materially inaccurate financial statements or performance calculations.
Lilly's most recent 10-K discloses that its insulin pricing and sale are the subject of civil investigative demands from the Attorneys General of Washington, Colorado and New Mexico and information requests from the Attorneys General of five states and the District of Columbia. As well, Congressional committees have requested information about Lilly's insulin pricing.
In 2018, the Minnesota Attorney General accused Lilly of publishing "deceptive and misleading" list prices for insulin. The complaint urges that artificially high list prices were used to offer higher rebates to pharmacy benefit managers, increasing costs for patients whose out-of-pocket costs are based on the list price. Similar complaints have been filed by the Kentucky Attorney General and Harris County, Texas. Two cases have also been filed against Lilly for violating state consumer protection laws and the federal Racketeer Influenced and Corrupt Organizations Act.
Lilly has not made any proxy statement disclosure regarding the application of its clawback provisions. Such disclosure would allow shareholders to better assessevaluate the extent to which compensation arrangements encourageCompensation Committee's use of those provisions and reinforce behavioral expectations. Disclosure of recoupment from senior executives below the named executive officer level, recoupment from whom is already required to responsibly manage risks relatingbe disclosed under SEC rules, would be useful for shareholders because these executives may have business unit responsibilities or otherwise be in a position to drug pricingtake substantial risk or affect company policies.
We are sensitive to privacy concerns and contributerecommend that Policy provide for disclosure that does not violate privacy expectations (subject to long-term value creation. laws requiring fuller disclosure).
We urge shareholders to vote for this Proposal.
proposal.
Statement in Opposition to the Shareholder Proposal Requesting Reportto Disclose Clawbacks on the Extent to Which Risks Related to Public Concern Over Drug Pricing Strategies are Integrated intoExecutive Incentive Compensation Arrangements
Due to MisconductThe Public Policyboard, after review by its Directors and Corporate Governance Committee, Ethics and Compliance Committee and Compensation Committee, recommends a vote against this proposal.
The board believes that our current executive compensation structure, including our compensation recovery policy (otherwise referred to as our clawback policy) strikes an appropriate balance in motivating our executive officers to deliver long-term results for our shareholders, while simultaneously holding the senior leadership team accountable and discouraging unreasonable risk-taking. In addition, the board believes the broad disclosure requested by the proposal extends beyond what is required under existing legal requirements.
Our core values of integrity, excellence and respect for people guided the creation and implementation of the company’s existing clawback policy, which was adopted in 2013. We hold all employees accountable to these core values, but we strongly believe that our executive officers carry an even higher burden in ensuring our values are upheld. To that end, all executives’ incentive compensation is subject to the terms of our clawback policy. Executives may be subject to the forfeiture or clawback of cash or equity in the event of misconduct that results in causing significant harm to the company, disciplinary action, a material violation of law or company policy or financial restatement. The board has reviewed this proposalbelieves that the company’s current ability to recoup employee compensation for up to three years discourages unreasonable risk-taking and recommends against it.reflects our strong commitment to ethics and integrity.
The company’sLilly is already subject to SEC requirements to disclose in its annual proxy statement provides detailed information onwhen compensation has been recouped, and the amount recouped, from the chief executive officer, the chief financial officer, and other current and former named executive officers who served during the prior fiscal year. If necessary to understanding the company’s policies, plans, and practices relating to executive compensation. Each year, the CD&A section of this document describes our executive compensation philosophy,structure, the Board of Director’s Compensation Committee's processcompany is required to disclose in its annual proxy statement the reasons for setting executive compensation, the elements of our compensation program, the factors the committee considered when setting executive compensation for the previous year,recoupment and how the company's results affectedcompany determined the amount to be recovered. Thus, the board does not believe that expanding the disclosure requirements to all current and former "senior executives" is warranted.
Further, the recoupment of incentive payouts forcompensation is not the previous year’s performance.
The proxy statement includes a detailed summary of the Compensation Committee’s review of individual named executive officers. These summaries provide all relevant information regarding the factors considered in those executive’s compensation. These summaries include information regarding specific individualized performance inputs, including inputs relating to strategic efforts and decisions. Thisonly action that is information is broadly available to shareholdersaddress any potential misconduct of senior executives. In response to senior executive misconduct or violation of company policy, the company may institute reasonable and the general public.
Given that information relatingappropriate corrective actions to executiveaddress misconduct, such as termination or change in job responsibility, further training, disciplinary action, or material alterations to compensation programs, plans and practices is alreadyin future years. None of these actions would be disclosed as part of the proxy statement, we believein an annual report requested by the proposal. As a result, the annual report contemplated by the proposal could present a misleading picture of how instances of misconduct might be addressed by the company.
In summary, the board believes that adopting a policy requiring an annual report of compensation clawbacks is unnecessary.overly prescriptive and unnecessary given the company’s existing clawback policy and the SEC’s disclosure requirements discussed above; for these reasons, we believe the proposal is not necessary and not in the best interests of the company and its shareholders.
Board Recommendation on Item 109
The Board of Directorsboard recommends athat you vote AGAINST thethis proposal.
Other Information
Meeting and Voting Logistics
Additional Items of Business
We do not expect any items of business to be submitted to shareholders at the Annual Meeting other than those above because the deadline for shareholder proposals and nominations has passed.referred to in this proxy statement. Nonetheless, if necessary, the accompanying proxy gives discretionary authority to the persons named on the proxy have discretionary authority to vote the shares represented thereby with respect to any other matters that might be brought before the meeting. Those persons intend to vote that proxyon any such matters in accordance with their best judgment.
Voting
Shareholders as of the close of business on March 12, 2018February 22, 2021 (the record date) may vote or have their shares voted at the annual meeting.Annual Meeting. You have one vote for each share of common stock you held on the record date, including shares:
•held directly in your name as the shareholder of recordrecord;
•held for you in an account with a broker, bank, or other nomineenominee; and
•attributed to your account in the company's 401(k) plan.Plan.
You may vote your shares in person at the meeting. However, weWe encourage you to vote by mail, by telephone, or online even if you plan to attend the meeting.
Annual Meeting. Shareholders who hold their shares in the 401(k) Plan must vote by April 28, 2021 so the plan trustee can vote their shares accordingly. See "—Voting Shares Held in the Company 401(k) Plan" for more information.
Required Vote
Below are the vote requirements for the various proposals:
•The five nominees for director will be elected if the votes cast for the nominee exceed the votes cast against the nominee. Abstentions and broker non-votes will not count as votes cast either for or against a nominee.
•The following items of business will be approved if the votes cast for the proposal exceed thosethe votes cast against the proposal:
•an advisory approval of compensation paid to the named executive compensationofficers presented in this proxy statement;
•ratification of the appointment of principalthe independent auditorauditor; and
approve the amended and restated 2002 Lilly stock plan
•four shareholder proposals.
Abstentions and broker non-votes will not be counted as votes cast either for or against these proposals. As discussed below in "Meeting and Voting Logistics — Voting Shares Held by a Broker," broker non-votes are not expected in connection with the ratification of the appointment of the independent auditor.
•The proposals to amend the articles of incorporation for declassification ofto eliminate the classified board structure and to eliminate supermajority voting provisions require the vote of 80 percent of the outstanding shares.shares of our common stock. For these items, abstentions and broker nonvotesnon-votes have the same effect as a vote against the proposals.
Quorum
A majority of the outstanding shares entitled to vote, present or represented by proxy, constitutes a quorum for the annual meeting.Annual Meeting. As of the record date, XXXXXXFebruary 22, 2021, [●] shares of company common stock were issued and outstanding.
Voting By Proxyby Shareholders of Record
If you are a shareholder of record, you may vote your proxy by any one of the following methods:
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8 | OnlineOnline. . You may vote online at www.proxyvote.com.proxyvote.com. Follow the instructions on your proxy card or notice. If you received these materials electronically, follow the instructions in the e-mailemail message that notified you of their availability. Voting online has the same effect as voting by mail. If you vote online, do not return your proxy card.
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) | By telephonetelephone.. Shareholders in the U.S., Puerto Rico,Call 1-800-690-6903 using a touch-tone phone and Canada may vote by telephone by followingfollow the instructions on your proxy card or notice.provided. |
| By mail. If you received these materials electronically, follow the instructions in the e-mail message that notified youor requested paper copies of their availability. Voting by telephone has the same effect as voting by mail. If you vote by telephone, do not return your proxy card. |
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* | By mail. Signmaterials, sign, date, and datereturn each proxy card you receive and return it in the prepaid envelope. Sign your name exactly as it appears on the proxy.appears. If you are signing in a representative capacity (for example, as an attorney-in-fact, executor, administrator, guardian, trustee, or the officer or agent of a corporation or partnership), please indicate your name and your title or capacity. If the stock is held in custody for a minor (for example, under the Uniform Transfers to Minors Act), the custodian should sign, not the minor. If the stock is held in joint ownership, one owner may sign on behalf of all owners. If you return your signed proxy but do not indicate your voting preferences, wethe proxy holder will vote on your behalf withbased upon the board’s recommendations.
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You may vote your shares prior to the Annual Meeting until 11:59 p.m. EDT on May 2, 2021 online or by telephone. If you are voting by mail, your marked, signed, and dated proxy card must be received by May 2, 2021. Shareholders of record may also opt to vote at the Annual Meeting, which will be held online via live webcast at virtualshareholdermeeting.com/LLY2021. See "—Attending the Annual Meeting" for more information on attending the meeting.
You have the right to change your vote or revoke your proxy before it is voted at any time before the meetingAnnual Meeting by (i) timely notifying the company’s secretaryGeneral Counsel and Secretary in writing, or (ii) timely delivering a later-dated proxy online, by mail, or (iii) timely casting a new vote online or by telephone. If you are a shareholderShareholders of record you may also revoke your proxytheir proxies by voting in person at the meeting.
Annual Meeting.
Voting Shares Held Byby a Broker
If your shares are held by a broker, the broker will ask you how you want your shares to be voted. You may instruct your broker or other nominee to vote your shares by following instructions that the broker or nominee provides to
you. Most brokers offer voting by mail, by telephone, and online. You may submit new voting instructions by contacting your broker or other nominee or by voting at the Annual Meeting.
If you give the broker instructions, your shares will be voted as you direct. If you do not giveprovide voting instructions, oneyour shares will not be voted on any proposal on which the broker does not have discretionary authority to vote. This is called a "broker non-vote." In these cases, the broker can register your shares as being present at the Annual Meeting for purposes of two things can happen, dependingdetermining the presence of a quorum but will not be able to vote on the typethose matters for which specific authorization is required under NYSE rules. If you are a beneficial owner whose shares are held of proposal. Forrecord by a broker, your broker has discretionary voting authority under NYSE rules to vote your shares on the ratification of EY as the principal independent auditor for 2021, even if the broker maydoes not receive voting instructions from you. However, your broker does not have discretionary authority to vote on the election of directors, the advisory approval of executive compensation, or the shareholder or management proposals without instructions from you, in which case a broker non-vote will occur, and your shares in its discretion. For all other proposals, the broker maywill not vote your shares at all.
be voted on these matters.
Voting Shares Held in the Company 401(k) Plan
You may instruct the plan trustee on how to vote your shares in the 401(k) planPlan online, by mail, or by telephone as described above in "Meeting and Voting Logistics — Voting by Shareholders of Record," except that if you vote by mail, the card that you use will be a voting instruction form rather than a proxy card.
In addition, unless you decline, your vote will apply to a proportionate number of other shares held by participants in the 401(k) planPlan for which voting directions are not received (except for a small number of shares from a prior stock ownership plan, which can be voted only on the directions of the participants to whose accounts the shares are credited).
All participants are named fiduciaries under the terms of the 401(k) planPlan and under the Employee Retirement Income Security Act (ERISA) for the limited purpose of voting shares credited to their accounts and the portion of undirected shares to which their vote applies. Under ERISA, fiduciaries are required to act prudently in making voting decisions.
If you do not want to have your vote applied to the undirected shares, you must so indicate when you vote. Otherwise, the trustee will automatically apply your voting preferences to the undirected shares proportionally with all other participants who elected to have their votes applied in this manner.
If you do not vote online or by telephone by 11:59 p.m. EDT on April 28, 2021, or if your mailed ballot is not received by April 28, 2021, your shares will be voted byin accordance with instructions received from other plan participants who have elected to have their voting preferences applied proportionally to all shares for which voting instructions are not otherwise received.
You will not be able to vote your shares personally at the Annual Meeting.
Multiple Notices, Proxy Cards and NoticesMaterials, or Emails
If you received more than one notice, full set of proxy card, notice,materials, or e-mailemail related to proxy materials, you hold shares in more than one account. To ensure that all your shares are voted, sign and return each card. Alternatively, if you vote by telephone or online, youYou will need to cast a vote once for each notice, full set of proxy card, notice,materials, or e-mailemail you receive. If you do not receive a proxy card, you may have elected to receive your proxy statement electronically, in which case you should have received an e-mailemail with directions on how to access thethis proxy statement and how to vote your shares. If you wish to request a paper copy of these materials and a proxy card, please call 800-579-1639.
1-800-579-1639 on or before April 19, 2021 to facilitate timely delivery.
Vote Tabulation
Votes are tabulated by an independent inspector of election, Broadridge Financial Solutions, Inc.
Attending the Annual Meeting
The Annual Meeting will be held on Monday, May 3, 2021, at 11:00 a.m. EDT, and all shareholders as of close of business on February 22, 2021, are entitled to participate.
AttendanceDue to concerns regarding the ongoing COVID-19 pandemic and to support the health and well-being of our employees, board of directors, shareholders, and other meeting participants, the Annual Meeting will be held virtually via live webcast.
Although you will not be able to attend the Annual Meeting at a physical location, we have designed the Annual Meeting live webcast to provide shareholders the opportunity to participate virtually to facilitate shareholder attendance and provide a consistent experience to all shareholders, regardless of location.
The live webcast of the Annual Meeting can be accessed by shareholders on the day of the meeting at virtualshareholdermeeting.com/LLY2021and will begin promptly at 11:00 a.m. EDT. To attend the Annual Meeting, you will need to log in to virtualshareholdermeeting.com/LLY2021 using the 16-digit control number found on the proxy card, voting instruction form, or notice you previously received. This website can be accessed on a computer, tablet, or phone with internet connection. Online access to the webcast will open 15 minutes prior to the start of the Annual Meeting to allow time to log in and test your device’s audio system. We encourage you to access the meeting in advance of the designated start time.
To submit questions in advance of the Annual Meeting, visit proxyvote.com before May 3, 2021 and enter your 16-digit control number. During the meeting, if you wish to submit a question, log into the virtual meeting website at virtualshareholdermeeting.com/LLY2021, type your question into the "Ask a Question" field, and click "Submit." In order to provide an opportunity to as many shareholders as possible who wish to ask a question, each shareholder will be limited to one question. Shareholders may ask a second question if all other shareholders have had an opportunity to ask a question and if time allows. The Annual Meeting is scheduled to begin at 11:00 a.m. EDT and end at 11:45 a.m. EDT, and time remaining after agenda items are addressed will be available for shareholder questions.We will endeavor to answer as many questions submitted by shareholders as time permits. We reserve the right to edit profanity or other inappropriate language and to exclude questions regarding topics that are not pertinent to meeting matters or company business. If we receive substantially similar questions, we may group such questions together and provide a single response to avoid repetition. Responses to questions relevant to meeting matters that we do not have time to respond to during the meeting will be limitedposted to shareholders of record, those holding proxies from shareholders of record, and invited guests from the media and financial community. All shareholders of record as of the record date may attend by presenting the admission ticket that appears at the end of this proxy statement. Please fill it out and bring it with you toour website following the meeting. TheQuestions regarding topics that are not pertinent to meeting matters or company business will not be held at the Lilly Center Auditorium. Please use the Lilly Center entrance to the south of the fountain at the intersection of Delaware and McCarty streets. You will need to pass through security, including a metal detector. Present your ticket to an usher at the meeting.answered.
Support staff will be available on a first-come, first-served basisshould you experience any technical difficulties in accessing the garage indicated onvirtual meeting. Instructions for requesting technical assistance will be available at virtualshareholdermeeting.com/LLY2021.
List of Shareholders of Record
A list of the mapnames of shareholders entitled to vote at the end of this report. If you have questions about admittance or parking, please call 855-731-6026 (toll free) or 317-433-5112 (priorAnnual Meeting will be available to shareholders for five business days prior to the annual meeting)Annual Meeting for any purpose germane to the Annual Meeting. Please contact us at shareholderproposals@lilly.com if you wish to examine the list prior to the Annual Meeting. The shareholder list will also be available during the virtual Annual Meeting for examination by shareholders who access the Annual Meeting using their 16-digit control number atvirtualshareholdermeeting.com/LLY2021.
The 20192022 Annual Meeting
The company’s 20192022 annual meeting of shareholders is currently scheduled for May 6, 2019.2, 2022.
Other Matters
Notice and Access
We distribute proxy materials to many shareholders via the internet under the SEC’s "Notice and Access" rules to reduce production and mailing costs and to help preserve environmental resources. Using this method of distribution, on or about March 19, 2021, we mailed the Notice Regarding the Availability of Proxy Materials that contains basic information about the Annual Meeting and instructions on how to view all proxy materials and vote. If you receive the notice and prefer to receive proxy materials by regular mail or email, follow the instructions in the notice for making this request, and the materials will be sent promptly to you via the preferred method. If you prefer to vote by phone rather than online, the website listed on the notice (proxyvote.com) has instructions for voting by phone.
Householding
We have adopted a procedure approved by the SEC called "householding." Under the householding procedure, certain shareholders, whether they own registered shares or shares in street name, who have the same address and who receive either notices or paper copies of the proxy materials in the mail will receive only one setcopy of our proxy materials, or a single notice, for all shareholders at that address, unless one or more of the shareholders at that address has previously notified us that they want to receive separate copies. Each 401(k) Plan participant will continue to receive a copy of all of the proxy materials. Regardless of how you own your shares, if you received a single set of proxy materials as a result of householding, and one or more shareholders at your address would like to have separate copies of these materials with respect to the 2018 annual meetingAnnual Meeting or in the future, or if you would like to request that only a single set of proxy materials be sent to the household, please contact Broadridge Financial Solutions, Inc., at 866-540-7095.
1-866-540-7095 or 51 Mercedes Way, Edgewood, NY 11717.
Other information regardingInformation Regarding the company’s proxy solicitationCompany’s Proxy Solicitation
The board of directors is soliciting proxies for the 2018 annual meeting.Annual Meeting. We will pay all expenses in connection with our solicitation of proxies. We will pay brokers, nominees, fiduciaries, or other custodians their reasonable expenses for sending proxy material to and obtaining instructions from persons for whom they hold stock of the company. We expect to solicit proxies primarily by mail and email, but directors, officers, and other employees of the company may also solicit in person or by telephone, fax, or email. We have retained Georgeson LLC to assist in the distribution and solicitation of proxies. Georgeson may solicit proxies by personal interview, telephone, fax, mail, and email. We expect that the fee for those services will not exceed $17,500 plus reimbursement of customary out-of-pocket expenses.
Section 16(a) beneficial ownership reporting complianceCorporate Governance Materials
Under SEC rules,The company’s main corporate website address is lilly.com. We also make available through our directors and executive officers are required to fileinvestor relations website, free of charge, our company filings with the SEC reports of holdings and changes in beneficial ownership of company stock. We have reviewed copies of reports providedas soon as reasonably practicable after we electronically file them with, or furnish them to, the company, as well as other recordsSEC. The reports we make available include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements, and information. Basedany amendments to those documents. The website link to our SEC filings is investor.lilly.com/sec.cfm. This proxy statement and the annual report to shareholders are also available on that review, we concluded thatour website at lilly.com/policies-reports/annual-report, and the articles of incorporation, bylaws, and all reports were timely filed, except that, due to administrative errors, Dr. Carolyn Bertozzi was late in filing Form 3, due to absence of SEC Edgar access codes; Christi Shaw was late in filing a Form 4 to report a restricted stock unit grant; and Maria Crowe was late in filing a Form 4 to report a 2016 charitable gift contribution. Each filing was made promptly after the issue was discovered.committee charters are available online at lilly.com/leadership/governance.
By order of the Board of Directors,
Bronwen L. MantloMs. Anat Hakim
Senior Vice President, General Counsel and Secretary
March 19, 20182021
Appendix A - Summary of Adjustments Related to the Annual Cash Bonus and Performance Award
Consistent with past practice, the Compensation Committee adjusted the reported financial results on which the 20172020 annual cash bonus and the 2016-20182019-2021 performance awards were determined to eliminate the distorting effect of certain unusual items on incentive compensation performance measures. The adjustments are intended to:
•align award payments with the underlying performance of the core business
•avoid volatile, artificial inflation or deflation of awards due to unusual items in the award year, and, where relevant, the previous (comparator) year
•eliminate certain counterproductive short-term incentives—for example, incentives to refrain from acquiring new technologies, to defer disposing of underutilized assets, or to defer settling legacy legal proceedings to protect current bonus payments
•facilitate comparisons with peer companies.
To ensure the integrity of the adjustments, the Compensation Committee establishes adjustment guidelines in the first 90 days of the performance period. These guidelines are generally consistent with the company guidelines for reporting non-GAAP financial measures to the investment community, which are reviewed by the Audit Committee. The adjustments apply equally to income and expense items. The Compensation Committee reviews all adjustments and retains downward discretion, i.e., discretion to reduce compensation below the amounts that are yielded by the adjustment guidelines.
Adjustments for 20172020 Bonus Plan
For 20172020 bonus calculations, the Compensation Committee made the following adjustments to reported EPS consistent with our external reporting of non-GAAP financial measures:
•Eliminated the impact of the charge related to U.S. tax reform legislationcharges recognized for acquired in-process research and development
•Eliminated the impact of amortization of intangible assets
•Eliminated the impact of asset impairments, restructuring, and other special charges
Eliminated
In addition to the adjustments consistent with our reporting of non-GAAP financial measures, the Compensation Committee made the following adjustments:
•When the Compensation Committee set 2020 bonus targets, the EPS goal was set assuming a lower amount of net gains on investments in equity securities than were recognized during 2020. The Compensation Committee neutralized the impact of the charge recognizednet gains on investments in equity securities on EPS results in an amount that significantly exceeded the expected net gains on investments originally included in the EPS goal.
•When the Compensation Committee set 2020 bonus targets, the revenue and EPS goal did not contemplate estimated savings from certain discrete and unplanned performance items.The Compensation Committee reduced revenue and non-GAAP EPS for acquired in-process research and developmentthe purposes of the bonus calculation to exclude the savings from these items.
Eliminated the impact
A reconciliation of amortizationadjustments to our reported revenue is below:
| | | | | | | | | | | | | | |
| 2020 |
Revenue as reported | $24,539.8 |
Adjustment for estimated savings from certain discrete and unplanned performance items | $(286.0) |
Adjusted revenue | $24,253.8 |
A reconciliation of certain intangible assets
Eliminated the impact of inventory step-up costs associated with the acquisition of Boehringer Ingelheim Vetmedica’s U.S. feline, canine, and rabies vaccine portfolio.
Reconciliations of these adjustments to our reported EPS areis below:
| | | | | |
| |
| 20172020 |
EPS as reported | $(0.19) |
Eliminate U.S. tax reform legislation charge
| $1.81 |
Eliminate asset impairments, restructuring and other special charges
| $1.236.79 |
Eliminate acquired in-process research and development chargecharges | $0.970.64 |
Eliminate amortization of certain intangible assets | $0.440.36 |
Eliminate inventory step-up costs associated with the acquisition of Boehringer Ingelheim Vetmedica’s U.S. feline, canine,asset impairments, restructuring, and rabies vaccine portfolio other special charges | $0.030.14 |
Non-GAAP EPS | $4.287.93 |
Net gains on investments in equity securities adjustment | $(0.98) |
Adjustment for estimated savings from certain discrete and unplanned performance items | $(0.25) |
Adjusted Non-GAAP EPS | $6.70 |
*Numbers may not add due to rounding
Adjustments for 2016-20182019-2021 Performance Award
For the 2016-20182019-2021 performance award payout calculations, the Compensation Committee made the following adjustments to reported EPS consistent with our reporting of non-GAAP financial measures:
2017:
•2019 and 2018: Eliminated Elanco discontinued operations
•2020, 2019, and 2018: Eliminated the impact of the charge related to U.S. tax reform legislation
2017: Eliminated the impact of inventory step-up costs associated with the acquisition of Boehringer Ingelheim Vetmedica’s U.S. feline, canine, and rabies vaccine portfolio
2017, 2016 and 2015: Eliminated the impact of the charges recognized for acquired in-process research and development
2017, 2016•2020, 2019, and 2015:2018: Eliminated the impact of amortization of intangible assets
•2020, 2019, and 2018: Eliminated the impact of asset impairments, restructuring, and other special charges
2017, 2016 and 2015: Eliminated the impact of amortization of certain intangible assets.
2016:•2019: Eliminated the impact of the Venezuelan financial crisisgain on sale of the China antibiotics business
2015:•2019: Eliminated the charge related to the repurchase of debt
•2019: Eliminated the impact of the debt extinguishment lossLartruvo charges
2015:•2019 and 2018: Eliminated the impact of inventory step-up for Novartis Animal Health.reduced shares outstanding from the Elanco exchange offer
•2019 and 2018: Eliminated the impact of certain income tax items
•2018: Eliminated the impact of other specified items
In addition to the adjustments consistent with our reporting of non-GAAP financial measures, the Compensation Committee made the following other adjustments:
•When the Compensation Committee set 2016-20182019-2021 performance award targets, the EPS goals weregoal was set assuming the transfera lower amount of the commercialization rights for Erbitux®net gains on investments in North America to Lilly (which occurred in October 2015). To make effective comparisons, the committee adjusted the base year 2015 results to includeequity securities. The Compensation Committee neutralized the impact of the transfernet gains on investments in equity securities on EPS results in an amount that significantly exceeded the expected net gains on investments originally included in the EPS goal during 2020.
•When the Compensation Committee set 2019-2021 performance award targets, the Compensation Committee adjusted the 2018 base-year results, to which the expected industry growth rates are applied to derive the two-year cumulative EPS goals, to neutralize the expected EPS impact of the commercialization rightsacquisition of Erbitux as if the transfer hadLoxo Oncology, Inc. (Loxo), which occurred asin February 2019.
A reconciliation of January 1, 2015.
Reconciliations of these adjustments to our reported EPS are below.is below:
| | | | | | | | | | | | | | | | | |
| 2020 | 2019 | % Growth 2020 vs. 2019 | 2018 | % Growth 2019 vs. 2018 |
EPS as reported | $6.79 | $8.89 | (23.6%) | $3.13 | NM |
Eliminate Elanco discontinued operations | — | $(3.93) | | $(0.08) | |
EPS as reported from continuing operations | $6.79 | $4.96 | | $3.05 | |
Eliminate acquired in-process research and development charges | $0.64 | $0.21 | | $1.96 | |
Eliminate amortization of intangible assets | $0.36 | $0.18 | | $0.28 | |
Eliminate asset impairment, restructuring, and other special charges | $0.14 | $0.58 | | $0.24 | |
Eliminate gain on sale of China antibiotics business | — | $(0.26) | | — | |
Eliminate charge related to repurchase of debt | — | $0.22 | | — | |
Eliminate Lartruvo charges | — | $0.14 | | — | |
Eliminate impact of reduced shares outstanding for non-GAAP reporting(a) | — | $0.07 | | $0.20 | |
Eliminate the impact of certain tax items(b) | — | $(0.05) | | $(0.27) | |
Eliminate other specified items | — | — | | $(0.02) | |
Non-GAAP EPS | $7.93 | $6.04 | 31.3% | $5.44 | 11.0% |
Net gains on investments in equity securities | $0.98 | — | | — | |
Loxo acquisition adjustment | — | — | | $(0.34) | |
Adjusted Non-GAAP EPS | $6.95 | $6.04 | 15.1% | $5.10 | 18.4% |
*Numbers may not add due to rounding
(a) Non-GAAP EPS assume that the disposition of Elanco occurred at the beginning of 2019 and 2018 and, therefore, exclude the approximately 65.0 million shares of Lilly common stock retired in the Elanco exchange offer.
(b) For 2019, amount relates to a tax benefit from a capital loss on the disposition of subsidiary stock. For 2018, amounts relate to U.S. tax reform and tax expenses associated with the separation of Elanco.
|
| | | | | |
| 2017 | 2016 | % Growth 2017 vs. 2016 | 2015 | % Growth 2016 vs. 2015 |
EPS as reported | $(0.19) | $2.58 | NM | $2.26 | 14.2% |
Eliminate impact of U.S. tax reform legislation
| $1.81 | — | | — | |
Eliminate inventory step-up for Vetmedica
| $0.03 | — | | — | |
Eliminate impact of the Venezuelan financial crisis
| — | $0.19 | | — | |
Eliminate acquired in-process research and development charges
| $0.97 | $0.02 | | $0.33 | |
Eliminate asset impairments, restructuring and other special charges
| $1.23 | $0.29 | | $0.25 | |
Eliminate amortization of certain intangible assets
| $0.44 | $0.44 | | $0.39 | |
Eliminate debt extinguishment loss
| — | — | | $0.09 | |
Eliminate inventory step-up for Novartis Animal Health
| — | — | | $0.10 | |
Non-GAAP EPS | $4.28 | $3.52 | 21.6% | $3.43 | 2.6% |
Transfer of Erbitux commercialization rights adjustment | — | — | | $0.09 | |
Adjusted Non-GAAP EPS | $4.28 | $3.52 | 26.6% | $3.52 | — |
*Numbers may not add due to rounding | | | | | |
Appendix B - Proposed Amendments to the Company's Articles of Incorporation
Proposed changes to the company’s articles of incorporation are shown below related to Items 4 and 5,, “Items "Items of Business To Be Acted Upon at the Meeting.”Business." The changes shown to Article 9(b) will be effective if Item 4,, "Proposal to Amend the Company’s Articles of Incorporation to Eliminate the Classified Board Structure,”" receives the vote of at least 80 percent of the outstanding shares. The changes to Articles 9(c), 9(d), and 13 will be effective if Item 5,, "Proposal to Amend the Company’s Articles of Incorporation to Eliminate Supermajority Voting Provisions,”" receives the vote of at least 80 percent of the outstanding shares. Additions are indicated by underlining and deletions are indicated by strike-outs. The full text of the company'scompany’s Articles of Incorporation can be found on our website at: https://www.lilly.com/who-we-are/governance.at lilly.com/leadership/governance.
. . . . .
9. The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and it is expressly provided that the same are intended to be in furtherance and not in limitation or exclusion of the powers conferred by statute:
(a) The number of directors of the Corporation, exclusive of directors who may be elected by the holders of any one or more series of Preferred Stock pursuant to Article 7(b) (the "Preferred"Preferred Stock Directors"Directors"), shall not be less than nine, the exact number to be fixed from time to time solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office.
(b) Prior to the 20192022 annual meeting of directors,Tthe Board of Directors (exclusive of Preferred Stock Directors) shall be divided into three classes, with the term of office of one class expiring each year. At the annual meeting of shareholders in 1985, five directors of the first class shall be elected to hold office for a term expiring at the 1986 annual meeting, five directors of the second class shall be elected to hold office for a term expiring at the 1987 annual meeting, and six directors of the third class shall be elected to hold office for a term expiring at the 1988 annual meeting.Commencing with the annual meeting of shareholders in 198620192022, each class of directors whose term shall then expire shall be elected to hold office for a threeone-year term.expiring at the next annual meeting of shareholders.shareholders. In the case of any vacancy on the Board of Directors, including a vacancy created by an increase in the numberof Directors,Ddirectors, the vacancy shall be filled by election of the Board of Directors with the director so elected to serve for the remainder of the term of the director being replaced or, in the case of an additional director,for the remainder of the term of the class to which the director has been assigned.assigned until the next annual meeting of shareholders. All directors shall continue in office until the election and qualification of their respective successors in office. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so assigned among the classes by a majority of the directors then in office, though less than a quorum, as to make all classes as nearly equal in number as possible.No decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Election of directors need not be by written ballot unless the By-laws so provide.
(c) Any director or directors (exclusive of Preferred Stock Directors) may be removed from office at any time, but only for cause and only by the affirmative vote of at least 80%a majority of the votes entitled to becast by theholders of all the outstanding shares of Voting Stock (as defined in Article 13 hereof), voting together as a single class.
(d) Notwithstanding any other provision of these Amended Articles of Incorporation or of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class of Voting Stock required by law or these Amended Articles of Incorporation, the affirmative vote of at least 80% of the votes entitled to be cast by holders of all the outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article 9.
13. In addition to all other requirements imposed by law and these Amended Articles and except as otherwise expressly provided in paragraph (c) of this Article 13,, none of the actions or transactions listedin paragraph (a) below shall be effected by the Corporation, or approved by the Corporation as a shareholder of any majority-owned subsidiary of the Corporation if, as of the record date for the determination of the shareholders entitled to vote thereon, any Related Person (as hereinafter defined) exists, unless the applicable requirements of paragraphs (b),
(c), (d), (e), and (fe)(f) of this Article 13 are satisfied.
(a) The actions or transactions within the scope of this Article 13 are as follows:
(i) any merger or consolidation of the Corporation or any of its the Corporation’s subsidiaries into or with such Related Person;
(ii) any sale, lease, exchange, or other disposition of all or any substantial part of the assets of the Corporation or any of itsthe Corporation’s majority-owned subsidiaries to or with such Related Person;
(iii) the issuance or delivery of any Voting Stock (as hereinafter defined) or of voting securities of any of the Corporation'sCorporation’s majority-owned subsidiaries to such Related Person in exchange for cash, other assets or securities, or a combination thereof;
(iv) any voluntary dissolution or liquidation of the Corporation;
(v)(iv) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its subsidiaries, or any other transaction (whether or not with or otherwise involving a Related Person) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of capital stock of the Corporation, or any securities convertible into capital stock of the Corporation or into equity securities of any subsidiary, that is beneficially owned by any Related Person; or
(vi)(vi) any agreement, contract, or other arrangement providing for any one or more of the actions specified in the foregoing clauses (i) through (v)(iv).
(b) The actions and transactions described in paragraph (a) of this Article 13 shall have been authorized by the affirmative vote of at least 80% of alla majorityof the votes entitled to be cast by holders of allthe outstanding shares of Voting Stock, voting together as a single class.
(c) Notwithstanding paragraph (b) of this Article 13, the 80% voting special shareholder approval requirement set forth in paragraph (b) shall not be applicable if any action or transaction specified in paragraph (a) is approved by the Corporation'sCorporation’s Board of Directors and by a majority of the Continuing Directors (as hereinafter defined).
(d
(c)(d) Unless approved by a majority of the Continuing Directors, after becoming a Related Person and prior to consummation of such action or transaction.:
(i) the Related Person shall not have acquired from the Corporation or any of its subsidiaries any newly issued or treasury shares of capital stock or any newly issued securities convertible into capital stock of the Corporation or any of its majority-owned subsidiaries, directly or indirectly (except upon conversion of convertible securities acquired by it prior to becoming a Related Person or as a result of a pro rata stock dividend or stock split or other distribution of stock to all shareholders pro rata);
(ii) such Related Person shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges, or other financial assistance or tax credits provided by the Corporation or any of its majority-owned subsidiaries, or made any major changes in the Corporation'sCorporation’s or any of its majority-owned subsidiaries'subsidiaries’ businesses or capital structures or reduced the current rate of dividends payable on the Corporation'sCorporation’s capital stock below the rate in effect immediately prior to the time such Related Person became a Related Person; and
(iii) such Related Person shall have taken all required actions within its power to ensure that the Corporation'sCorporation’s Board of Directors included representation by Continuing Directors at least proportionate to the voting power of the shareholdings of Voting Stock of the Corporation'sCorporation’s Remaining Public Shareholders (as hereinafter defined), with a Continuing Director to occupy an additional Board position if a fractional right to a director results and, in any event, with at least one Continuing Director to serve on the Board so long as there are any Remaining Public Shareholders.
(ed)(e) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, as amended, whether or not the Corporation is then subject to such requirements, shall be mailed to the
shareholders of the Corporation for the purpose of soliciting shareholder approval of such action or transaction and shall contain at the front thereof, in a prominent place, any recommendations as to the advisability or inadvisability of the action or transaction which the Continuing Directors may choose to state and, if deemed advisable by a majority of the Continuing Directors, the opinion of an investment banking firm selected by a majority of the Continuing Directors as to the fairness (or not) of the terms of the action or transaction from a financial point of view to the Remaining Public Shareholders, such investment banking firm to be paid a reasonable fee for its services by the Corporation. The requirements of this paragraph (ed)(e) shall not apply to any such action or transaction which is approved by a majority of the Continuing Directors.
(fe)(f) For the purpose of this Article 13:
(i) the term "Related Person""Related Person" shall mean any other corporation, person, or entity which beneficially owns or controls, directly or indirectly, 5% or more of the outstanding shares of Voting Stock, and any Affiliate or Associate (as those terms are defined in the General Rules and Regulations under the Securities Exchange Act of 1934) of a Related Person; provided however, , however, that the term Related Person shall not include (a) the Corporation or any of its subsidiaries, (b) any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any subsidiary of the Corporation or any trustee of or fiduciary with respect
to any such plan when acting in such capacity, or (c) Lilly Endowment, Inc.; and further provided, that no corporation, person, or entity shall be deemed to be a Related Person solely by reason of being an Affiliate or Associate of Lilly Endowment, Inc.;
(ii) a Related Person shall be deemed to own or control, directly or indirectly, any outstanding shares of Voting Stock owned by it or any Affiliate or Associate of record or beneficially, including, without limitation, shares
a. which it has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants, or options, or otherwise; or
b. which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause a. above), by any other corporation, person, or other entity with which it or its Affiliate or Associate has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of Voting Stock, or which is its Affiliate (other than the Corporation) or Associate (other than the Corporation);
(iii) the term "Voting Stock""Voting Stock" shall mean all shares of any class of capital stock of the Corporation which are entitled to vote generally in the election of directors;
(iv) the term "Continuing Director""Continuing Director" shall mean a director who is not an Affiliate or Associate or representative of a Related Person and who was a member of the Board of Directors of the Corporation immediately prior to the time that any Related Person involved in the proposed action or transaction became a Related Person or a director who is not an Affiliate or Associate or representative of a Related Person and who was nominated by a majority of the remaining Continuing Directors; and
(v) the term "Remaining"Remaining Public Shareholders"Shareholders" shall mean the holders of the Corporation'sCorporation’s capital stock other than the Related Person.
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(g) A majority of the Continuing Directors of the Corporation shall have the power and duty to determine for the purposes of this Article 13, on the basis of information then known to the Continuing Directors, whether
(i) any Related Person exists or is an Affiliate or an Associate of another and (ii) any proposed sale, lease, exchange, or other disposition of part of the assets of the Corporation or any majority-owned subsidiary involves a substantial part of the assets of the Corporation or any of its subsidiaries. Any such determination by the Continuing Directors shall be conclusive and binding for all purposes.
(hg)(h) Nothing contained in this Article 13 shall be construed to relieve any Related Person or any Affiliate or Associate of any Related Person from any fiduciary obligation imposed by law.
(ih)(i) The fact that any action or transaction complies with the provisions of this Article 13 shall not be construed to waive or satisfy any other requirement of law or these Amended Articles of Incorporation or to impose any fiduciary duty, obligation, or responsibility on the Board of Directors or any member thereof, to
approve such action or transaction or recommend its adoption or approval to the shareholders of the Corporation, nor shall such compliance limit, prohibit, or otherwise restrict in any manner the Board of Directors, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such action or transaction. The Board of Directors of the Corporation, when evaluating any actions or transactions described in paragraph (a) of this Article 13, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, give due consideration to all relevant factors, including, without limitation, the social and economic effects on the employees, customers, suppliers, and other constituents of the Corporation and its subsidiaries and on the communities in which the Corporation and its subsidiaries operate or are located.
(j) Notwithstanding any other provision of these Amended Articles of Incorporation or of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class of Voting Stock required by law or these Amended Articles of Incorporation, the affirmative vote of the holders of at least 80% of the votes entitled to be cast by holders of all the outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend, or repeal this Article 13.
Appendix C - Proposed Amended and Restated 2002 Lilly Stock Plan
AMENDED AND RESTATED
2002 LILLY
STOCK PLAN
(Effective May 07, 2018)
ARTICLE 1. PURPOSES OF THE PLAN
The Company believes that this Amended and Restated 2002 Lilly Stock Plan, as amended from time to time (the “Plan”), will benefit the Company’s shareholders by allowing the Company to attract, motivate and retain the best available Employees and Directors and by providing those Employees and Directors stock-based incentives to strengthen the alignment of interests between those persons and the Company’s shareholders.
ARTICLE 2. DEFINITIONS
Wherever the following terms are used in the Plan, they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates.
2.1 “Affiliate” shall have the meaning given to such term in Rule 12b-2 promulgated under the Exchange Act. The Board shall have the authority to determine the time or times at which “Affiliate” status is determined within the foregoing definition.
2.2 “Applicable Laws” means the requirements relating to the administration of equity-based and cash-based awards, as applicable, and the related issuance of Shares under U.S. state corporate laws, U.S. federal and state and non-U.S. securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any non-U.S. country or jurisdiction where Awards are, or will be, granted under the Plan.
2.3 “Award” means an Option, Restricted Stock Units, Restricted Stock, a Stock Appreciation Right, Dividend Equivalent Rights, an Other Share-Based Award or a Performance-Based Award granted to a Participant pursuant to the Plan.
2.4 “Award Agreement” means any written agreement, contract, or other instrument or document evidencing the terms and conditions of an Award, including through electronic medium.
2.5 “Board” means the board of directors of the Company.
2.6 “Change in Control” means and includes each of the following:
(a) the acquisition by any “person,” as that term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (i) the Company, (ii) any subsidiary of the Company, (iii) any employee benefit plan or employee stock plan of the Company or a subsidiary of the Company or any trustee or fiduciary with respect to any such plan when acting in that capacity, or (iv) Lilly Endowment, Inc.) of “beneficial ownership,” as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of twenty percent (20%) or more of the shares of the Company’s capital stock the holders of which have general voting power under ordinary circumstances to elect at least a majority of the Board (or which would have such voting power but for the application of the Indiana Control Shares Statute) (“Voting Stock”); provided, however, that an acquisition of Voting Stock directly from the Company shall not constitute a Change in Control under this Section 2.6(a);
(b) the first day on which less than one-half of the total membership of the Board shall be Continuing Directors (as that term is defined in Section 13(f) of the Company's Articles of Incorporation);
(c) consummation of a merger, share exchange, or consolidation of the Company (a “Transaction”), other than a Transaction which would result in the Voting Stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than sixty percent (60%) of the Voting Stock of the Company or such surviving entity immediately after such Transaction;
(d) a complete liquidation of the Company or a sale or disposition of all or substantially all the assets of the Company, other than a sale or disposition of assets to any subsidiary of the Company.
For purposes of this Section 2.6(a) only, the term “subsidiary” means a corporation or limited liability company of which the Company owns directly or indirectly fifty percent (50%) or more of the voting power.
2.7 “Code” means the U.S. Internal Revenue Code of 1986, as amended. All references herein to specific sections of the Code shall include any successor provisions of the Code or corresponding sections of any future U.S. federal tax code.
2.8 “Committee” means the committee of the Board appointed or described in Article 3 to administer the Plan.
2.9 “Common Stock” means the common stock of the Company, no par value, and such other securities of the Company that may be substituted for the Common Stock pursuant to Article 13.
2.10 “Company” means Eli Lilly and Company, an Indiana corporation, and any successor corporation thereto.
2.11 “Director” means a member of the Board.
2.12 “Disability”means, unless otherwise provided in an Award Agreement, that the Participant would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate to which the Participant provides Service regardless of whether the Participant is covered by such policy. If the Company or the Affiliate to which the Participant provides Service does not have a long-term disability policy, “Disability” means that a Participant is unable to carry out the responsibilities and functions of the position held by the Participant by reason of any medically determined physical or mental impairment for a period of not less than ninety (90) consecutive days. A Participant shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Committee in its discretion. Notwithstanding the foregoing, (a) for purposes of Incentive Stock Options granted under the Plan, “Disability” means that the Participant is disabled within the meaning of Section 22(e)(3) of the Code, and (b) with respect to an Award that is subject to Section 409A of the Code where the payment or settlement of the Award will accelerate as a result of the Participant’s Disability, solely for purposes of determining the timing of payment, no such event will constitute a Disability for purposes of the Plan or any Award Agreement unless such event also constitutes a “disability” as defined under Section 409A of the Code.
2.13 “Dividend Equivalent Right” means a right to receive the equivalent value of dividends paid on the Shares with respect to Shares underlying Restricted Stock Units or an Other Share-Based Award that is a Full Value Award prior to vesting of the Award in accordance with the provision of Section 12.4.
2.14 “Effective Date” means the date that the shareholders approved the amendment and restatement of the Plan.
2.15 “Eligible Individual” means any natural person who is an Employee or a Director determined by the Committee as eligible to participate in the Plan.
2.16 “Employee” means an individual, including an officer or Director, who is treated as an employee in the personnel records of the Company or an Affiliate and providing Service to the Company or the Affiliate. Neither services as a Director nor payment of a director’s fee by the Company or an Affiliate shall be sufficient to constitute “employment” by the Company or an Affiliate.
2.17 “Equity Restructuring” shall mean a nonreciprocal transaction between the Company and its shareholders, such as a stock dividend, stock split, spin-off, rights offering or recapitalization through a large, nonrecurring cash dividend, that affects the Shares (or other securities of the Company) or the price of Shares (or other securities) and causes a change in the per-share value of the Shares underlying outstanding Awards.
2.18 “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.
2.19 “Fair Market Value” means, as of any given date, (a) if Shares are traded on any established stock exchange, the closing price of a Share as quoted on the principal exchange on which the Shares are listed, as reported in The Wall Street Journal (or such other source as the Company may deem reliable for such purposes) 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; or (b) if Shares are not traded on an exchange but are regularly quoted on a national market or other quotation system, the closing sales price on such date as quoted on such market or system, or if no sales occurred on such date, then on the date immediately prior to such date on which sales prices are reported; or (c) in the absence of an established market for the Shares of the type described in (a) or (b) of this Section 2.19, the fair market value established by the Committee acting in good faith, under a reasonable methodology and reasonable application in compliance with Section 409A of the Code to the extent such determination is necessary for Awards under the Plan to comply with, or be exempt from, Section 409A of the Code.
Notwithstanding the foregoing, for income tax reporting purposes under U.S. federal, state, local or non-US law and for such other purposes as the Committee deems appropriate, including, without limitation, where Fair Market Value is used in reference to exercise, vesting, settlement or payout of an Award, the Fair Market Value shall be determined by the Company in accordance with uniform and nondiscriminatory standards adopted by it from time to time.
2.20 “Full Value Award” means any Award other than an (i) Option, (ii) Stock Appreciation Right or (iii) other Award for which the Participant pays (or the value or amount payable under the Award is reduced by) an amount equal to or exceeding the Fair Market Value of the Shares, determined as of the date of grant.
2.21 “Incentive Stock Option” means an Option that is intended to meet the requirements of Section 422 of the Code.
2.22 “Non-Employee Director” means a Director of the Company who is not an Employee.
2.23 “Non-Qualified Stock Option” means an Option that is not intended to be an Incentive Stock Option.
2.24 “Option” means a right granted to a Participant pursuant to Article 6 to purchase a specified number of Shares at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.
2.25 “Other Share-Based Award” shall mean an Award granted pursuant to Article 10.
2.26 “Outstanding Qualified Performance-Based Awards” shall mean any Awards granted prior to November 3, 2017 and that are outstanding as of the Effective Date and that are intended to constitute “qualified performance-based compensation” as described in Section 162(m)(4)(C) of the Code. For the avoidance of any doubt, all provisions of the Plan governing Outstanding Qualified Performance Awards that were in effect prior to the Effective Date shall continue in effect with respect to Outstanding Qualified Performance-Based Awards, notwithstanding the elimination of such provisions from the Plan as of the Effective Date.
2.27 “Participant” means any Eligible Individual who, as an Employee or Director, has been granted an Award pursuant to the Plan.
2.28 “Performance-Based Award” means an Award that are subject, in whole or in part, to Performance Goals and are granted pursuant to Article 10.
2.29 “Performance Criteria” means the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant for a Performance Period. The Performance Criteria that will be used to establish Performance Goals include, but are not limited to, the following: cash flow (including, without limitation, operating cash flow and free cash flow), earnings per share, gross or net profit margin, net income (either before or after interest, taxes, amortization, and/or depreciation), operating income (either before or after restructuring and amortization charges), return on capital or return on invested capital, return on equity, return on operating assets or net assets, return on sales, sales or revenue, stock price goals, total shareholder return. The Committee shall define objectively the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Participant.
2.30 “Performance Goals” means, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon the Performance Criteria that the Committee, in its sole discretion, selects. The Committee, in its sole discretion, may provide that one or more objectively determinable adjustments shall be made to one or more of the Performance Goals.
2.31 “Performance Period” means the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the payment of, a Performance-Based Award, provided that the duration of any Performance Period shall not be less than twelve (12) months.
2.32 “Plan” means this Amended and Restated 2002 Lilly Stock Plan, as it may be amended from time to time.
2.33 “Prior Plans” means the 1989, 1994 and 1998 Lilly Stock Plans, as amended from time to time.
2.34 “Restricted Stock” means Shares awarded to a Participant pursuant to Article 8 that are subject to certain restrictions and may be subject to risk of forfeiture.
2.35 “Restricted Stock Unit” means an Award granted pursuant to Article 7 that shall be evidenced by a bookkeeping entry representing the equivalent of one Share.
2.36 “Securities Act” means the U.S. Securities Act of 1933, as amended.
2.37 “Service” means service as an Employee or Non-Employee Director. Except as otherwise determined by the Committee in its sole discretion, a Participant’s Service terminates when the Participant ceases to actively provide services to the Company or an Affiliate and shall not be extended by any notice period mandated under applicable employment laws or the terms of the Participant’s employment or service contract, if any. The Committee shall determine which leaves shall count toward Service and when Service terminates for all purposes under the Plan. Further, unless otherwise determined by the Committee, a Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant provides Service to the Company or an Affiliate, or a transfer between entities (i.e., the Company or any Affiliates), provided that there is no interruption or other termination of Service in connection with the Participant’s change in capacity or transfer between entities (except as may be required to effect the change in capacity or transfer between entities). For purposes of determining whether an Option is entitled to Incentive Stock Option status, an Employee’s Service shall be treated as terminated ninety (90) days after such Employee goes on leave, unless such Employee’s right to return to active work is guaranteed by law or by a contract.
2.38 “Share” means a share of Common Stock.
2.39 “Stock Appreciation Right” or “SAR” means a right granted pursuant to Article 9 to receive a payment equal to the excess of the Fair Market Value of a specified number of Shares on the date the SAR is exercised over the exercise price of the SAR, as set forth in the applicable Award Agreement.
2.40 “Tax-Related Items” means any U.S. federal, state, and/or local taxes and any taxes imposed by a jurisdiction outside of the U.S. (including, without limitation, income tax, social insurance and similar contributions, payroll tax, fringe benefits tax, payment on account, employment tax, stamp tax and any other taxes related to participation in the Plan and legally applicable to a Participant, including any employer liability for which the Participant is liable pursuant to Applicable Laws or the applicable Award Agreement).
ARTICLE 3. ADMINISTRATION
3.1 Committee. The Board, at its discretion or as otherwise necessary to comply with the requirements of Section 162(m) of the Code (with respect to Outstanding Qualified Performance-Based Awards), Rule 16b-3 promulgated under the Exchange Act or to the extent required by any other Applicable Law or regulation, may delegate administration of the Plan to a Committee consisting of two or more members of the Board. Unless otherwise determined by the Board, the Committee shall consist solely of two or more Non-Employee Directors, each of whom is an “outside director,” within the meaning of Section 162(m) of the Code (with respect to Outstanding Qualified Performance-Based Awards), a “non-employee director” within the meaning of Rule 16b-3(b)(3) under the Exchange Act, or any successor rule, and an “independent director” under the applicable New York Stock Exchange rules (or other principal securities
market on which Shares are traded). Notwithstanding the foregoing: (a) the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to all Awards granted to Non-Employee Directors and for purposes of such Awards the term “Committee” as used in this Plan shall be deemed to refer to the Board and (b) the Committee may delegate its authority hereunder to the extent permitted by Section 3.5 hereof. Unless and until the Board delegates administration of the Plan to a Committee as set forth below, the Plan shall be administered by the full Board, and for such purposes the term “Committee” as used in this Plan shall be deemed to refer to the Board. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan, except with respect to matters which under Rule 16b-3 under the Exchange Act or Section 162(m) of the Code (with respect to Outstanding Qualified Performance-Based Awards), or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee.
3.2 Action by the Committee. Unless otherwise established by the Board or in any charter of the Committee, a majority of the Committee shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by a majority of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Affiliate, the Company’s independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.
3.3 Authority of Committee. Subject to any specific designation in the Plan, the Committee has the exclusive power, authority and discretion to:
(a) designate Participants to receive Awards;
(b) determine the type or types of Awards to be granted to each Participant;
(c) determine the number of Awards to be granted and the number of Shares to which an Award will relate;
(d) determine the terms and conditions of any Award granted pursuant to the Plan, including, without limitation, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, any provisions related to recoupment of gain on an Award, based in each case on such considerations as the Committee in its sole discretion determines;
(e) determine whether, to what extent, and pursuant to what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Shares, other Awards, or other property, or an Award may be cancelled, forfeited, or surrendered;
(f) prescribe the form of each Award Agreement, which need not be identical for each Participant and may vary for Participants within and outside of the U.S.;
(g) decide all other matters that must be determined in connection with an Award;
(h) establish, adopt or revise any rules and regulations, including adopting sub-plans to the Plan, for the purposes of facilitating compliance with foreign laws, easing the administration of the Plan and/or taking advantage of tax-favorable treatment for Awards granted to Participants outside the U.S., in each case as it may deem necessary or advisable;
(i) suspend or terminate the Plan at any time, subject to Article 15;
(j) amend or modify the terms of an Award, including, without limitation, accelerate the vesting and/or exercisability of any Award for any reason, including, without limitation, the Participant's retirement or other termination; provided, however, that no amendment or modification of an outstanding Award other than the following types of amendments or modifications shall affect adversely, in any material way, any Award previously granted pursuant to the Plan without the prior written consent of the Participant: (i) an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option; (ii) an amendment made or other action taken pursuant to Section 16.14 of the Plan; (iii) any amendment or other action that may be required or desirable to facilitate compliance with Applicable Laws, as determined in the sole discretion of the Committee .
(k) interpret the terms of, and any matter arising pursuant to, the Plan or any Award Agreement; and
(l) make all other decisions and determinations that may be required pursuant to the Plan or that the Committee deems necessary or advisable to administer the Plan.
3.4 Decisions Binding. The Committee’s interpretation of the Plan, any Awards granted pursuant to the Plan, and any Award Agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.
3.5 Delegation of Authority. To the extent permitted by Applicable Laws, the Board, from time to time, may delegate to a Committee of one or more members of the Board (pursuant to delegation that does not meet the requirement of Section 3.1 hereof) or to one or more officers of the Company the authority to grant Awards to Participants other than (a) Employees who are subject to Section 16 of the Exchange Act, or (b) officers of the Company (or Directors) to whom authority to grant or amend Awards has been delegated hereunder. Furthermore, if the authority to grant or amend Awards has been delegated to the Committee pursuant and subject to the preceding sentence, such authority may be further delegated by the Committee to one or more officers of the Company. For the avoidance of doubt, provided it meets the limitations of this Section 3.5, any delegation hereunder shall include the right to modify Awards as necessary to accommodate changes in Applicable Laws or regulations, including in jurisdictions outside the U.S. Furthermore, any delegation hereunder shall be subject to the restrictions and limitations that the Board (or, as applicable, the Committee) specifies at the time of such delegation, and the Board (or, as applicable, the Committee) may rescind at any time the authority so delegated and/or appoint a new delegatee. At all times, the delegatee appointed under this Section 3.5 shall serve in such capacity at the pleasure of the Board (or, as applicable, the Committee).
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to Article 13 hereof, the aggregate number of Shares that may be issued or transferred pursuant to Awards under the Plan shall be the sum of (i) 75,657,296 Shares, plus (ii) the number of Shares available for issuance under the Prior Plans (including Shares subject to awards granted under the Prior Plans that otherwise subsequently became available for issuance under the Prior Plans upon forfeiture, cancellation, or termination of the awards or any other reason under the terms of the Prior Plans); provided, however, that only 53,000,000 Shares may be issued or transferred pursuant to new Awards granted on or following the Effective Date. Subject to Article 13, the aggregate number of Shares that may be issued or transferred pursuant to the exercise of Incentive Stock Options shall be 30,000,000.
(a) Shares Reissuable under Plan. The following Shares shall again be available for the grant of an Award pursuant to the Plan: (i) Shares that are not issued as a result of the termination, expiration or lapsing of any Award for any reason; (ii) Shares subject to a Full Value Award that are not issued because the Award is settled in cash; (iii) Shares covered by an Option which are surrendered in payment of the Option exercise or purchase price or in satisfaction of obligations for Tax-Related Items incident to the exercise of an Option; (iv) Shares covered by an Award which are surrendered in satisfaction of obligations for Tax-Related Items incident to the vesting or settlement of a Full Value Award. Notwithstanding the provisions of this Section 4.1, no Shares may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an Incentive Stock Option.
(b) Shares Not Reissuable under Plan. Notwithstanding the foregoing, Shares that are repurchased on the open market with the proceeds of the exercise of an Option shall be counted against the maximum number of Shares available for issuance pursuant to Section 4.1 hereof and shall not be returned to the Plan.
(c) Shares Not Counted Against Share Pool Reserve. To the extent permitted by Applicable Laws, 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 shall not be counted against Shares available for grant pursuant to this Plan. Additionally, to the extent permitted by Applicable Laws, in the event that a company acquired by (or combined with) the Company or an Affiliate has shares available under a pre-existing plan approved by its shareholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the shareholders of the entities party to such acquisition or combination) may, at the discretion of the Committee, be used for Awards under the Plan in lieu of awards under the applicable pre-existing plan of the other company and
shall not reduce the Shares authorized for grant under the Plan; provided that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan absent the acquisition or combination, and shall only be made to individuals who were not employees or directors of the Company or any Affiliate in existence prior to such acquisition or combination by the Company or an Affiliate. The payment of Dividend Equivalent Rights in cash in conjunction with any outstanding Awards shall not be counted against the Shares available for issuance under the Plan.
4.2 Shares Distributed. Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares, treasury Shares or Shares purchased on the open market, subject to Section 4.1(b)(ii) hereof.
4.3 Limitation on Number of Shares Subject to Awards. Notwithstanding any provision in the Plan to the contrary, and subject to Article 13, the maximum number of Shares subject to all Awards that may be granted to any one Participant during any calendar year shall be 1,500,000 Shares.
4.4 Non-Employee Director Award Limit. Notwithstanding any provision to the contrary in the Plan or in any policy of the Company regarding compensation payable to a Non-Employee Director, the sum of the grant date fair value (determined as of the grant date in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, or any successor thereto) of all Awards payable in Common Stock to an individual as compensation for services as a Non-Employee Director, together with cash compensation earned by the Non-Employee Director during any calendar year, shall not exceed $800,000 in any calendar year.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 Eligibility. Each Eligible Individual shall be eligible to be granted one or more Awards pursuant to the Plan. An Eligible Individual who is subject to taxation in the U.S. and who is providing Services to an Affiliate may be granted Options or SARs under this Plan only if the Affiliate qualifies as an “eligible issuer of service recipient stock” within the meaning of the U.S. Department of Treasury regulations promulgated under Section 409A of the Code.
5.2 Participation. Subject to the provisions of the Plan, the Committee, from time to time, may select from among all Eligible Individuals those to whom Awards shall be granted, and shall determine the nature and amount of each Award. No Eligible Individual shall have any right to be granted an Award pursuant to this Plan and the grant of an Award to an Eligible Individual shall not imply any entitlement to receive future Awards.
ARTICLE 6. STOCK OPTIONS
6.1 General. The Committee is authorized to grant Options to Eligible Individuals on the following terms and conditions, and the Committee may specify such additional terms and conditions as:
(a) Exercise Price. The exercise price per Share subject to an Option shall be determined by the Committee and set forth in the Award Agreement; provided that, subject to Section 6.2(c) hereof, the per-Share exercise price for any Option shall not be less than 100% of the Fair Market Value of a Share on the date of grant.
(b) Time and Conditions of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part; provided that the term of any Option granted under the Plan shall not exceed ten (10) years. Subject to Section 12.3, the Committee also shall specify the vesting conditions, if any, as it deems appropriate that must be satisfied before all or part of an Option may be exercised. The vesting conditions, if any, may be based on, among other conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both.
(c) Payment. The Committee shall determine the methods by which the exercise price of an Option may be paid, including the following methods: (i) cash or check; (ii) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Committee may require (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a Fair Market Value on the date or surrender of attestation equal to the aggregate exercise price of the Shares as to which the Option is to be exercised; (iii) promissory note from a Participant to the Company or a third-party loan guaranteed by the Company (in either case, with such loan bearing interest at no less than such rate as shall then preclude the imputation of interest under the Code); (iv) through the delivery of a notice that the Participant has placed a market sell order with a broker with respect to Shares then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient
portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, provided that payment of such proceeds is then made to the Company upon settlement of such sale; (v) by a “net exercise” arrangement pursuant to which the number of Shares issuable upon exercise of the Option shall be reduced by the largest whole number of Shares having an aggregate fair market value that does not exceed the aggregate exercise price (plus withholding taxes, if applicable) and any remaining balance of the aggregate exercise price (and/or applicable withholding taxes) not satisfied by such reduction in the number of whole Shares to be issued shall be paid by Participant in cash or other form of payment approved by the Committee; (vi) other property acceptable to the Committee; or (vii) any combination of the foregoing methods of payment. The Award Agreement will specify the methods of paying the exercise price available to each Participant. The Committee also shall determine the methods by which Shares shall be delivered or deemed to be delivered to Participants. Notwithstanding any other provision of the Plan to the contrary, no Participant who is a Director or an “executive officer” of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to pay the exercise price of an Option, or continue any extension of credit with respect to the exercise price of an Option, with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act.
(d) Exercise of Option.
(i) Procedure for Exercise; Rights as a Shareholder. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (A) a notice of exercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the Option, and (B) full payment for the Shares with respect to which the Option is exercised (together with applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Committee and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Participant. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no dividends or Dividend Equivalent Right shall be paid, and no right to vote or receive dividends or Dividend Equivalent Rights or any other rights as a shareholder shall exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13.1 of the Plan.
(ii) Termination of Participant’s Service. If a Participant ceases to provide Service, including as a result of the Participant’s death or Disability, 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). Unless otherwise provided by the Committee, if on the date of termination of Service the Participant is not vested as to his or her entire Option, the unvested portion of the Option shall be forfeited and the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination of Service, the Participant does not exercise his or her Option within the time specified by the Committee, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. To the extent the Option is exercisable following a Participant’s death, the Option may be exercised by such persons as may be specified in the Award Agreement, which may include any of the following: (i) the Participant’s designated beneficiary, provided that such designation is permitted under Applicable Laws and that such beneficiary has been designated before the Participant’s death in a form acceptable to the Company; (ii) the Participant’s legal representative or representatives; (iii) the person or persons entitled to do so pursuant to the Participant’s last will and testament; or (iv) if the Participant fails to make testamentary disposition of the Option or dies intestate, by the person or persons entitled to receive the Option pursuant to the applicable laws of descent and distribution.
6.2 Incentive Stock Options. Incentive Stock Options shall be granted only to Employees of the Company or any “subsidiary corporation,” as defined in Section 424(f) of the Code and any applicable U.S. Department of Treasury regulations promulgated thereunder, of the Company, and the terms of any Incentive Stock Options granted pursuant to the Plan, in addition to the requirements of Section 6.1 hereof, must comply with the provisions of this Section 6.2.
(a) Expiration. Subject to Section 6.2(c) hereof, an Incentive Stock Option shall expire and may not be exercised to any extent by anyone after the first to occur of the following events:
(i) Ten (10) years from the date of grant, unless an earlier time is set in the Award Agreement;
(ii) Three (3) months after the date of the Participant’s termination of Service on account of any reason other than death or Disability (within the meaning of Section 22(e)(3) of the Code); and
(iii) One (1) year after the date of the Participant’s termination of Service on account of death or Disability (within the meaning of Section 22(e)(3) of the Code).
(b) Dollar Limitation. The aggregate Fair Market Value (determined as of the time the Option is granted) of all Shares with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed US$100,000 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options.
(c) Ten Percent Owners. An Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of Shares of the Company only if such Option is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five (5) years from the date of grant.
(d) Notice of Disposition. The Participant shall give the Company prompt notice of any disposition of Shares acquired by exercise of an Incentive Stock Option within (i) two (2) years from the date of grant of such Incentive Stock Option or (ii) one (1) year after the transfer of such Shares to the Participant.
(e) Right to Exercise. During a Participant’s lifetime, only the Participant may exercise an Incentive Stock Option.
(f) Failure to Meet Requirements. Any Option (or portion thereof) purported to be an Incentive Stock Option, which, for any reason, fails to meet the requirements of Section 422 of the Code shall be considered a Non-Qualified Stock Option.
ARTICLE 7. RESTRICTED STOCK UNITS
7.1 Restricted Stock Units. The Committee is authorized to grant Restricted Stock Units to Eligible Individuals in such amounts and subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose.
7.2 Vesting Conditions. Subject to Section 12.3, the Committee shall specify the date or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable, and may specify such conditions to vesting, if any, as it deems appropriate. The vesting conditions, if any, may be based on among other conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both.
7.3 Form and Timing of Payment. The Committee shall specify the settlement date applicable to each grant of Restricted Stock Units, which date shall not be earlier than the date or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable, or such settlement date may be deferred to any later date, subject to compliance with Section 409A of the Code, as applicable. On the settlement date, the Company shall, subject to Section 12.6(a) hereof and satisfaction of applicable Tax-Related Items (as further set forth in Section 16.3 hereof), transfer to the Participant one 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 the Shares that otherwise would have been issued) or any combination of cash and Shares, as determined by the Committee, in its sole discretion, in either case, less applicable Tax-Related Items (as further set forth in Section 16.3 hereof). Until a Restricted Stock Unit is settled, the number of Restricted Stock Units shall be subject to adjustment pursuant to Article 13 hereof.
7.4 Forfeiture. 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 shall be forfeited.
7.5 General Creditors. A Participant who has been granted Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement evidencing the grant of the Restricted Stock Units.
ARTICLE 8. RESTRICTED STOCK AWARDS
8.1 Grant of Restricted Stock. The Committee is authorized to grant Restricted Stock to Eligible Individuals selected by the Committee in such amounts and subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose.
8.2 Purchase Price. At the time of the grant of Restricted Stock, the Committee shall determine the price, if any, to be paid by the Participant for each Share subject to the Award. The purchase price of Shares acquired pursuant to the Award shall be paid either: (i) in cash at the time of purchase; (ii) at the sole discretion of the Committee, by Service rendered or to be rendered to the Company or an Affiliate; or (iii) in any other form of legal consideration that may be acceptable to the Committee in its sole discretion and in compliance with Applicable Laws.
8.3 Issuance and Restrictions. Subject to Section 12.3 hereof, Restricted Stock shall be subject to such restrictions, if any, on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). The restrictions, if any, may be based on, among other conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both. These restrictions, if any, 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.
8.4 Dividends. Any dividends that are distributed with respect to Shares of Restricted Stock shall be paid in accordance with the applicable Award Agreement, subject to the provisions of Section 12.4(b).
8.5 Forfeiture. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of Service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited.
8.6 Certificates for Restricted Stock. Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, at its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.
ARTICLE 9. STOCK APPRECIATION RIGHTS
9.1 Grant of Stock Appreciation Rights. The Committee is authorized to grant SARs to Eligible Individuals on the following terms and conditions, and the Committee may specify such additional terms and conditions as:
(a) Exercise Price. The exercise price per Share subject to a SAR shall be determined by the Committee and set forth in the Award Agreement; provided that the exercise price per Share for any SAR shall not be less than 100% of the Fair Market Value of a Share on the date of grant.
(b) Time and Conditions of Exercise. The Committee shall determine the time or times at which a SAR may be exercised in whole or in part; provided that the term of any SAR granted under the Plan shall not exceed ten (10) years. Subject to Section 12.3, the Committee also shall specify the vesting conditions, if any, as it deems appropriate that must be satisfied before all or part of a SAR may be exercised. The vesting conditions, if any, may be based on, among other conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both.
(c) A SAR may not be exercised for a fraction of a Share. A SAR shall be deemed exercised when the Company receives a notice of exercise (in such form as the Committee may specify from time to time) from the person entitled to exercise the SAR.
9.2 Tandem Stock Appreciation Rights. A SAR may be granted in connection with an Option, either at the time of grant or at any time thereafter during the term of the Option. A SAR granted in connection with an Option will entitle the holder, upon exercise, to surrender the Option or any portion thereof to the extent unexercised, with respect to the number of Shares as to which such SAR is exercised, and to receive payment of an amount computed as described in Section 9.3. The Option shall, to the extent and when surrendered, cease to be exercisable. A SAR granted in connection with an Option hereunder will have an exercise price per share equal to the per share exercise price of the Option, will be exercisable at such time or times, and only to the extent, that the related Option is exercisable, and will expire no later than the related Option expires. If a related Option is exercised in whole or in part, then the SAR related to the Shares purchased terminates as of the date of such exercise.
9.3 Payment and Limitations on Exercise.
(a) A SAR shall entitle the Participant (or other person entitled to exercise the SAR pursuant to the Plan) to exercise all or a specified portion of the SAR (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount equal to the excess of the aggregate Fair Market Value of the Shares on the date the SAR is exercised over the aggregate exercise price of the SAR, less applicable Tax-Related Items (as further set forth in Section 16.3 hereof), subject to any limitations the Committee may impose.
(b) Payment of the amounts determined under Section 9.3(a) hereof shall be in cash, in Shares (based on the Fair Market Value of the Shares as of the date the SAR is exercised) or a combination of both, as determined by the Committee in the Award Agreement. To the extent Shares are issued upon exercise of a SAR, the Shares shall be issued in the name of the Participant. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no dividends or Dividend Equivalent Right shall be paid, and no right to vote or receive dividends or Dividend Equivalent Rights or any other rights as a shareholder shall exist with respect to the Shares subject to a SAR, notwithstanding the exercise of the SAR. The Company shall issue (or cause to be issued) such Shares promptly after the SAR is exercised. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13.1 of the Plan. The provisions of Section 6.1(d)(ii) regarding the treatment of a termination of the Participant’s Service shall also apply to SARs.
ARTICLE 10. OTHER SHARE-BASED AWARDS
10.1 Grants of Other Share-Based Awards. Subject to limitation under Applicable Laws, the Committee is authorized under the Plan to grant Awards (other than Options, Restricted Stock Units, Restricted Stock and SARs) to Eligible Individuals subject to the terms and conditions set forth in this Article 10 and such other terms and conditions as may be specified by the Committee that are not inconsistent with the provisions of the Plan and that, by their terms, involve or might involve the issuance of, consist of, or are denominated in, payable in, valued in whole or in part by reference to, or otherwise relate to, Shares. The Committee may also grant Shares as a bonus, or may grant other Awards in lieu of obligations of the Company or an Affiliate to pay cash or other property under the Plan or other plans or compensatory arrangements. The terms and conditions applicable to such other Awards shall be determined from time to time by the Committee and set forth in an applicable Award Agreement. The Committee may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Participants on such terms and conditions as determined by the Committee from time to time.
10.2 Exercise Price. The Committee may establish the exercise price, if any, of any Other Share-Based Award granted pursuant to this Article 10; provided that such exercise price shall 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.
10.3 Form of Payment. Payments with respect to any Awards granted under Section 10.1 shall be made in cash or cash equivalent, in Shares or any combination of the foregoing, as determined by the Committee.
10.4 Vesting Conditions. Subject to Section 12.3, the Committee shall specify the date or dates on which the Awards granted pursuant to this Article 10 shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate. The vesting conditions may be based on, among other vesting conditions, a Participant’s continued Service, the attainment of performance conditions, or a combination of both.
10.5 Term. Except as otherwise provided herein, the Committee shall set, in its discretion, the term of any Award granted pursuant to this Article 10; provided that the term of any Award granted pursuant to this Article 10 shall not exceed ten (10) years.
ARTICLE 11. PERFORMANCE-BASED AWARDS
11.1 Purpose. If the Committee, in its discretion, decides to grant a Performance-Based Award to an Eligible Individual, the provisions of this Article 11 shall control over any contrary provision contained in Articles 6 through 10; provided that the Committee may in its discretion grant Awards to Eligible Individuals that are based on Performance Criteria or other performance conditions but that do not satisfy the requirements of this Article 11.
11.2 Applicability. This Article 11 shall apply only to those Eligible Individuals selected by the Committee to receive Performance-Based Awards. The designation of an Eligible Individual as a Participant for a Performance Period shall not entitle the Participant, in any manner, to receive an Award for the period. Moreover, the designation of an Eligible Individual as a Participant for a particular Performance Period shall not require designation of such Eligible Individual as a Participant in any subsequent Performance Period and designation of one Eligible Individual as a Participant shall not require designation of any other Eligible Individuals as a Participant in such period or in any other Performance Period.
11.3 Procedures with Respect to Performance-Based Awards. With respect to any Performance-Based Awards, which may be granted to one or more Eligible Individuals, within the first twenty-five percent (25%) of the Performance Period in question or period of Service, the Committee, in writing (a) shall designate one or more Eligible Individuals as eligible for an Award, (b) shall designate the Performance Period over which the Performance Goals shall be measured; (c) shall select the Performance Criteria applicable to the Performance Period, (d) shall establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such Performance Period, and (e) shall specify the relationship between Performance Criteria and the Performance Goals and the amounts of such Awards, as applicable, to be earned by each Eligible Individuals for such Performance Period. Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amount earned by an Eligible Individual, the Committee shall have 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.
11.4 Payment of Performance-Based Awards. Unless otherwise provided in the applicable Award Agreement, a Participant must be providing Service on the day a Performance-Based Award for the appropriate Performance Period is paid to the Participant. Furthermore, unless otherwise provided in the applicable Award Agreement, a Participant shall be eligible to receive payment pursuant to a Performance-Based Award for a Performance Period only if the Performance Goals for such period are achieved.
ARTICLE 12.PROVISIONS APPLICABLE TO AWARDS
12.1 Stand-Alone and Tandem Awards. Awards granted pursuant to the Plan may, in the discretion of the Committee, be granted either alone, in addition to, or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.
12.2 Award Agreement. Awards under the Plan shall be evidenced by Award Agreements that set forth the terms, conditions and limitations for each Award, not inconsistent with the Plan, which may include, without limitation, the term of an Award, the provisions applicable in the event the Participant’s Service terminates, and the Company’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award.
12.3 Minimum Vesting Requirements. Notwithstanding any other provision of the Plan, except in connection with Awards granted in connection with assumption or substitution of awards as part of a transaction as contemplated under Section 4.1(c) or Awards that may be settled only in cash, no portion of an Award granted on or after the Effective Date may vest before the first anniversary of the date of grant, subject to accelerated vesting as contemplated under Section 3.3(j) and ARTICLE 13; provided, however, that the Company may grant Awards with respect to up to five percent (5%) of the number of Shares reserved under Section 4.1 as of the Effective Date without regard to the minimum vesting period set forth in this Section 12.3.
12.4 Dividends and Dividend Equivalent Rights.
(a) Any Participant selected by the Committee may be granted Dividend Equivalent Rights based on the dividends declared on the Shares that are subject to any Restricted Stock Unit or an Other Share-
Based Award that is a Full Value Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date the Award vests or is settled, as determined by the Committee and set forth in the applicable Award Agreement. Such Dividend Equivalent Rights shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Committee.
(b) To the extent Shares subject to an Award (other than Restricted Stock) are subject to vesting conditions, any Dividend Equivalent Rights relating to such Shares shall either (i) not be paid or credited or (ii) be accumulated and subject to restrictions and risk of forfeiture to the same extent as the underlying Award with respect to which such cash, stock or other property has been distributed. For Shares of Restricted Stock that are subject to vesting, dividends shall be accumulated and subject to any restrictions and risk of forfeiture to which the underlying Restricted Stock is subject.
12.5 Limits on Transfer. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or an Affiliate. Except as otherwise provided by the Committee, no Award shall be assigned, transferred, or otherwise disposed of by a Participant other than by will or the laws of descent and distribution.
12.6 Stock Certificates; Book Entry Procedures.
(a) Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates evidencing Shares pursuant to the exercise or vesting, as applicable, of any Award, unless and until the Board has determined, with advice of counsel, that the issuance and delivery of such certificates is in compliance with all Applicable Laws, regulations of governmental authorities and, if applicable, the requirements of any exchange on which the Shares are listed or traded. All certificates evidencing Shares delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal, state, or local securities or other laws, including laws of jurisdictions outside of the U.S., rules and regulations and the rules of any national securities exchange or automated quotation system on which the Shares are listed, quoted, or traded. The Committee may place legends on any certificate evidencing Shares to reference restrictions applicable to the Shares. In addition to the terms and conditions provided herein, the Board may require that a Participant make such reasonable covenants, agreements, and representations as the Board, in its discretion, deems advisable in order to comply with any such laws, regulations, or requirements. The Committee shall have the right to require any Participant to comply with any timing or other restrictions with respect to the settlement or exercise of any Award, including, without limitation, a window-period limitation, as may be imposed in the discretion of the Committee.
(b) Notwithstanding any other provision of the Plan, unless otherwise determined by the Committee or required by any Applicable Laws, rule or regulation, the Company shall not deliver to any Participant certificates evidencing Shares issued in connection with any Award and instead such Shares shall be recorded in the books of the Company (or, as applicable, its transfer agent or stock plan administrator).
12.7 Paperless Administration. In the event that the Company establishes, for itself or using the services of a third party, an automated system for the documentation, granting or exercise of Awards, such as a system using an internet website, intranet or interactive voice response, then the paperless documentation, granting or exercise of Awards by a Participant may be permitted through the use of such an automated system.
ARTICLE 13. CHANGES IN CAPITAL STRUCTURE
13.1 Adjustments.
(a) 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 Company assets to shareholders, or any other similar event or other change related to a corporate event affecting the Shares or the price of the Shares other than an Equity Restructuring, the Committee shall make such adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change with respect to (a) the aggregate number and kind of shares that may be issued under the Plan (including, without limitation, adjustments of the limitations in Sections 4.1 and 4.3 hereof); (b) the terms and conditions of any outstanding Awards (including, without limitation, the number and kind of shares that may be issued, or any applicable performance goals or criteria with respect thereto); and (c) the grant or exercise price per Share for any outstanding Awards under the Plan.
(b) In the event of any transaction or event described in Section 13.1(a) hereof or any unusual or infrequently occurring items or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in Applicable Laws, regulations or accounting principles, the Committee, in its sole and absolute discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant’s request, is hereby authorized to take any one or more of the following actions whenever the Committee determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles:
(i) to provide for either (A) termination of any such Award in exchange for an amount of cash, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction or event described in this Section 13.1 the Committee determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company without payment) or (B) the replacement of such Award with other rights or property selected by the Committee in its sole discretion;
(ii) to provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;
(iii) to make adjustments in the number and type of Shares (or other securities or property) subject to outstanding Awards, and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards;
(iv) to provide that such Award shall be exercisable or payable or fully vested with respect to all Shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Agreement; and
(v) to provide that the Award cannot vest, be exercised or become payable after such event.
(c) In connection with the occurrence of any Equity Restructuring, and notwithstanding anything to the contrary in Sections 13.1(a) and 13.1(b) hereof:
(i) the number and type of securities subject to each outstanding Award and the exercise price or grant price thereof, if applicable, shall be equitably adjusted. The adjustments provided under this Section 13.1(c)(i) shall be final and binding on the affected Participant and the Company.
(ii) the Committee shall make such equitable adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such Equity Restructuring with respect to the aggregate number and kind of shares that may be issued under the Plan (including, without limitation, adjustments of the limitations in Sections 4.1 and 4.3 hereof).
13.2 Change in Control.
(a) Notwithstanding Section 13.1 hereof, and provided that any applicable Award Agreement does not expressly preclude the following from applying, if a Change in Control occurs and Awards that vest solely on the Participant’s continued Service are not converted, assumed, substituted or replaced by a successor or survivor corporation, or a parent or subsidiary thereof, then immediately prior to the Change in Control such Awards shall become fully exercisable and all forfeiture restrictions on such Awards shall lapse and, immediately following the consummation of such Change in Control, all such Awards shall terminate and cease to be outstanding.
(b) Notwithstanding Section 13.1 hereof, Awards that vest based on the attainment of performance-based conditions shall be subject to the provisions of the Award Agreement governing the impact of a Change in Control, provided that any such provisions in the Award Agreement shall (i) not permit the vesting of
Awards at a rate that is greater than the actual level of attainment and/or (ii) provide for pro-rated vesting of the Award based on any reduction to the performance period resulting from the Change in Control.
(c) 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 within a designated period following the effective date of such Change in Control. Any such Award shall accordingly, upon an involuntary termination of the Participant’s employment or service in connection with a Change in Control, become fully exercisable and all forfeiture restrictions on such Award shall lapse.
(d) The portion of any Incentive Stock Option accelerated in connection with a Change in Control shall remain exercisable as an Incentive Stock Option only to the extent the applicable $100,000 limitation is not exceeded. To the extent such U.S. dollar limitation is exceeded, the accelerated portion of such Option shall be exercisable as a Non-Statutory Option under the U.S. federal tax laws.
13.3 No Other Rights. Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of Shares of any class, the payment of any dividend, any increase or decrease in the number of Shares of any class or any dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action of the Committee under the Plan, no issuance by the Company of Shares of any class, or securities convertible into Shares of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to an Award or the grant or the exercise price of any Award.
ARTICLE 14. EFFECTIVE AND EXPIRATION DATE
14.1 Plan Effective Date. The Plan was approved by the Board on February 20, 2018 and shall become effective upon approval of the shareholders of the Company.
14.2 Expiration Date. The Plan will continue in effect until it is terminated by the Board pursuant to Section 15.1 hereof, except that no Incentive Stock Options may be granted under the Plan after February 20, 2028. Any Awards that are outstanding on the date the Plan terminates shall remain in force according to the terms of the Plan and the applicable Award Agreement.
ARTICLE 15. AMENDMENT, MODIFICATION, AND TERMINATION
15.1 Amendment, Modification, and Termination. Subject to Section 16.14 hereof, with the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan; provided, however, that to the extent necessary and desirable to comply with any Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required. Notwithstanding any provision in this Plan to the contrary, absent approval of the shareholders of the Company, and except as permitted by Article 13, no Option or SAR may be amended to reduce the per-Share exercise price of the Shares subject to such Option or SAR below the per-Share exercise price as of the date the Option or SAR is granted and (a) no Option or SAR may be granted in exchange for, or in connection with, the cancellation, surrender or substitution of an Option or SAR having a higher per-Share exercise price and (b) no Option or SAR may be cancelled in exchange for, or in connection with, the payment of a cash amount 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 a Share.
15.2 Awards Previously Granted. Except with respect to amendments made or other actions taken pursuant to Section 16.14 hereof or any amendment or other action with respect to an outstanding Award that may be required or desirable to facilitate compliance with Applicable Laws, as determined by the Committee in its sole discretion, no termination, amendment, or modification of the Plan shall affect adversely, in any material way, any Award previously granted pursuant to the Plan without the prior written consent of the Participant; provided, however, that an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option shall not be treated as adversely affecting the rights of the Participant.
ARTICLE 16. GENERAL PROVISIONS
16.1 No Rights to Awards. No Eligible Individual or other person shall have any claim to be granted any Award pursuant to the Plan, and neither the Company nor the Committee is obligated to treat Eligible Individuals, Participants or any other persons uniformly.
16.2 No Shareholders Rights. Except as otherwise provided herein, a Participant shall have none of the rights of a shareholder with respect to Shares covered by any Award, including the right to vote or receive dividends, until the Participant becomes the record owner of such Shares, notwithstanding the exercise of an Option or SAR or vesting of another Award.
16.3 Tax-Related Items. The Company or any Affiliate, as applicable, shall have the authority to require a Participant to remit to the Company or an Affiliate, an amount sufficient to satisfy the withholding obligations for Tax-Related Items or to take such other action as may be necessary or appropriate in the opinion of the Company or an Affiliate, as applicable, to satisfy withholding obligations for Tax-Related Items, including one or a combination of the following: (a) withholding from the Participant’s wages or other cash compensation payable to the Participant by the Company or an Affiliate; (b) withholding from the proceeds of the sale of Shares acquired pursuant to an Award, either through a voluntary sale or a mandatory sale arranged by the Company on the Participant’s behalf, without need of further authorization; or (c) in the Committee’s sole discretion, by withholding Shares otherwise issuable under an Award (or allowing the return of Shares) sufficient, as determined by the Committee in its sole discretion, to satisfy such Tax-Related Items. No Shares shall be delivered pursuant to an Award to any Participant or other person until the Participant or such other person has made arrangements acceptable to the Committee to satisfy the withholding obligations for Tax-Related Items.
16.4 No Right to Employment or Services. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Affiliate to terminate any Participant’s Service at any time, nor confer upon any Participant any right to continue in the Service of the Company or any Affiliate.
16.5 Unfunded Status of Awards. The Plan is intended to be an “unfunded” plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Affiliate.
16.6 Indemnification. To the extent allowable pursuant to Applicable Laws, each member of the Committee and the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled pursuant to the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.
16.7 Relationship to other Benefits. No payment pursuant to the Plan shall be taken into account in determining any benefits pursuant to any pension, retirement, savings, profit sharing, group insurance, termination programs and/or indemnities or severance payments, welfare or other benefit plan of the Company or any Affiliate, except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.
16.8 Expenses. The expenses of administering the Plan shall be borne by the Company and/or its Affiliates.
16.9 Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.
16.10 Fractional Shares. No fractional Shares shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up or down as appropriate.
16.11 Limitations Applicable to Section 16 Persons. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any Participant who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 under the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by Applicable Laws, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.
16.12 Government and Other Regulations. The obligation of the Company to make payment of awards in Shares or otherwise shall be subject to all Applicable Laws, and to such approvals by government agencies, including government agencies in jurisdictions outside of the U.S., in each case as may be required or as the Company deems necessary or advisable. Without limiting the foregoing, the Company shall have no obligation to issue or deliver evidence of title for Shares subject to Awards granted hereunder prior to: (i) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and (ii) completion of any registration or other qualification with respect to the Shares under any Applicable Laws in the U.S. or in a jurisdiction outside of the U.S. or ruling of any governmental body that the Company determines to be necessary or advisable or at a time when any such registration or qualification is not current, has been suspended or otherwise has ceased to be effective. The inability or impracticability of the Company to obtain or maintain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained and shall constitute circumstances in which the Committee may determine to amend or cancel Awards pertaining to such Shares, with or without consideration to the affected Participant. The Company shall be under no obligation to register, pursuant to the Securities Act or otherwise, any offering of Shares issuable under the Plan. If, in certain circumstances, the Shares paid pursuant to the Plan may be exempt from registration pursuant to the Securities Act, the Company may restrict the transfer of such Shares in such manner as it deems advisable to ensure the availability of any such exemption.
16.13 Governing Law. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Indiana.
16.14 Section 409A. Except as provided in Section 16.15 hereof, to the extent that the Committee determines that any Award granted under the Plan is subject to Section 409A of the Code, the Award Agreement evidencing such Award shall incorporate the terms and conditions required by Section 409A of the Code. To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section 409A of the Code and U.S. Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the date an Award is granted the Committee determines that the Award may be subject to Section 409A of the Code and related U.S. Department of Treasury guidance (including such guidance as may be issued after the Effective Date), the Committee may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, including amendments or actions that would result in a reduction to the benefits payable under an Award, in each case, without the consent of the Participant, that the Committee determines are necessary or appropriate to (a) exempt the Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (b) comply with the requirements of Section 409A of the Code and related U.S. Department of Treasury guidance and thereby avoid the application of any penalty taxes under such Section or mitigate any additional tax, interest and/or penalties or other adverse tax consequences that may apply under Section 409A of the Code if compliance is not practical.
16.15 No Representations or Covenants with respect to Tax Qualification. Although the Company may endeavor to (a) qualify an Award for favorable or specific tax treatment under the laws of the U.S. (e.g., Incentive Stock Options under Section 422 of the Code) or jurisdictions outside of the U.S. or (b) avoid adverse tax treatment (e.g., under Section 409A of the Code), the Company makes no representation to that effect and expressly disavows any covenant to maintain favorable or avoid unfavorable tax treatment, notwithstanding anything to the contrary in this Plan, including Section 16.14 hereof. The Company shall be unconstrained in its corporate activities without regard to the potential negative tax impact on Participants under the Plan. Nothing in this Plan or in an Award Agreement shall provide a basis for any person to take any action against the Company or any Affiliate based on matters covered by Section 409A of the Code, including the tax treatment of any Awards, and neither the Company nor any Affiliate will have any liability under any circumstances to the Participant or any other party if the Award that is intended to be exempt from, or compliant with, Section 409A of the Code, is not so exempt or compliant or for any action taken by the Committee with respect thereto.
16.16 Clawback/Recovery. All Awards granted under the Plan will be subject to recoupment in accordance with 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.
16.17 Severability. If any provision of the Plan or the application of any provision hereof to any person or circumstance is held to be invalid or unenforceable, the remainder of the Plan and the application of such provision to any other person or circumstance shall not be affected, and the provisions so held to be unenforceable shall be reformed to the extent (and only to the extent) necessary to make it enforceable and valid.
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Annual Meeting Admission Ticket
Eli Lilly and Company 2018 Annual Meeting of Shareholders
Monday, May 7, 2018
11:00 a.m. EDT
Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285
The top portion of this page will be required for admission to the meeting.
Please write your name and address in the space provided below and present this ticket when you enter the Lilly Center.
Doors open at 10:15 a.m.
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Parking Pass
Directions and Parking
From I-70 take Exit 79B; follow signs to McCarty Street. Turn right (east) on McCarty Street; go straight into Lilly Corporate Center. You will be directed to parking. Be sure to take the admission ticket (the top portion of this page) with you to the meeting and leave this parking pass on your dashboard.
Take the top portion of this page with you to the meeting.
Eli Lilly and Company
Annual Meeting of Shareholders
May 7, 2018
Please place this identifier on the dashboard of your car as you enter Lilly Corporate Center so it can be clearly seen by security and parking personnel.