I recall reading a rule in the old blue book that says you can pick up weapons from fallen allies, and I know one can pass off a banner but is there a ruling regarding dropping hear? IE, can Lurtz drop his bow and get the defence bonus from his shield once I as the controlling player have decided that he's done enough shooting? I'm not referring to magical compulsion, I mean straight up dropping the bow.

That used to be in the advanced rules section of the ORB. I'm not sure it made the transition to the new hobbit book.
Even so, if it is in the adv rules section, it means it is optional so can only be used with your opponents prior permission before the game starts.

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