In certain cases, disputes between companies and activist shareholders may be amicably resolved by entering into a settlement agreement. These agreements may provide a means to address the concerns and objectives of both parties while potentially avoiding costly and burdensome proxy battles or litigation.

Overview of Settlement Agreements

Settlement agreements are used, on the one hand, by companies seeking to put activist campaigns to rest and, on the other hand, by activist shareholders seeking to achieve their objectives regarding, among other things, the strategic direction and/or corporate governance of a company. While negotiating settlement agreements, companies may seek to, among other things, prohibit proxy solicitation and other activities by activists for a prescribed period of time. In contrast, activist shareholders may seek to acquire board representation or a commitment by management to recommend an activist proposal, establish a special representative committee or effect other specific demands.

Trends in Settlement Agreements

Settling with activists is common. As reported by Kingsdale Advisors, there were 69 shareholder activist campaigns launched against Canadian companies in 2023. Of the campaigns which sought to contest board composition, 48% settled rather than proceeding to a vote – the highest percentage observed in the past five years. Furthermore, as noted by Diligent Market Intelligence, 43 board seats were gained by activists in Canada in 2023 (representing a 43.3% increase on the 30 seats gained by activists in 2022), 24 of which were secured through settlements.

Kingsdale Advisors also reported an increase in the publicity surrounding activist campaigns in 2023. Historically, about 66% of campaigns were settled behind closed doors, but the large number of smaller, first-time activists launching fights has caused this ratio to decrease in 2023 potentially as a result of companies not engaging with the activist early enough or being unaware of the campaign.

Factors to Consider

Settlement agreements can be an effective tool for activists to implement meaningful change and for companies to address concerns expressed by shareholders and avoid the potential cost and distraction associated with proxy fights. However, there are many factors that companies should take into consideration when determining whether to settle:

• Interests of the corporation. The board of directors has a fiduciary obligation to act in the best interests of the corporation. Accordingly, the board of directors should decide to settle only after all alternatives have been thoroughly considered and it is determined that settling is in the best interests of the corporation.
• Short-term “peace”. Standstill provisions are the primary means of ensuring that an activist does not continue with its campaign following a settlement. However, these provisions generally restrict the activists’ activities only for a fixed period of time and, as such, may not be an effective long-term strategy. When agreeing to settle, companies should consider how to proceed after the standstill period expires.
• Activist designees need to be suitable board members. While a corporation may grant board nomination rights to an activist shareholder as part of a settlement, it’s important to ensure that the activist’s director nominees will comply with applicable legal requirements, align with the corporation’s governance practices and goals and not unduly impede the corporation’s ability to execute on its plans. Careful consideration should be given to how any nomination rights granted to an activist can be tailored to ensure that the exercise of those rights does not significantly disrupt the functioning of the board or result in the agenda of the activist being prioritized over the best interests of the corporation.

Key Takeaway

Although sometimes an amicable way for companies and activists to resolve disputes, a board must fully consider the effect of a settlement agreement before settling with activist investors.