3 Nomination of directors. Perhaps the most common feature of any settlement agreement is the right granted to the shareholder to nominate an agreed number of directors to the issuer’s board. This is of course not surprising since board- related change is still the most common objective of an activist campaign. The nomination right typically requires the issuer to appoint the shareholder’s director nominees to the board immediately and to nominate such directors for election at the upcoming (and sometimes subsequent) annual shareholders’ meeting. Importantly, however, gaining board representation is often a means to the investor achieving some other objective, not an end itself; therefore, having an agreement that solely entitles the shareholder to board representation may not be sufficient. As such, this right is typically accompanied by a variety of other investor rights, such as a requirement that the issuer appoint the shareholder’s director nominees to certain board committees and/or the creation of new board committees (such as a strategic review committee). A settlement agreement may also include a provision barring the issuer from expanding the board beyond a certain size to ensure that the influence afforded to the shareholder’s director nominees is not diluted at a later date. Conversely, if the maximum number of directors permitted under the issuer’s articles already serve on the board, and no incumbent directors intend to resign, the agreement may include a requirement that the issuer increase the board’s size to accommodate the appointment of the shareholder’s nominees. An activist with a larger stake in the issuer will generally have more leverage to negotiate for the appointment of a greater number of director nominees under a settlement agreement. If the parties cannot agree on the number of director nominees to be appointed to the board, a reasonable compromise may be to agree to appoint an independent director who is mutually acceptable to the issuer and the shareholder.
activist demands. In other contexts, titles such as “cooperation agreement” or “stewardship agreement” may suggest that the parties’ interests are aligned with a view toward the long-term interests of all shareholders, eliminating the focus on a presumed fight or assumed short-term demands often (and sometimes inappropriately) associated with activist campaigns. With the universe of activists and their objectives expanding, finding the right way to convey the parties’ intentions can be critical to achieving a settlement in the first place and appropriately signalling those objectives to the market. Even in this context, words matter. 2 Term and duration . Settlement agreements typically terminate after a finite period of time. The termination date is often tied to the date of the issuer’s upcoming annual shareholders’ meeting, whether immediately following the meeting or upon a related deadline such as the nomination deadline under the issuer’s advance notice bylaws. The agreement, or certain terms, may also terminate once the engaged shareholder’s director nominee no longer serves on the issuer’s board or once the shareholder’s ownership in the issuer falls below a threshold level. Many settlements include standstill provisions, as discussed below, which may have their own termination date. While the duration of an agreement or its standstill provision will depend on the surrounding context, it is generally advisable for the agreement’s rights and restrictions to overlap and expire at the same time. Additionally, it is important to ensure that the timeframes selected provide the issuer with sufficient opportunity to execute its long- term strategy and for the activist to implement its objectives, since the agreement (and any standstill) will provide for peace only while it is in force.
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Governance Insights 2020
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