Importantly, while a shareholder’s initial inclination is to seek reimbursement of its expenses, other considerations, including any adverse impact it may have on the independence of the shareholder or its director nominees, must be carefully evaluated.
7 Expense reimbursement. A settlement agreement may include an expense reimbursement provision stipulating that the shareholder will be reimbursed for all or part of its contest-related expenses. An issuer will often attempt to negotiate a cap on the reimbursement amount. Conversely, a shareholder may resist a cap and instead propose to accept “reasonable” fees and expenses as a compromise. Importantly, while a shareholder’s initial inclination may be to seek reimbursement of its expenses, other considerations, including any adverse impact it may have on the independence of the shareholder or its director nominees, must be carefully evaluated. In some cases it may be preferable to forgo expense reimbursement in exchange for other, more beneficial rights. While settlement agreements cover a lot of the same ground, as noted above, there is no one-size-fits-all approach. Deciding whether or not (and when) to settle, and on what terms, will depend on a variety of factors. Increasingly, we see greater variation in the terms of settlements. And those terms should in all cases be customized to reflect the parties’ principal objectives.
the issuer’s director nominees. Depending on the circumstances, this provision may also require the shareholder to support other business items in line with the issuer board’s recommendations. 6 Non-disparagement. Settlement agreements often, but not always, include a mutual non- disparagement clause requiring both the issuer and the shareholder not to make or release any disclosure or statement that would reasonably be expected to undermine, disparage or reflect adversely on the other party. A non-disparagement provision typically includes a carve-out allowing either party to make disclosure that it determines, after consulting with legal counsel, is legally required to be made. And as with all other settlement agreement terms, the language and scope of the non-disparagement clause matter, as does its duration. Typically, the length of the non-disparagement obligations will dovetail with the time periods associated with the standstill. Doing so is important to ensure that, once the shareholder is sprung from the restrictions on its actions, the non- disparagement restrictions do not indirectly prevent it from doing what it may directly wish to do, such as solicit proxies. The non-disparagement obligations will also typically fall away in the event of a breach of the agreement by a party, so that the non-breaching party is not hamstrung in its ability to take action in the face of a breach.
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Governance Insights 2020
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