Public companies in the US and around the world are increasingly signing settlement agreements as a means to put shareholder activist campaigns to rest.

While companies are allured by the prospect of a quick end to the public side of an activist campaign, settlement agreements often invite new disruptions inside the boardroom and interrupt a board’s ability to concentrate on executing a long-term strategy. Moreover, settlement agreements are of increasingly shorter duration, meaning that the peace boards bargained for often becomes merely a fleeting respite from what is, in fact, a multi-year campaign of the activist.

The anatomy of a settlement agreement

At first sight, settlement agreements with activists have much to offer. The downside for the incumbent board is nearly always that one or more activist designees will join the board, often immediately. If the activist had leverage in the negotiations, it will have successfully pushed for “replacement rights”—the right of the activist to designate a replacement for any of its designees on the board who leave for ostensibly unforeseen reasons. Replacement rights create the possibility that an activist can replace a “good cop” that it first designated to the board with a “bad cop” who will push his or her agenda harder in the boardroom. Often, the activist designees are principals or employees of the activist fund. Regularly, settlement agreements provide that activist designees on the board will occupy seats on key committees.

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