As the Sotheby’s situation wrapped up, and Dan Loeb and the company resolved their differences, we used it to illustrate how settlement agreements work.

To our chagrin, at the time we missed a fascinating example of one such agreement from a couple of months earlier. US Auto Parts Network (PRTS) and its largest investor, Timothy Maguire of Maguire Financial, also settled a possible proxy situation. Yet, they did so in a way not seen before, with a written agreement to work together to find a BoD nominee.

We can thank noted activist investor attorney Steve Wolosky for this novel agreement. It features some interesting terms that allow the company and shareholder to find a mutually-agreeable director. It also has a couple of more onerous terms. Even with these terms, in the right situation we think that other investors should consider such an agreement with their portfolio companies.

Agreeing to Agree

The core of the PRTS Board Candidate Agreement provides for the BoD to take 90 days to search for an additional director that satisfies both the company and Maguire. Both will suggest candidates for the other to review, interview, and approve. The first candidate to satisfy both of them becomes the nominee.

If they cannot agree within the 90-day period, they will continue to identify candidates until they find one. At that point, Timothy Maguire takes the board spot, and will resign once the company and Maguire find a candidate.

If Maguire wants to become the director, he can just wait out the initial 90-day period. At that point, and within that period, he need not approve any of the company’s suggestions, or suggest any of his own.

Maguire “keeps” the BoD position, too. If the director leaves the BoD, he can continue to suggest a replacement, as long as he continues to comply with other terms of the agreement.

Other Onerous Terms

The agreement also sets forth many of the same standstill terms found in other settlement agreements. These include the requirement to maintain a minimum ownership (in this case, 4% of outstanding shares), and vote with the BoD on other director candidates. We highlighted these in our earlier explanation.

It has some somewhat restrictive terms, too. As with other settlement agreements, PRTS does not need to re-appoint Maguire’s director after the expiration of his or her first term. So, Maguire can continue to hold its shares and otherwise comply with the agreement, and PRTS can still remove that new director.

Worse, Maguire basically can’t communicate with other shareholders while the agreement remains in force:

1. ...Maguire shall not...[communicate] with any third parties with respect to (or that could reasonably be expected to lead to)...any matter (or director nomination) not formally recommended by a majority of the Board.
   

This is tough. As we have noted, successful activism depends on engaging other shareholders.

Still, despite the shortcomings, the agreement allows a shareholder access to the BoD, either through its own nominee, or one that the company provides. Makes good sense to us.