Meaning
Contractual right granted to a specific shareholder or investor allows them to block the resolution of a legal dispute or a tax claim. Governance protections often include the power to prevent the company from accepting a deal that might harm the long term value of the investment. This settlement veto ensures that the majority cannot end a lawsuit on terms that are unfavorable to the minority.
It acts as a control term, distinct from an economic right, though it has measurable financial consequences.
Bargaining Power
Holding this power gives an investor a seat at the table during delicate negotiations with third parties. If the board wants to pay a fine to avoid a trial, the holder of the settlement veto can demand that the case proceed to clear the company name. This creates a check against management taking the easy path at the expense of shareholder principles.
Deadlock Resolution
Disputes over the use of this right are common when the company is short of cash. Because a settlement veto can force a company to continue expensive litigation, the shareholders agreement often includes a buyout clause. This allows the party wanting to settle to purchase the shares of the blocking party at a fair market price.
Exercise Limit
Exercise limit for the settlement veto is sometimes restricted.
