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A CP freight train runs along the Bow River and distant Rocky Mountains near Lake Louise, Alta.LARRY MACDOUGAL/The Canadian Press

Canadian Pacific Railway Ltd. embattled directors are signalling that they want to negotiate a peace accord with activist Bill Ackman as the company draws near to a May 17 proxy shootout.

According to interviews with people close to CP, Mr. Ackman's New York hedge fund, Pershing Square Capital Management, and some of the railway's largest shareholders, the board is floating an offer to back at least four of the activist's alternative slate of seven directors.

CP has also indicated it remains opposed to Mr. Ackman's plan to name former Canadian National Railway chief Hunter Harrison as its new chief executive officer, but it is prepared to commit to a search for a new chief to replace current CEO Fred Green.

In recent days, sources said, some of CP's largest shareholders have privately advised the company that they would prefer to see a settlement rather than risk the uncertainty of a rare proxy vote process in two weeks that will ask shareholders to vote for 16 directors from a single, so-called universal ballot that combines the railway's existing directors with Mr. Ackman's proposed replacements. Such a boardroom beauty contest is almost unprecedented and, as one person close to CP said, "would be an exercise in uncertainty."

An executive with one of CP's largest shareholders said that although he plans to support all seven directors proposed by Pershing Square, he would prefer a settlement over war. "You always hope, if possible, to allow the other part to lose with dignity, it is better for everyone."

CP spokesman Ed Greenberg said the railway has heard that many investors would prefer to see a compromise. "Mr. Ackman's recent public statements indicate he is opposed to a compromise. If that changes, we would be pleased to have discussions towards a constructive resolution that would be in the best interests of CP and all its shareholders." Mr. Ackman declined to comment.

Sources close to Pershing Square said they see little room for negotiation in CP's offer because Mr. Harrison is central to Mr. Ackman's strategy to transform an underperforming railway, whose operating performance has been lagging its major North American peers for years.

One person close to CP confirmed that Pershing Square has so far shown no indication it is willing to enter discussions. "They are pretty well dug in on the other side," this source said.

If the peace overture fails, the company will be forced to forge ahead with the unusual universal voting ballot that, according to corporate governance experts, has only been used a handful of times for a limited pool of shareholders in previous U.S. proxy battles.

Typically, opposing sides in proxy battles propose competing slates of directors rather than listing all nominees on one ballot. Activists have been pushing universal ballots for years to hold individual directors more accountable for their decisions Such a vote could potentially be a humbling defeat for a number of CP's establishment directors, which include the railway's chairman and former Royal Bank of Canada chief John Cleghorn and former Westcoast Energy Inc. chief Michael Phelps.

Interviews with some of CP's largest shareholders suggest the hedge fund currently has enough shareholder support to elect most of its proposed seven directors. Mr. Ackman has said repeatedly that he expects to win all seven seats; CP declines to predict the vote outcome.

The railway warns that Mr. Ackman's plan to replace Mr. Green with Mr. Harrison would be destructive to the company's multiyear turnaround strategy.

An executive with another major CP shareholder said that although he is concerned that Pershing Square's rosy profit projections may not be obtainable, his fund will likely vote for some of the activist's nominees because "it is time to sweep some cobwebs off the board."

The final two weeks of the CP proxy battle will depend on how much both sides are willing to bend. Mr. Ackman has offered no sign that he is willing to compromise and he has publicly stated a number of times that he expects all of his seven nominees to be elected.

Backing his boast is a robust 66-per-cent climb in CP's stock price since the activist first acquired last September what is now a 14.2-per-cent stake in the railway.

The lofty stock price puts added pressure on shareholders to support Mr. Ackman's slate, because a defeat will likely deflate CP's stock price.