The lawsuit alleged that Shell colluded with Nigeria's then-government in a crackdown against environmental and human rights activists in the Niger Delta.
It accused Shell of helping the military government capture and hang Ken Saro-Wiwa, a well-known rights activist, and eight other protesters on November 10, 1995.
The settlement brings an end to a 13-year dispute that was due to go to trial in a US district court in New York.
'Admission of guilt'
Shell, which still operates in Nigeria, said it had agreed to settle the lawsuit in the hope of aiding a "process of reconciliation", but acknowledged no wrongdoing.
But Ogon Patterson, a human rights activist in the Niger Delta and the founder of the Ijaw council for Human Rights, said that the payment by Shell showed that it was guilty of complicity in the abuses by the government.
He said: "This is blood money.
"If its hands were clean, it would have continued to claim innocence. Shell's [move] to want this out-of-court settlement is a demonstration of their guilt.
"For its profit motives, Shell cannot then claim to be doing a humanitarian gesture," he said.
"Shell has tried to stop what would have been coming, far ahead of time. There are several other cases in the Niger Delta where Shell need to pay restitution.
"Shell and other transnational corporations in the Niger Delta cannot continue to monitor the blood of the dispossessed people of the Niger Delta.
Settlement 'a victory'
The complaint alleged that officials from Shell Petroleum Development Company of Nigeria, Shell's Nigerian subsidiary, asked government troops to shoot villagers protesting against the construction of a pipeline that later leaked oil.
The officials were also accused of helping to provide Nigerian police with weapons and joining in security sweeps of the region.
Saro-Wiwa, the leader of the Movement for the Survival of Ogoni People, led rallies against Shell, which he blamed for oil spills and gas fires in the region.
His son, Ken Saro-Wiwa Jr, said on Monday he felt his father "would be happy" with the decision, despite no declaration of wrongdoing on Shell's part.
"The fact that they would have to settle is a victory for us," he said.
James Marriot, from the Remember Saro-Wiwa organisation, told Al Jazeera that the plaintiffs had to be congratulated.
"Shell have resisted at every stage for the past 13 or 14 years against the idea of going to court.
"I think that it is a great success for the plaintiffs ... The people who actually stood up and took Shell to court in the Niger Delta are relatively powerless people.
"They have been immensely brave and immensely courageous trying to deal with the situation of environmental degradation in their own homes and still standing up and taking a multinational, one of the largest companies in the world, to court."
'Violators face account'
People living in Ogoniland will receive just under one third of the $15.5m settlement, Marco Simons, a lawyer for the plaintiffs in the case, said.
"Shell should treat us as civilised human beings and not those to be exploited because of our oil"
Movement for the Survival of the Ogoni People
"Five million of [the $15.5m total] is going into the trust and the remainder is used for the plaintiffs and the estates of the descendants and the costs of litigation and legal fees," he told the AFP news agency.
The text of the settlement agreed by Shell does not state how the money will be disbursed.
"We have agreed with plaintiffs not to release these details. The size of the trust fund will be clear when it is set up," Shaun Wiggins, a Royal Dutch Shell spokesman, said.
Shell earlier said that the settlement would support initiatives in education, skills development, agriculture, small enterprise development and adult literacy.
Lawyers hailed the agreement as a rare and significant success in the field of international human rights and as a precedent for holding Shell and other oil giants responsible for activities in countries with repressive governments.
"We hope that this settlement provides another building block in the efforts to forge a legal system that holds violators accountable wherever they may be and prevents future violations," lawyers for the plaintiffs said in a joint statement.
Bariara Kpalap, a spokesman for the Movement for the Survival of the Ogoni People, said that Shell still had to address "environmental pollution, neglect and degradation in Ogoniland".
"For a lasting peace in the Ogoniland, Shell has to change its attitude towards the people. Shell should treat us as civilised human beings and not those to be exploited because of our oil," Kpalap said.