Clawback Policies: Next Steps to Prepare Your Public Company

White & Case Public Company Advisory Group Provides Sample Clawback Policy

6 min read

In light of NYSE and Nasdaq's proposed listing standards on clawback policies, it is time to assess your public company's clawback provisions and consider the appropriate policy to put in place. As a reminder, these new listing rules requiring clawback policies will apply to both domestic companies and foreign private issuers ("FPIs"). Once the proposed listing standards are approved by the SEC, companies will have 60 days to adopt clawback policies that are compliant with the new listing rules.1

To this end, White & Case's Public Company Advisory Group has prepared a sample clawback policy aligned with the proposed listing standards, attached as Annex A to this alert.2 Notably, each listed company should assess and tailor its own clawback policy and consider the text of the final listing rules ultimately approved by the SEC, along with any additional guidance that may be provided by the staff of the SEC or the stock exchanges. Following its adoption, a company's clawback policy compliant with the new listing standards will need to be filed as an exhibit to annual reports on Form 10-K or Form 20-F, as applicable. 

When drafting, a key point to keep in mind is that the proposed listing standards will require a clawback policy that generally represents a significant change from most prior policies that companies put in place. In particular, once adopted, the new listing rules will require the mandatory clawback of "erroneously awarded" incentive-based compensation from current and former Section 16 officers (see below for the implication of this on FPIs) in the event of either a "little r" or a "Big R" accounting restatement, whether or not such officers were at fault for the restatement. 

The amount that is subject to a clawback under the proposed listing rules, known as "erroneously awarded compensation," is any amount of incentive-based compensation that exceeds the amount that otherwise would have been received had it been determined based on the restated amounts. Additional aspects of the proposed listing standards include the following:

  • Whose Compensation Must Be Covered by Policy: Under the proposed listing standards, the required clawback policy will only need to apply to current and former Section 16 officers. The only technical difference between the definition of a Section 16 officer and the definition of "executive officer" used for other SEC filings3 is that the definition of Section 16 officer also specifically includes both the principal financial officer and principal accounting officer (or if there is no principal accounting officer, the controller). Thus, for FPIs, this will be all "executive officers" (also known as "members of senior management") for purposes of the Form 20-F plus the principal financial officer and principal accounting officer (or, if there is no principal accounting officer, the controller).
  • Trigger Date for Recovery of Compensation under Policy: The policy's clawback provisions must be triggered when the issuer is "required to prepare an accounting restatement due to the material noncompliance with any financial reporting requirement under the securities laws"—meaning a "Big R" or a "little r" restatement. The precise date of this trigger must be the date that the company's board of directors or a committee of the board "concludes or reasonably should have concluded" that the company is required to prepare such an accounting restatement. To the extent that the company is required to file an Item 4.02(a) Form 8-K (or presumably, based on the applicable rules for FPIs, a Form 6-K that states the same), this conclusion is expected to coincide with the trigger date for that filing.
  • Type of Compensation Covered by the Policy: The policy must address the recovery of "incentive-based compensation," which is defined to mean "any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a financial reporting measure." The terms "financial reporting measure" and "incentive-based compensation" are intended to be expansive and also include compensation awarded based on stock price and TSR targets. The terms are not, however, intended to cover equity-based awards that vest solely based on the passage of time or continued employment (such as time-based vesting RSU), base salary or discretionary cash bonuses—unless any such compensation is earned based on the attainment of a financial performance goal.
  • Time Period Covered for Recovery Assessment under Policy: The policy must apply to incentive-based compensation received during the three completed fiscal years immediately preceding the Trigger Date (i.e., the date that the company is required to prepare the accounting statement, as noted above). Incentive-based compensation is "received" in the fiscal period during which an applicable financial reporting measure is attained, even if the payment or grant occurs after the end of that period.
  • Recovery Process under Policy: The policy can allow for discretion with respect to how to pursue the recovery of the compensation, as long as this is done "reasonably promptly", but not whether to pursue recovery of the compensation. The only exception to recovery is if one of three limited conditions is met, as set forth in Section B(2) of our Sample Clawback Policy in Annex A, and recovery is determined to be impracticable by a fully independent compensation committee (or the independent directors of the board).

Companies that have alternative clawback provisions in their award agreements, compensatory plans or policies should understand and take stock of any other applicable clawback provisions at this time. However, it should generally not be necessary to find creative ways to combine clawback provisions that have significantly different purposes. For example, alternative clawback provisions may relate to employees who are not Section 16 officers, have different clawback "triggers" (such as violations of company policies, the code of conduct or reputational harm to the company) and provide a company with broad discretion as to when and whether to actually clawback compensation. Additional clawback provisions that could remain separate include those provisions adopted to align with the Department of Justice's Criminal Division policy on clawbacks, which differ in terms of their application to all potential corporate wrongdoers (including employees) and the recovery triggers (wrongdoers in the criminal context, rather than for a "Big R" or "little r" restatement).4

Likewise, the new proposed listing standards, once adopted, are not intended to alter or otherwise affect the interpretation of other recovery provisions under any foreign recovery regime or under Sarbanes-Oxley Section 304, which is triggered when a restatement is the result of misconduct and only applies to the compensation of CEOs and CFOs (not to other officers).5

The following White & Case Public Company Advisory Group members authored this alert: Maia Gez, Scott Levi and Danielle Herrick.


1 For more background, see our prior client alert, "SEC (Finally) Adopts Clawback Rules."
2 This sample has been prepared based on the proposed listing standards, which have not been approved by the SEC as of the date of this alert. 
3 See Rule 3b-7 of the Exchange Act.
4 On March 2, 2023, Deputy Attorney General Lisa Monaco announced a new Criminal Division policy for Department of Justice prosecutors to consider the implementation of compensation clawback policies as an important factor in corporate criminal resolutions. See:
Deputy Attorney General Lisa Monaco Delivers Remarks at American Bar Association National Institute on White Collar Crime.
5 As noted in the SEC's adopting release: "Rule 10D-1 is not intended to alter or otherwise affect the interpretation of other recovery provisions, such as Sarbanes-Oxley Act Section 304, or the determination by the Commission or the courts of when reimbursement is required under Section 304. To the extent that the application of Rule 10D-1 would provide for recovery of incentive-based compensation that the issuer recovers pursuant to Section 304 or other recovery obligations, it would be appropriate for the amount the executive officer has already reimbursed the issuer to be credited to the required recovery under the issuer's Rule 10D-1 recovery policy."

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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