The Advisors' Blog

– Liz Dunshee

Clawbacks & forfeitures were a hot topic at our “15th Annual Proxy Disclosure/Executive Compensation Conference” and the accompanying NASPP conference. We dove into what’s discussed in this Washington Post article – the trend of broadening clawback provisions to cover hard-to-define concepts like “reputational damage” – and the emerging concept of whether to penalize executives for undisclosed sexual misconduct that occurred before they were hired.

In these scenarios, a clawback (or forfeiture) could be triggered by termination for “cause” – with a few approaches to defining that term:

– Employment agreement includes a representation that the executive hasn’t been the subject of a sexual harassment claim, guilty of prior claims or even that they’d never engaged in harassment or misconduct – with a breach of that representation constituting “cause” for termination

– Explicitly refer to sexual harassment in the wording of severance arrangements or in the employment agreement definition of termination for “cause”

– Employment agreement refers to a violation of company policies (while an employee) as “cause” for termination – and prohibited behavior is defined in the code of conduct

There are pros & cons to going down this path – our “Executive Compensation Disclosure Treatise” describes them on pg. 103 of the CD&A Chapter – also see the resources in our “Clawbacks” Practice Area.

And since this is all part of a bigger trend, there eventually could be some convergence with the types of reps that are making their way into merger agreements (see our DealLawyers.com blog on that) – or even venture capital deals. This WSJ article says investors in that space are trying to craft a standard provision that would penalize portfolio companies for executive or employee sexual misconduct, harassment and other issues. Here’s an excerpt:

Eamon Devlin, managing partner at MJ Hudson, a law and advisory firm that works with private-equity funds and investors, says that with pension funds increasingly being held accountable for where their money is invested, such a clause could become standard practice in investment agreements.

To be sure, finding usable wording for a #MeToo clawback clause that covers different countries and a range of different types of bigotry and harassment, without being pages and pages long, has proved challenging, says Bill Liao, a general partner in a VC firm. Lawyers who have donated their services to the initiative have run 30 different versions past him already, he says. Mr. Liao has been drumming up support among investors and venture capitalists. He aims to have the clause ready within the next year.