The Advisors' Blog

– Liz Dunshee

If your company has to restate three years of financials due to some bad accounting decisions, who pays for the fallout? In a still-rare move, Hertz recently filed this complaint to attempt to recover $70 million in incentive compensation paid to its former CEO, CFO and GC. Hertz also wants $200 million in consequential damages resulting from an SEC investigation into the company’s accounting & disclosure (which resulted in a $16 million settlement), and defense of class action & derivative suits ($25 million in legal fees!).

Hertz is claiming that the former execs are required to return their golden parachutes because they breached their separation agreements by representing they hadn’t engaged in any conduct that met the standard of “willful gross neglect” or “willful gross misconduct” that resulted in material economic harm to the company, etc. In addition, Hertz says a clawback is warranted because the executives agreed to be bound by the company’s then-effective clawback policies in their equity award & separation agreements, which provided for repayment or forfeiture if all of these conditions were met:

– The payment, grant or vesting of such [incentive-based compensation] was based on the achievement of financial results that were the subject of a restatement . . . as filed with the Securities and Exchange Commission

– The need for the restatement was identified within 3 years after the date of the … filing of the financial results that were subsequently restated

– The Compensation Committee determines in its sole discretion, exercised in good faith, that the executive officer’s gross negligence, fraud or misconduct caused or contributed to the need for the restatement

– The Compensation Committee determines in its sole discretion that it is in the best interests of the Company and its stockholders for the executive officer to repay or forfeit all or any portion of the [incentive-based compensation]

The clawback policy also provides that all determinations & decisions made by the compensation committee are final, conclusive and binding on all persons.

The standard of conduct is important here. This Clearly blog explains that the company is alleging that a wrongful “tone at the top” was a form of misconduct & gross negligence – and that raises quite a few novel legal questions. For more info about how this case and another recent case might affect board decisions and indemnification & advancement, check out this other Cleary blog…