June 15, 2023
Dodd-Frank Clawbacks: Handling the Broad “Indemnification” Prohibition
One of the common questions that companies are facing with respect to the (thankfully extended) Dodd-Frank clawback policy rule is whether the prohibition on indemnifying covered executives against the loss of erroneously awarded compensation means that the company cannot cover executives’ legal costs in connection with a clawback dispute. K&L Gates’ Ali Nardali sent me this view:
“Indemnification” is used pretty broadly in the release and covers legal costs:
“The Proposing Release acknowledged that state indemnification statutes, indemnification provisions in an issuer’s charter, bylaws, or general corporate policy and coverage under directors’ and officers’ liability insurance provisions may protect executive officers from personal liability for costs incurred in a successful defense against a claim or lawsuit resulting from the executive officer’s service to the issuer. However, Section 10D’s listing standard requirement that “the issuer will recover” is inconsistent with indemnification because a listed issuer does not effectively “recover” the excess compensation from the executive officer if it has an agreement, arrangement, or understanding that it will mitigate some or all of the consequences of the recovery.”
We do not believe that it is necessary to amend indemnification agreements, because the release contemplates that they are auto-nullified to the extent they are inconsistent with the clawback rule, per Section 29(a) of the ’34 Act.
– Liz Dunshee