The Advisors' Blog

As Liz shared when the final clawback rules were released, there are only three limited exceptions to enforcing a Dodd-Frank clawback policy:

– if direct expenses paid to third parties to assist in enforcing the policy would exceed the amount to be recovered and the issuer has made a reasonable attempt to recover;

– if recovery would violate home country law that existed at the time of adoption of the rule (November 28, 2022) and the issuer provides an opinion of counsel to that effect to the exchange; or

– if recovery would likely cause an otherwise tax-qualified retirement plan to fail to meet the requirements of the IRC.

This recent Mayer Brown alert addresses the first two exceptions in more detail and discusses complications for companies incorporated in foreign jurisdictions or with executives working abroad. The memo reminds us that “home country law” is limited to the laws of the issuer’s country of incorporation and does not address complications due to the country where the executive works:

For companies that have executives working in foreign countries where enforcement may fall under the local laws of that country, the company must be able to enforce the clawback requirements or rely on the Direct Expense Exception. […] However, to rely on [the Direct Expense Exception], the company must first make a reasonable attempt to recover the requisite compensation and document the recovery efforts. To be deemed to be impracticable, the direct costs paid to a third party to assist in enforcing recovery, such as legal expenses and consulting fees, must exceed the erroneously awarded compensation amounts.

It goes on to discuss how these two exceptions would be invoked:

For each of these exceptions, the determination would have to be made by a committee of independent directors responsible for executive compensation decisions, such as a compensation committee, or in the absence of such a committee, by a majority of the independent directors. In addition, as discussed below, the company would need to disclose why it did not pursue the recovery. The determination is subject to review by the applicable exchange.

The memo then details local laws applicable to a clawback in each of Brazil, China, France, Germany, Hong Kong, Singapore, the UAE & the UK, the availability of offsets against future compensation and steps companies can take now to increase the likelihood of enforceability in each jurisdiction.

– Meredith Ervine