The Advisors' Blog

The Dodd-Frank clawback policies that are now required under exchange listing standards don’t apply to incentive-based compensation that was received by executives before the October 2, 2023 effective date. How exactly will that play out in practice? This Winston & Strawn blog says that the answer depends on the “Restatement Determination Date” – which is the date that a company is determined to be required to prepare an accounting restatement. Here’s more detail:

For issuers with calendar year fiscal years, if the Restatement Determination Date occurred on or before December 31, 2023, then the Recovery Period runs from January 1, 2020 through December 31, 2022, i.e., the three completed fiscal years immediately preceding December 31, 2023. Since any incentive-based compensation received before the Final Rules’ October 2, 2023 effective date is not subject to clawback thereunder, any restatement with a Restatement Determination Date on or before December 31, 2023 will not result in a clawback under the Final Rules. This is because, for calendar-year issuers, the three-year lookback period for the Recovery Period would consist of fiscal years that all ended prior to October 2, 2023, resulting in no incentive-based compensation being received during the Recovery Period and on or after October 2, 2023. Therefore, no incentive-based compensation is subject to such issuer’s Clawback Policy. See Example 1 below.

There are different results for a calendar year issuer if the Restatement Determination Date occurs after December 31, 2023, as illustrated in Example 2 below.

In addition, the results may differ if the issuer is not a calendar year filer depending on the Restatement Determination Date. See Example 3 below for an example of an issuer with a June 30 fiscal year end that had a Restatement Determination Date after October 2, 2023, but that results in no incentive-based compensation subject to such issuer’s Clawback Policy since the Recovery Period would consist of fiscal years that all ended prior to October 2, 2023.

This blog walks through several examples, which are good to read alongside the hypo that I flagged a couple months ago. It recommends establishing a clear record that the policy has not been triggered, if you find yourself in that situation, and reviewing any clawback policies that the company has adopted voluntarily that may nevertheless apply. It concludes with this example of what to do if a restatement does trigger analysis, but if no incentives were erroneously paid due to the financials being corrected prior to the payout:

For example, a calendar year issuer granted Performance Shares with a 2021–2023 performance period that are deemed received as of December 31, 2023. In February 2024, the Board of Directors determined that a restatement of the 2022 financials was required. If the required restatement of the 2022 financials is completed in March 2024 in connection with the 2023 Form 10-K and the Compensation Committee’s determination of the performance results for 2023, the Compensation Committee should evaluate whether the performance goal had been attained by using the restated financials for the portion of performance relating to fiscal year 2022. Since that award is received after October 2, 2023, it is subject to clawback under the issuer’s Clawback Policy. However, it should not result in erroneously awarded compensation due to a restated financial performance measure since the Compensation Committee evaluated the performance goal using the restated financials. We recommend establishing a clear record of the Compensation Committee analyzing the impact of the restatement and adopting resolutions reflecting the Compensation Committee’s determination that no erroneously awarded compensation was received by any executive officer. Depending on the timing, this evaluation could be completed as part of certifying the performance results for such incentive-based compensation award.

– Liz Dunshee