The Advisors' Blog

In 2023, the SEC Staff was asked about the application of the first Form 10-K clawbacks checkbox when a company is required to restate interim results. The Staff informally commented that if financial statements included in the 10-K are not required to disclose the correction of an error because the error only existed in interim periods, it would not object to an issuer’s decision not to check the box on the Form 10-K. This Weil proxy season alert has this important reminder that the SEC’s guidance noted that Item 402(w) disclosures may still be required in this situation:

Item 402(w) of Regulation S-K requires proxy disclosure concerning a company’s action to recover erroneously awarded incentive-based compensation in proxy and information statements in which Item 402 compensation disclosure is required . . .

Companies should take note that the SEC Staff confirmed through informal guidance that while the 10-K checkbox does not need to be checked as a result of material corrections to interim financial statements where annual periods are not affected by the errors, companies must still provide the disclosures required by Item 402(w). This suggests the possibility that a correction of interim financials could be an accounting restatement that could require a clawback if, for example, incentive-based compensation is based on interim period financial results.

This brought to mind the “1st half/2nd half” annual incentive plans adopted in response to COVID-19 uncertainty. Some companies may have continued that approach.

– Meredith Ervine