I know that the compensation clawback provisions of Dodd-Frank Act 954 will not apply for a couple years, but this subject was on my mind. Before the ink is even dry on your new compensation clawback policy and the proxy statement disclosure of same, you may need to be thinking about the future sources of litigation under the policy. Like SOX Section 304 before it, the Dodd-Frank Act clawback provisions do not create a private right of action for stockholders. However, you can bet that the plaintiffs’ bar will test in court whether the same is true for Dodd-Frank. Many other statutes do not provide for a private right of action, yet the strike suit lawyers file suits anyway (see, e.g., FCPA).
What are the likely sources of litigation over compensation clawbacks? Well, for starters, there is:
- Litigation with the SEC
- Litigation by shareholders
- Litigation by executives
- Litigation with whistleblowers
- Litigation with D&O insurers
- Litigation with IRS
I am willing to bet my life that after the rules are effective, a company files a restatement of its financials and claws back some compensation, the strike suit action lawyers will file lawsuits against the company and its board members, ostensibly on behalf of shareholders, alleging that the directors and the company did not clawback enough compensation and, thus, breached their fiduciary duty to shareholders and breached the terms of their written clawback policy. The lawyers also might allege that a larger clawback would have been possible except that the company poorly drafted its clawback policy or poorly drafted its incentive plan, award, and other compensation agreements.
I will be discussing compensation clawbacks and the new SEC rules on a panel “Creating Effective Clawbacks (& Disclosures)” at the upcoming Proxy Disclosure/Say-on-Pay Conferences on October 27-28 in San Diego (and via Live Nationwide Video Webcast). Hope to see you all there.