Daily Archives: Wednesday, September 28, 2022

Clawback Policies: Evolving Market Norms and SEC Rules

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS Corporate Solutions publication by Jun Frank, Managing Director, Advisory, and Paul Hodgson, Senior Editor, at ISS Corporate Solutions.

Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse M. Fried.

Key Takeaways

  • SEC expected to release revised rules on clawback policies in October
  • Comments focused on how to categorize restatements based on impact
  • Clawback policies are already the market norm in most industries
  • Health Care has one of the lowest adoption rates for clawback policies
  • New rules may prompt companies to re-examine the scope of their policies

The Securities and Exchange Commission is poised to revise its rules on so-called clawbacks: the process of recovering incentive compensation from current and former executives when a company is forced to make a material restatement of its accounts. With a target of releasing its revisions in October, the SEC has twice reopened public comment periods on proposals that it first advanced in 2015 to implement part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulator also added 10 new policy questions along with a memorandum that addressed two matters: the voluntary adoption of clawback policies by companies and whether clawbacks should apply to restatements of lesser significance, known as “little r,” as well as those that have a meaningful material impact “Big R.”


The Market for Corporate Criminals

Andrew Jennings is an Assistant Professor of Law at Brooklyn Law School. This post is based on his recent paper, forthcoming in the Yale Journal on Regulation.

There’s a problem at the intersection of M&A and corporate crime. The problem arises from buyers’ acquisition of not just targets’ private assets and liabilities but also their criminal and regulatory (i.e., quasi-criminal) liabilities. That is, if A commits a criminal offense, and if B acquires A, B is liable for A’s offense despite being uninvolved in its commission. In the case of tort or contract claims, successor liability can be justified as preventing firms from evading private obligations through restructuring. In arm’s-length transactions, buyers can manage private successor liability through contractual terms that reallocate those costs and risks onto sellers. In the case of successor liability for criminal offenses, however, the serious non-financial consequences of criminal conviction (or even potential conviction) cannot be neatly managed through contractual risk allocation. Instead, distinctive consequences of criminal liability could frighten potential buyers away from otherwise-attractive deals. The result would be a suboptimal level of M&A activity: firms that would be ideal targets for acquisition but for their criminal exposure might sell for less efficient prices or to less efficient buyers, or they might not sell at all. As a result, this problem could represent social cost in that one of corporate law’s key mechanisms for addressing business deficiencies—the market for corporate control—might fail when the deficiency in question is a culture of lawbreaking.

The acquisition of Bankrate—a once-public financial firm—by Red Ventures—a private marketing company—is an instructive example. In 2012, the SEC raised concerns with Bankrate about its financial reporting, leading to the discovery that its CFO had engaged in a form of securities fraud known as a cookie-jar accounting. In 2017, Red Ventures, although it was aware of the accounting issues, bought Bankrate for approximately $1.4 billion. The investigation continued and later that year Red Ventures and the DOJ entered into a non-prosecution agreement (NPA). Under the NPA, the DOJ acknowledged that “Red Ventures acquired Bankrate, Inc. after the criminal conduct had taken place and had been investigated by the government, and Red Ventures had no involvement in any of the misconduct . . .”. Nevertheless, Red Ventures “admit[ted], accept[ed], and acknowledge[d] that it [wa]s responsible under United States law for the acts of [Bankrate’s former] officers, directors, employees, and agents” in connection with the old CFO’s fraud.