On 9 June 2023, the US Securities and Exchange Commission (SEC) approved the amended listing standards of NASDAQ and NYSE relating to clawbacks. The listing standards that have been approved took effect on 2 October 2023. Companies listed on these exchanges will have until 1 December 2023 to adopt clawback policies that provide for the recovery of erroneously awarded incentive-based compensation received by former and current executive officers on or after 2 October 2023 in connection with an accounting restatement.
The new clawback rules have a broad scope, encompassing all issuers listed on US stock exchanges, including foreign private issuers and emerging growth companies.
New rules and sanctions
As from 1 December 2023, all US-listed companies must:
- adopt and comply with a written policy to recover from current or former executive officers reasonably promptly erroneously awarded incentive-based compensation that was received during the three completed fiscal years immediately preceding the date that the issuer is required to prepare the accounting restatement;
- disclose the clawback policy, including by filing it as an exhibit to its annual report; and
- make various other disclosures in the event that a clawback is triggered under the policy.
Incentive-based compensation covers any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a financial reporting measure. Erroneously awarded incentive-based compensation is the incentive-based compensation received that exceeds the incentive-based compensation that would otherwise have been received had it been determined based on the restated amounts. Issuers are prohibited from indemnifying their executive officers against the loss of erroneously awarded compensation.
Subject to a cure period, failure to adopt and comply with a clawback policy that meets the relevant listing standards will result in delisting.
Under the new rules, executive officers include the issuer's president, principal financial officer, principal accounting officer (or if there is no such accounting officer, the controller), any vice-president in charge of a principal business unit, division, or function (e.g., sales, administration, or finance), any other officer who performs a policy-making function, and any other person who per-forms similar policy-making functions for the issuer.
Dutch clawback rules
Under Dutch company law, a public limited liability company (naamloze vennootschap: nv) may claw back a bonus from managing / executive directors if the payment of that bonus was based on incorrect information about the achievement of the objectives underlying the bonus or the circumstances on which the bonus was conditional.
In Dutch law, a bonus is defined as variable compensation that depends, in whole or in part, upon achieving specific objectives or the occurrence of certain circumstances. Given this broad definition, bonuses include incentive-based remuneration subject to recovery under the new US clawback rules.
Accordingly, for “executive officers” of a US-listed Dutch NV who are managing / executive directors the US clawback obligation can be enforced through the Dutch statutory clawback regime. For “executive officers” who are not managing / executive directors and whose services agreements are governed by Dutch law, the Dutch legal framework for undue payments may provide a basis for recovery required under the US clawback rules (to the extent such agreements are not updated to include an express clawback provision).
Besides drafting or adopting compliant clawback policies and ensuring that the committee charters or other relevant governing documents appropriately address the responsibility for determining the recovery process, all companies listed on US stock exchanges should examine their compensation agreements, equity plans and other incentive arrangements to see if amendments are required in light of the new clawback rules. Foreign private issuers will need to determine the covered group of executive officers. Furthermore, the requisite disclosures will need to be made. We will update this blog as soon as any new developments arise.