Background
On October 26, 2022, the SEC adopted final clawback rules consistent with the requirements of the Dodd-Frank Act. The new rules direct the national securities exchanges to establish listing standards requiring companies to adopt, disclose, and enforce policies to recoup, or “clawback,” incentive-based compensation erroneously awarded to executive officers. Based upon recent SEC action, listed companies will have until December 1, 2023 to adopt compliant clawback policies. The following summarizes some key provisions of the final rules and the decisions that companies will have to make as they finalize their policies by the deadline.
Adopting Compliant Policies
Companies that do not have existing clawback provisions in place must adopt policies that comply with the standards established by the exchanges. Companies that have clawback provisions in place must determine if and how those policies differ from what is required and either modify their existing policies or adopt a new compliant policy on a stand-alone basis. Questions to help integrate or create compliant policies include:
Boards of directors have a lot – maybe too much – to do. Subjects long believed to be the province of management are now viewed as being in the board’s wheelhouse, and when a problem arises with respect to any of those subjects, the first question asked by investors, regulators, the media, and others is often “where was the board?” So it is with a degree of reluctance that I am writing to suggest another subject that I believe boards need to address.
Since the 1980s, Section 102(b)(7) of the Delaware General Corporation Law (the “DGCL”) has enabled Delaware corporations to provide exculpation from breaches of the fiduciary duty of care to directors – but not officers – in certain circumstances. Officers can now come in from the cold, as Section 102(b)(7) has now been amended to provide similar protection for certain officers. Specifically, the amendments, which became effective on August 1, 2022, allow Delaware corporations to provide exculpation from breaches of the duty of care to specified officers in certain circumstances. The new provisions allow a qualifying officer to be exculpated from such claims made directly by stockholders but do not provide relief in connection with other fiduciary duties, derivative actions, or actions brought by a corporation’s board against its officers.
I have long thought that the SEC is among the best, if not the best, government agency. Over the years, I’ve worked with and gotten to know many folks on the SEC’s staff, who have consistently impressed me as bright, hard-working, serious about the SEC’s mission, and very nice people. I am sure that most people on the staff continue to possess these and other great attributes.
I hope you will forgive me for this digression when there are so many things to talk about in our wacky worlds of securities law and corporate governance. However, though I am tempted to rant about the SEC’s proposals on climate change and cybersecurity disclosures, I’ll save that for another day. Today, I have decided to take a few minutes to reminisce about my encounters with Madeleine Albright, who died this week.
Remember those three monkeys – see no evil, hear no evil, speak no evil? Well, that’s kind of how the SEC views the internet and social media.