Corporate Governance

Shearman & Sterling 44 | Financial-Related Clawbacks FINANCIAL-RELATED CLAWBACKS It has been over two years since the SEC proposed rules to implement Section 954 of the Dodd-Frank Act, and final rules have yet to be promulgated. Proposed Exchange Act Rule 10D-1 would prohibit exchanges from listing any securities of a company that does not implement and disclose a policy requiring the recovery of excess incentive-based compensation received by an executive officer based on financial information that the company needs to correct by preparing an accounting restatement. Even without being required to do so, many of the largest U.S. public companies voluntarily maintain clawback policies. Proxy advisory groups strongly encourage public companies to adopt clawbacks as an element of sound corporate governance and risk mitigation. Issuer policies, however, are not uniform, and their application varies as to the events that trigger recovery, culpability standards, the individuals covered, the types of compensation subject to recovery, the level of board discretion as to whether to seek enforcement and the time period covered by the recovery policy. THE CLAWBACK PROPOSAL applies without regard to whether misconduct was a cause of the restatement 1 applies to almost all listed companies, including smaller reporting companies, emerging growth companies, controlled companies, foreign private issuers and issuers that only list debt 2 3 covers current and former employees who were "officers" under Section 16 of the Exchange Act during the relevant period 4 applies to incentive compensation based on, or derived from, financial information that must be reported under the securities laws, as well as on total shareholder return and stock price 5 exempts awards that vest solely on the basis of time, including time-vested options 6 recovers incentive-based compensation paid in excess of what would have been received had it been determined based on the restated financials 7 prohibits the indemnification of covered officers against the loss of any recovered compensation 8 requires the recovery policy be filed as an exhibit to the company's annual report 9 requires disclosure of actions taken pursuant to the policy in the company's proxy statement (or annual report if no proxy statement is required) 10 mandates delisting in the event a company fails to implement, disclose or adhere to its policy

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