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Compensation Clawback Attempts and Unanticipated Outcomes

Fulcrum Partners Executive Benefits News

The following article, originally published on the Executive Compensation Blog by Attorney Michael S. Melbinger, is republished here with permission. 

 

Compensation Clawback Attempts Lead to Unintended Consequences

 

Just back from another excellent CompensationStandards.com/NASPP* Annual Conference. Among the many new and interesting topics explored was an issue related to compensation clawbacks, which recently has been thrust into prominence. 

The issue whether a company’s indemnification provisions would require it to reimburse a covered executive for (i) compensation amounts clawed back and/or (ii) the costs of defending against the company’s lawsuit against the executive attempting to clawback the compensation.

In one ongoing case, after the company filed a lawsuit seeking a clawback, the former corporate officers responded by seeking advancement of legal fees and indemnification. The company’s bylaws provide that legal fees are advanced to former corporate officers when a claim related to actions taken in their official corporate capacity is brought. The company’s compensation clawback provision was silent on the matter of advancement of fees.

Despite the company’s best efforts to raise policy objections in response to the advancement issue raised by the defendants, the court awarded legal fee advancement to the former executives. A court has yet to issue a ruling on whether the company is entitled to clawback the former executives’ compensation. If that decision comes out in favor of the company, the officers could be required to pay back the legal fees that were advanced, but even that is uncertain.

Delaware courts recognize advancement of legal fees and indemnification as two distinct principles. An executive does not have to prove he or she ultimately will be entitled to indemnification in order to be granted an advance. Additionally, Delaware courts have upheld the advancement of expenses in cases where executives were accused of fraud or other serious misconduct (including conduct that wrongfully led to an increase in their compensation). Currently, however, there does not seem to be a published Delaware opinion that specifically addresses indemnification and advancement rights in the context of a clawback claim.

Another interesting issue that is developing is whether companies should in fact steer the executives into the indemnification and advancement of legal fees approach, instead of allowing them to file claims against the company’s directors and officers (D&O) liability insurance policy. A number of arguments are put forth in support of this approach including the fact that D&O insurance policies generally provide a limited amount of coverage and a company is better served by preserving that available coverage for directors and officers not accused of misconduct.

Related: 

#FulcrumPartners #DeferredCompensationNews #ExecutiveCompensation #clawback 

*National Association of Stock Plan Professionals

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