Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Sarbanes-Oxley requires executives to reimburse their public company employers for bonuses and profits realized from the sale of company stock for the 12 month period following the filing of a false financial report that requires a financial statement restatement.  The recent Second Circuit Court of Appeals DHB Industries, Inc. case involved executives who had realized gains as a result of the filing of such financial reports.  The twist in this case was that the executives, through the use of an indemnification agreement, attempted to contractually shift the entire burden of this clawback provision back to the company.  In other words, although the executives were technically and legally still subject to the clawback, they would look to the company to reimburse them for such amounts.   The Second Circuit Court of Appeals held that it was a violation of Sarbanes-Oxley to do so because each executive, “individually, would suffer no penalty at all.”

The Dodd-Frank Act also contains a clawback provision that, when adopted, will require that a public company recover any excess incentive-based compensation from any current or former executive officer who received such incentive-based compensation in the three preceding years if an accounting restatement for such company is prepared.  Although not legally binding precedent (at least yet), the DHB Industries, Inc. case strongly suggests that executives should have no expectation that they will be able to look to their employers (probably former employers by this point) to make them whole for any clawbacks they made be required to pay personally.