Strategies for Executive Compensation: Design and Tax Issues for a ...

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equity compensation. Triggers range from fraudulent misconduct to bad faith behaviour
and even the mere occurrence of a negative restatement of financial results.
2. U.S. STATUTORY CLAWBACKS
Specific types of clawbacks are statutorily mandated under the U.S. Sarbanes-Oxley
Act of 2002 (“SOX”), and Dodd-Frank Wall Street Reform and Consumer Protection Act
(“DFW”). These measures are relevant for Canadian corporations which are foreign
private issuers under U.S. securities laws. These provisions are also of more general
interest since the concepts introduced and developed in the U.S. statutory clawbacks
are widely adopted by both US and Canadian issuers in drafting their contractual
clawback policies.
The clawback provisions in SOX adopted the basic notion, incorporated in most current
clawback policies, that executive bonuses based on materially inaccurate financial
results that are subsequently subject to a negative revision should be forfeited. The
forfeiture, or clawback, is conditioned on a finding of executive misconduct that has
resulted in the material non-compliance in the financial results. These provisions apply
to any incentive payments, covering both cash and equity awards, in the one-year
period following the issue of the financial results that later had to be restated. The
clawback is mandatory for U.S. public companies but only applies to the CEO and the
CFO. However, the misconduct required to trigger the provision is not required to be
that of the CEO or the CFO. 2
The DFW introduced ‘bigger and better’ clawbacks that apply in a wider set of
circumstances to a wider base of employees. Under these provisions, any material
non-compliance with reporting requirements that necessitates a restatement of financial
results triggers a clawback mechanism that applies to incentive awards received by all
current or former executives. There is a three year look-back period, which means that
incentive awards handed out during the three years preceding the date of restatement
1 J. Tuzyk, Blakes Bulletin on Securities “Clawbacks Coming to Canada”, November 2011, available at
http://www.blakes.com/english/view_bulletin.aspID=5026