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

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- 2 - 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
- 3 - are subject to recoupment. It is significant to note the absolute-liability nature of these provisions in that there is no misconduct requirement for the DFW clawbacks to be triggered. DFW measures apply in addition to the already in place SOX provisions discussed above, yet they are in one aspect narrower: DFW clawbacks only apply to the excessive portion of the award that was received by the executive based on inaccurate financial results, whereas, under the SOX, the entire payment may be subject to forfeiture. This is probably an appropriate policy choice in light of the no-fault nature of DFW clawbacks. Also unlike SOX, which tasks the SEC with enforcing the clawbacks by litigation, the DFW provisions are required to be enforced by the issuer, who should disclose its policies for doing so as part of its securities reporting requirements. 3 3. FINANCIAL STABILITY BOARD (“FSB”) PRINCIPLES AND CANADIAN ADVISORY POLICIES The FSB is an international organization co-ordinating national financial authorities of countries such as the U.S., and Canada. Bank of Canada, OSFI and the Federal Ministry of Finance are members of FSB, which has issued FSB Principles for Sound Compensation Practices – Implementation Standards. The Principles espouse the basic notion that executive incentives based on inaccurate financial results that are subsequently subject to downward revision should trigger some form of recoupment or clawback mechanism. Further, unvested portions of deferred compensation should also be clawed back based on the actual performance of the business in the year of vesting. There are no regulatory or statutorily mandated clawbacks in Canada. However, Canadian issuers which are subject to SEC listing requirements are subject to clawback provisions, and clawbacks following the general guidelines of FSB Principles are recommended by OSFI as a best practice to the Canadian financial institutions that it 2 Ibid 3 Ibid
Page 1 and 2: Strategies for Executive Compensati
Page 3 and 4: April 10, 2012 Strategies for Execu
Page 5 and 6: Incentive And Stock Compensation Ar
Page 7 and 8: Types of Private Equity Transaction
Page 9 and 10: Participation of Target/Portfolio C
Page 11 and 12: Exit Strategies and Investment Hori
Page 13 and 14: Key Design Considerations and Commo
Page 15 and 16: Stock Options - Rules for Canadian-
Page 17 and 18: Stock Options - Rules for Canadian-
Page 19 and 20: Share Purchase Loans • Management
Page 21 and 22: Cash-Based Long-Term Incentive Plan
Page 23 and 24: Cash-Based Long-Term Incentive Plan
Page 25 and 26: Non-Portfolio Company Incentives (c
Page 27 and 28: Acquirer (Buyer) Priorities in a Co
Page 29 and 30: Program Treatment - Equity Compensa
Page 31 and 32: Dollar Amount Converted to RSUs/DSU
Page 33 and 34: U.S. Statutory Clawbacks (cont’d)
Page 35 and 36: Type and Relative Prevalence of Cla
Page 37 and 38: Potential Tax Relief for Later Year
Page 39 and 40: Conclusion • Clawbacks in Canada
Page 41: Long Term Incentive Plan Clawbacks:
Page 45 and 46: - 5 - U.S., a wide range of incenti
Page 47 and 48: - 7 - review our policy to assure t
Page 49 and 50: - 9 - Cash and Earnings Bonus Unit
Page 51 and 52: - 11 - underway or contemplated at
Page 53 and 54: - 13 - operate, the terminated part
Page 55 and 56: - 15 - use of the provision where a
Page 57 and 58: - 17 - interest paid or payable the
Page 59 and 60: - 19 - right is to postpone tax pay
Page 61 and 62: - 21 - taxpayer under subsection 7(
Page 63 and 64: Bill Sutherland Bill is a Senior Co

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