With the final rules having been issued by the U.S. Securities and Exchange Commission, US stock exchanges will have to set listing standards requiring listed companies to adopt a clawback policy that provides for the recovery of erroneously awarded incentive-based compensation from former and current executive officers – known as US Clawback Rules. The SEC has also informally provided more guidance on the timing of the US Clawback Rules. Although the effective date of the US Clawback Rules is not yet certain, companies should prepare to have a final clawback policy ready for adoption by early August 2023. In this article, we describe the Dutch law considerations that US-listed Dutch companies should take into account when implementing the US Clawback Rules.
Compliance with the SEC's final rules
On 26 October 2022, the U.S. Securities and Exchange Commission (SEC) adopted final rules (Final Rules) directing US stock exchanges - such as the NYSE and Nasdaq - to establish listing standards (Listing Standards) that require listed companies to adopt a clawback policy that provides for the recovery of erroneously awarded incentive-based compensation from former and current executive officers (the US Clawback Rules). The Final Rules generally apply to all issuers on US stock exchanges, including foreign private issuers on the NYSE and Nasdaq. Because US-listed Dutch companies typically qualify as foreign private issuers, the Final Rules also apply to these Dutch companies. A company may be subject to delisting if it does not adopt a clawback policy that complies with the applicable Listing Standards.
Mandatory recovery of incentive-based compensation
The Final Rules require listed companies to adopt and comply with a written clawback policy mandating the recovery of erroneously awarded incentive-based compensation during a three-year period before the date on which the company is required to prepare the accounting restatement from which the undue nature of the relevant incentive-based compensation results. The Final Rules provide limited "impracticability" exceptions to the company's obligation to enforce its clawback policy.
In the Final Rules, "incentive-based compensation" is defined as 'any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any financial reporting measure'. Financial reporting measures include both US GAAP and non-US GAAP financial measures. Financial measures also include measures linked to share price and total shareholder return.
The Final Rules broadly define "executive officer". Under the Final Rules, the executive officers of a domestic issuer include the issuer's president, principal financial officer, principal accounting officer (or, if there is no such officer, the controller), any vice-president of the issuer in charge of a principal business unit, division or function (such as sales, administration, or finance), and any other person who performs a policy-making function.
The executive officers of a US-listed Dutch company typically consist of either the members of the company's management board (two-tier board structure) or the company's executive directors (one-tier board). However, depending on the company's governance structure other individuals may also qualify as executive officers for purposes of the US Clawback Rules, such as members of an Executive Committee. From a Dutch law context, two categories of executive officers can be distinguished:
Recovery of incentive-based compensation under Dutch law
The categorisation above (of executive officers) is important to determine which recovery regime applies under Dutch law. This is so because executive officers in Category A are subject to a specific corporate law regime, while executive officers in Category B are subject to the general Dutch civil law regime on undue payments (onverschuldigde betaling).
Recovery from executive officers in Category A; specific corporate law regime for clawback
Dutch corporate law provides an express basis for Dutch NVs to recover "bonuses" from management board members and executive directors (article 2:135 (8) Dutch Civil Code). A bonus can be recovered if the payment of that bonus was based on incorrect information about: (i) the achievement of the financial or non-financial objectives underlying the bonus, or (ii) the circumstances on which the bonus is conditional. The company may initiate the recovery of incentive-based compensation even if the company or executive officer is not at fault.
Under the Dutch corporate law regime, a "bonus" refers to variable remuneration that depends on the attainment (in whole or in part) of certain objectives or the occurrence of certain circumstances. Because of this broad definition, a bonus also includes incentive-based compensation subject to recovery under the US Clawback Rules. This means that the clawback obligations can be enforced through the Dutch recovery regime that applies to executive officers in Category A.
Recovery from executive officers in Category B; general civil law regime on undue payments
Absent a specific recovery regime with respect to executive officers in Category B, the company will have to revert to the general Dutch regime on undue payments (article 6:203 DCC) to recover incentive-based compensation from executive officers who are not management board members or executive directors. The company may rely on this regime because the payment of erroneously awarded incentive-based compensation lacks a legal basis. These payments will qualify as undue payments for Dutch law purposes. The company may initiate the recovery of incentive-based compensation even if the company or executive officer is not at fault.
Clawback obligations for executive officers in Category B can be enforced through the general Dutch regime on undue payments. However, the recovery of erroneously awarded incentive-based compensation from executive officers in Category B will only be exclusively subject to Dutch law if the relevant executive officer's employment or services agreement is governed by Dutch law.
Incidentally, the general regime on undue payments may also be invoked as a backstop to recover erroneously awarded incentive-based compensation from executive officers in Category A.
Does the implementation of the clawback policy require shareholder approval or an amendment to the company's remuneration policy?
Dutch law does not require the clawback policy to be approved or adopted by the company's general meeting. Dutch law also does not require the statutory clawback remedies to be set forth in the company's remuneration policy in order to be invoked.
Dutch law imposes only one requirement on a specific group of listed companies: companies whose shares are also admitted to trading on a regulated market within the meaning of article 1:1 of the Financial Supervision Act must provide in their remuneration policy a description of the possibilities to recover remuneration from executive officers in Category A. However, this requirement has already been in place for several years; the remuneration policies of these dual-listed companies will therefore contain that description. Since the US Clawback Rules do not change the possibilities of recovering remuneration, they do not require that the remuneration policy be adjusted. But even if such an amendment were necessary, the absence of the clawback description would not prevent the actual recovery of incentive-based compensation.