A recent ruling by a U.S. District Court judge in New Jersey found that former Hertz CEO will not be required to payback incentive compensation that the company asserted should be recouped after discovering accounting errors from 2011-2013 which resulted in restating financial restatements. A recent Westlaw piece reviews the legal findings and notes practical implications for employers to consider related to recovering compensation.
The CEO was terminated without cause, in part, for “setting a tone at the top” that created a culture resulting in inappropriate accounting practices. The CEO received a separation agreement in 2014 that included severance payments and other benefits, but Hertz alleged the former CEO breached standalone clawback policies, breached the separation contract (including clawback provisions) and violated company policies in the Standards of Business Conduct.
The Court found “holes” in Hertz’s arguments concerning the clawback policies and contracts citing that neither were standalone contracts and, as a result, were not enforceable under New Jersey state contract law. Specifically, the Court determined that the contracts lacked “mutual agreement and an intent to promise” of material agreement terms.
- Clawback policies referenced language that indicated each incentive award agreement or other document would include a provision to the clawback policy which the Court considered to be “an acknowledgement that the clawback policies lack material terms unless incorporated into relevant agreements.”
- Standards of Business Conduct under New Jersey state law are not enforceable as a standalone agreement due to their vague nature creating uncertainty with “what each party has promised to do.” Additionally, the Court pointed out that Hertz did not inform the CEO of which provisions were violated.
- The Separation Agreement quite possibly may have held up in state law had Hertz not taken some conflicting positions in their arguments. Ultimately, the contract was not affirmed and therefore no damages - in terms of recoupment - could be sought.
Employers should have a strong understanding of the contract law in each state and consider the following:
- Acknowledgement of clawback policies. Executives should sign an affirmation that they have received the policy, understand the terms and agree to abide by the policy.
- Equity and other incentive compensation agreements should include a clause that all awards are subject to the clawback policy which is acknowledged by the executive.
- Separation agreements should state that incentive compensation will continue to be subject to the clawback policies and will apply regardless of misconduct by the executive.
As previously highlighted, companies will have until December 1, 2023 to adopt clawback policies that are in compliance with the SEC’s new regulations.