Clawback Updates: Freeze of Unvested Awards in the UK and Potential for Final Clawback Regulations in the US

What’s a company to do when engaged in an investigation that might result in the clawback of an executive’s awards?

Although a useful tool in recovering vested or paid awards, most stock plan professionals wince at the idea of having to undertake a clawback of already paid compensation. Why? Because it’s much harder to acquire something that has already been issued.

As such, when a company begins to investigate a matter that may lead to a clawback, what advance options are available? Recent actions in the United Kingdom by financial firm Barclays PLC might contain an answer, at least for UK companies.  

In late February, Barclays announced that they had “frozen” all unvested share awards for their former CEO. The reason for the freeze is an ongoing investigation into alleged connections between the former executive, Jes Stanley, and Jeffrey Epstein.

A vesting freeze means that should the investigation warrant a clawback of awards, it will be easy to simply cancel them. Some investigations can take months and placing a vest hold eliminates further issuances of awards during the investigation period.

Barclays is in the United Kingdom, and both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) expect certain companies to freeze award vesting for individuals who are undergoing an internal or external investigation that could result in performance adjustments, such as the application of malus and clawback. This point is covered in a recent Tapestry Alert, “Former CEO’s awards suspended, pending investigations.”

The Tapestry alert also points out that:

“It is widely accepted that malus (reducing or cancelling unvested or unpaid awards) is easier to enforce than clawback (recovering vested or paid awards). Where investigations are ongoing, suspending the vesting of awards is a useful way to extend the period during which malus can be operated. Companies could also extend the applicable clawback period in these circumstances, where necessary.

Companies should ensure they have a clear and robust contractual basis to suspend the vesting of awards and extend clawback periods in these circumstances. This can be achieved through carefully drafted “investigation provisions” in share plan rules and malus and clawback policies.”

Proposed clawback regulations in the U.S. may become final in 2022

In the U.S., expectations for clawbacks are a different story. For one thing, there is currently no regulation that dictates a freeze of unvested compensation during an investigation. In fact, implementing clawback regulations in general have been on the SEC’s rulemaking agenda for years.

In a move that suggests final rules may come in 2022, the SEC recently re-opened comments on proposed clawback rules that date back to 2015. Subsequent to that, the SEC modified it's draft regulations, broadening the proposal. 

While awaiting final clawback guidance (which we've been doing for years now), companies can proactively consider the impact and timelines of pending investigations when drafting or modifying their clawback policies.

In the U.S., law firm Sherman & Sterling offers a Clawback Policy Considerations Checklist, a good starting point for companies to implement or evaluate clawback related policies and procedures.

A recent Skadden article explains the status of clawback rulemaking in the US. It’s possible, but not certain, that regulations may finalized in 2022.

In the meantime, Skadden suggests that “companies may want to use this opportunity to review their existing clawback policy (or adopt a new policy, as necessary) and should continue to monitor developments with respect to the finalization of the clawback rules.”