Cross-Listed Canadian Issuers May Face Clawback Requirements

Last month, the U. S. Securities and Exchange Commission (SEC) proposed rules (Proposal) directing U.S. securities exchanges and associations to require companies to adopt clawback policies that would mandate executive officers to repay erroneously awarded incentive-based compensation. The Proposal reflects implementation of provisions of the The Dodd-Frank Wall Street Reform and Consumer Protection Act.
This change will affect Canadian issuers that are cross-listed on a U.S. exchange, including Multijurisdictional Disclosure System (MJDS) filers. The change is in addition to provisions relating to clawbacks currently applicable to such issuers pursuant to the U.S. Sarbanes-Oxley Act of 2002 (SOX).  Unlike SOX, the Proposal extends to all current and former executives (rather than simply the CEO and CFO) over a “look-back period” of three years (rather than 12 months). The Proposal also requires the triggering of a clawback strictly on the basis that a company has prepared an accounting restatement to correct a material error, rather than on the basis of CEO or CFO misconduct as under SOX; that is to say, recovery will be required on a “no fault” basis, without regard for any executive’s responsibility in overseeing the preparation of erroneous financial statements.
Under the Proposal, the amount subject to a clawback is the excess of what would have been granted, vested or paid based on the restated financial statements. For example, so long as the basis for each type of compensation was based wholly or in part on satisfying a financial reporting measure performance goal, the Proposal contemplates recovery of the following: 
  • Non-equity incentive plan awards
  • Restricted stock units (RSU)
  • Performance stock units (PSU)
  • Stock options
  • Proceeds received upon the sale of shares acquired through an incentive plan
Unlike SOX, under which the SEC recovers the clawback amounts, the Proposal imposes an obligation on issuers to create and publicly disclose the terms of a clawback policy, pursuant to which they would seek recovery. 
The Proposal will supplement existing disclosure requirements for those Canadian cross-listed issuers required to file annual reports with the SEC. It obligates such issuers to publicly file clawback policies as an exhibit to their annual reports. Beyond this filing obligation, the Proposal will require Canadian cross-listed issuers to disclose particulars relating to a restatement if, at any time during the last completed fiscal year, either:
  • A restatement that required recovery of excess incentive-based compensation pursuant to the issuer’s clawback policy was completed; or
  • There was an outstanding balance of excess incentive-based compensation from the application of their clawback policy to a prior restatement. 
There is no generally applicable Canadian requirement to impose clawback provisions, pursuant to legislation, securities commission rules or TSX requirements, nor are there any proposals to do so. However, Canadian public companies are required to disclose, if applicable, any “policies and decisions about the adjustment or recovery of awards, earnings, payments or payables if the performance goal or similar condition on which they are based are restated or adjusted to reduce the award, earning, payment or payable.”
Despite the absence of a clawback requirement applicable generally to Canadian public companies, a number of influential Canadian investor organizations, shareholder service providers and institutional investors have published recommendations and guidelines relating to clawback provisions. These guidelines typically encourage Canadian companies to consider introducing clawback policies as a best practice.
Notwithstanding the fact that Canadian companies are not generally required to impose clawbacks, the prevalence of such provisions has continued to increase over the past several years.
Approximately 87 per cent of S&P/TSX 60 Index companies — typically the forerunner of corporate governance practices — disclosed in their most recent information circulars that they have clawback policies in place. Due to their voluntary nature, these issuers have the flexibility to design clawback policies in view of their individual circumstances and objectives. However, cross-listed issuers that will become subject to the Proposal’s requirements may have to revise their policies — among other things, removing misconduct as a requirement for a clawback, such that a restatement of financial statements will be the single triggering condition. 
For detailed information on the status of clawback policies in the Canadian market, please see our January 2014 Blakes Bulletin: Canadian Clawbacks: Increasing but still Voluntary
The comment period for the Proposal will end on August 30, 2015. The SEC has proposed that the U.S. stock exchanges file the proposed listing rules to implement the clawback reform no later than 90 days following publication of the final version of the Proposal. Companies affected by the rules, including Canadian cross-listed issuers, would be required to adopt compliant clawback policies no later than 60 days after the date on which the relevant stock exchanges’ rules come into effect.
If the Proposal comes into effect in substantially the same form, Canadian cross-listed issuers that do not have clawback policies in place will have to introduce such policies, while Canadian cross-listed issuers that do have clawback policies will have to ensure that such policies are compliant, which may, in certain cases as noted above, require significant amendments to existing policies. In this regard, our review indicates that only 25 per cent of S&P/TSX 60 companies have clawback policies that are compliant with the terms of the Proposal (i.e. require that a clawback is triggered on the sole basis that an issuer has restated its financial statements to correct a material error).
For further information, please contact:
John Tuzyk           416-863-2918​
Georgia Brown     ​416-863-4244
or any other member of our Capital Markets group.

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