Give it back! Issues for Canadian companies to consider now in light of pending U.S. compensation clawback rules to become effective later this year

Canadian issuers listed on a U.S. stock exchange must adopt or revise their policies and practices with respect to recoupment of incentive compensation from executive officers in light of new U.S. stock exchange listing requirements that will become effective later this year. Canadian issuers not listed on a U.S. stock exchange should consider whether to modify their approach and the terms of their existing clawback policies or practices in light of the pending rules.

The Clawback Rules will require substantially all issuers listed on a U.S. stock exchange to adopt a policy providing for the mandatory clawback of incentive compensation received by executives during the three-year period preceding the date that a financial statement restatement is required by the amount that the compensation actually received by the executives exceeds the amount the executives would have received based on the restated financial statements. The obligation to recoup compensation applies to an executive even if there was no misconduct or omission by the executive. The policy is required to be attached to the annual report filed by the issuer with the SEC. Should a financial restatement occur, the issuer is required to disclose how it has applied the policy to its executives, including the amounts it has recouped from them.

Amendments to the proposed stock exchange rule changes state that the new listing standards will become effective on October 2, 2023 (the Effective Date). Canadian issuers listed on a U.S. stock exchange will have 60 days from the Effective Date to comply with the new requirements and should therefore be prepared to comply with the requirements by December 1, 2023.

We expect the new stock exchange listing requirements will be implemented substantially as proposed and recommend all Canadian issuers listed on a U.S. stock exchange begin work now to be ready to comply by December 1, 2023. In particular:

• Any Canadian issuer listed on a U.S. stock exchange which has not adopted a policy for recoupment of incentive compensation in the event of a financial restatement will need to act promptly to adopt a policy.
• All Canadian issuers listed on a U.S. stock exchange that have recoupment policies will need to modify the terms of such policies to align with the new rules for determining when a clawback is triggered, when incentive compensation is received, and the period of time prior to a financial restatement to which recoupment will apply.
• Most Canadian issuers listed on a U.S. stock exchange will need to modify the terms of some of their equity incentive compensation plans, and some issuers will need to modify the terms of certain outstanding awards made to their executive officers under such plans.
• Canadian issuers subject to the Clawback Rules may consider revising the terms of their executive employment agreements to expressly permit compensation clawbacks.
• Canadian issuers subject to the Clawback Rules may wish to consider adopting changes to the design of their incentive compensation programs since the U.S. rules only apply where the granting, vesting or settlement of incentive compensation is based on financial measures, including stock price and total shareholder return, and do not apply to other incentive compensation arrangements.

Issuers that fail to comply with the Clawback Rules by adopting and disclosing a compliant clawback policy, or that fail to provide required periodic reporting about their compliance with such policies as required under the Clawback Rules, risk their securities being delisted from their U.S. stock exchange once the new rules are in effect.

Read the full Update posted on June 9, 2023