SEC Maintains That Shareholder Proposal to Adopt Bonus Clawback Policy for Senior Executives May Not Be Omitted
 
January 28, 2008
 

In a SEC No-Action Letter, available January 3, 2008, the SEC stated that the registrant may not omit from proxy materials for its upcoming annual meeting a shareholder proposal that the board adopt a bylaw or policy to enable the company to recoup all unearned incentive bonuses to senior executives whose performance targets were later determined to have been missed. The proposal requested that the board “adopt a bylaw to enable [the company] to recoup all unearned incentive bonuses or other incentive payments to all senior executives to the extent that their corresponding performance targets were later reasonably determined to have not been achieved or resulted from an error.” The shareholder proposal requested that the provision be adopted as a bylaw unless such a bylaw format is absolutely impossible in which case the provision would be adopted as a policy.

Counsel for the registrant argued that the proposal could be excluded under Rule 14a-8(i)(6) of the Securities Exchange Act of 1934 because the company lacks the power or authority to implement the proposal. They argued that while the company could develop and adopt a bylaw addressing this issue, “corporate bylaws do not operate to establish rights as between corporations and third parties” and that whether adopted as a bylaw or policy it could not be implemented by the company without the agreement of affected executives. In addition, counsel urged the SEC to permit exclusion under Rule 14a-8(i)(3) because it is materially false and misleading.

Pursuant to the No-Action letter, the SEC staff said that it did not concur in counsel’s view that the proposal could be omitted in reliance on Rule 14a-8(i)(3) as materially misleading, or Rule 14a-8(i)(6) as beyond the company’s power to implement.

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