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Hertz’s Quest for $70 Million in Clawbacks

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May 16, 2019 | Jennifer Namazi

Hertz’s Quest for $70 Million in Clawbacks

In what is considered a rare in the world of clawbacks to date, rental-car company, Hertz, made recent headlines when they filed a complaint seeking to recover $70 million in incentive payments to former top executives – including a former CEO, former CFO and former General Counsel. In addition, the company seeks $200 million in related damages – the damages that ensued as part of an SEC investigation and class-action and derivative lawsuits.

The core of Hertz’ complaint centers on the company’s restatement of three years-worth of financial statements. The company maintains that the executives named in the complaint violated their separation agreements when they represented that they had not engaged in conduct that was harmful to the company (all of them were part of the leadership during the years of financials that required subsequent restatement.) The company’s clawback policy allows for forfeiture or repayment of incentive compensation when the conditions of “willful gross neglect” or “willful gross misconduct” are met.

What’s particularly interesting about the Hertz case (which is still pending) is an argument that appears to have a new angle. The company suggests that the “tone at the top” of the organization represented a form of misconduct, and eventually led to negligence, which ultimately led to the company’s earning restatements and subsequent fallout. The “tone at the top” described in the complaint contains a laundry list of details – including the temperament and management style of the CEO.

The “tone at the top” concept is a novel one in considering clawbacks and raises key questions that should probably be considered in designing or updating a clawback policy. A Cleary Gottlieb blog “Hertz Pursues Novel Theory to Hold Former Management Team Personally Liable for Restatement and Ensuing Legal Proceedings” (David Lopez, Arthur H. Kohn & Margot G. Mooney – May 7, 2019) dives further into the “tone at the top” analysis and provides some key takeaways, including that “Having the wrong “tone at the top” could potentially lead to claims for gross negligence and resulting damages.”

The Hertz case still needs to play out, and it’s definitely one to keep on the radar in evaluating how executive leadership contributes to misconduct and in turn affects clawback potential.

Although proposed rules were released back in 2015, the SEC has yet to finalize clawback rules (a requirement under Dodd-Frank). Many companies implemented clawback policies post Dodd-Frank, but I’m guessing that most have not updated their policies for quite some time – likely in part due to the absence of final rules. Several recent corporate scandals seem to not meet the threshold for a “for cause” termination – which would allow boards to pursue recovery of executive pay. A Willis Towers Watson article “The reach and breadth of your clawback policy matters, research finds,” (Andy Goldstein and Steve Seelig, August 14, 2018) honed in on this point, and suggests that boards may want to take a closer look at clawback policies and contemplate how those policies would be implemented in real scenarios. The blog also evaluates some key questions that may arise during such a review. Now seems like it may be a good time to resurrect discussion around clawbacks and determine whether policy adjustments may need to be made, even as SEC rules are still pending.


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