As public corporations adopt clawback policies for incentive payments before the December 1, 2023 deadline in adherence to the NASDAQ and NYSE listing requirements following implementation of SEC Rule 10D-1, a recent Federal case in New Jersey offers a cautionary tale.

This past June, a New Jersey Federal District Court granted partial summary judgment for the defendant executive, the former CEO, who was being sued by Hertz for breach of multiple contracts. The Hertz Corp. v. Frissora, No. 19cv08927, 2023 WL 4173031, at *1-12 (D. N.J. June 26, 2023). Hertz’s former CEO allegedly pressured employees to apply improper methodologies to determine allowances and write-offs for aged receivables that favorably impacted the financial statements. From February 2012 through March 2014, Hertz’s financial statements materially misstated pre-tax income, and because of these accounting errors, in July 2015, Hertz restated such financial statements. For this misconduct, in 2019, Hertz sought to reclaim incentive compensation paid to the former CEO under Hertz’s clawback policy.

Hertz argued that its clawback policy was incorporated by reference into the former CEO’s agreements with Hertz. However, due to certain procedural mishaps and contradicting oral arguments as to the relief sought by Hertz and on what grounds, the court’s rulings only left Hertz with a single path to win — to prove that the clawback policy could be enforced as a stand-alone contract. The court held that the clawback policy was not a stand-alone contract for lack of an offer and meeting of the minds as such policy was merely an administrative mechanism unsigned by executives.

Hertz then sought refuge in its standards of conduct by seeking to link the executive’s failure to abide by the provisions within the clawback policy. However, by applying Delaware and New Jersey case law, the court held that aspirational language alone in employee standards of conduct is not enough to create a binding contract.

While this case is likely to be only persuasive authority for most corporations, public corporations should observe the following best practices with respect to their clawback policies:

• Understand the rules of each relevant state’s contract law.
• Adopt a stand-alone clawback policy that requires a signed acknowledgment by executives subject to such policy.
• Confirm that the clawback policy and separate acknowledgment use language that is final, binding, and conclusive (and not aspirational as alleged in Hertz).
• Ensure that executives separately sign such acknowledgment affirming that they have received a copy of the clawback policy and that they understand the terms of such policy.
• Include a provision in equity award agreements, equity plans, or other incentive compensation plans that such incentive compensation is subject to the clawback policy.
• Confirm that severance agreements, separation agreements, or similar agreements include a provision that the incentive compensation continues to be subject to the clawback policy.