Canada: Canadian Clawbacks: Increasing But Still Voluntary

"Clawbacks" are arrangements under which an employee forfeits previously awarded compensation, usually either as a result of a misstatement of the employer's financial statements, misconduct or "bad behaviour" of the employee or, more commonly, a combination of both. Clawback mechanisms can be used to cancel unvested awards or recoup proceeds from vested awards and can apply to various types of compensation, such as annual bonuses or longer term equity or non-equity awards. For a more extensive discussion of the types and forms of clawbacks, and considerations relating to adopting clawback policies, see our previous

Blakes Bulletin: Clawbacks Coming to Canada?


While Canadian laws and stock exchange requirements do not subject Canadian public companies to clawback provisions or require them to have clawback policies, Canadian companies that are subject to Securities and Exchange Commission (SEC) or U.S. listing requirements are subject to the provisions of the Sarbanes-Oxley Act (SOX) that provide for clawbacks. SOX provides for recoupment of CEO or CFO compensation in circumstances where the issuer is required to prepare an accounting restatement due to material non-compliance with financial reporting requirements where such non-compliance results from misconduct. The recovery of compensation is effected through an action brought by the SEC and applies to any bonus or other incentive-based compensation and any profits realized from sale of securities of the issuer during the 12-month period following the issue of misstated financial statements. It has been reported that, since 2007, the SEC has demanded forfeiture of compensation pursuant to these provisions for just 31 companies, of which 13 have been in the past three years. Executive pay has been returned in only seven of these to date.

In addition to the SOX provisions, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) introduced requirements for clawback provisions for U.S. issuers by requiring the SEC to direct U.S. national securities exchanges and securities associations to prohibit listing issuers that fail to develop and implement the compensation clawback policies mandated by Dodd-Frank. Notably, the Dodd-Frank-mandated clawbacks will apply to all current and former executive officers of the issuer – versus only the CEO and CFO under SOX – and misconduct is not a condition for clawbacks to apply. They are solely triggered by a restatement of financial statements. The Dodd-Frank provisions are to be implemented through an SEC direction to U.S. stock exchanges to require listed companies to adopt the Dodd-Frank clawback provisions; however, as these requirements are not yet finalized, the Dodd-Frank clawback provisions are not currently in effect.


As noted, Canadian legal and stock exchange requirements do not subject Canadian public companies to clawback provisions. However, under Form 51-102F6 pursuant to National Instrument 51-102 Continuous Disclosure Obligations, relating to executive compensation disclosure, Canadian reporting issuers are required to disclose 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." As such, to the extent that Canadian companies adopt or are subject to clawbacks, they are required to make disclosure in that regard.

The Canadian Coalition for Good Governance (CCGG), an organization representing institutional investors and asset managers, has recently recommended that payments of performance-based compensation should be based on key business metrics that are aligned with corporate strategy and the period during which risks are assumed. CCGG states that companies should ensure that they have a formal "recoupment" or clawback policy in their code of business conduct. However, CCGG notes that, despite the usefulness of clawback policies, "it generally is preferable to align payouts with the period in which risks are realized and to use intrinsically risk-adjusted economic efficiency measures and equity based compensation, rather than to rely on a recoupment policy."

Our recent study of S&P/TSX 60 companies, the largest Canadian companies by market capitalization, reveals that 40 (or two-thirds) of them have clawback policies or arrangements, representing an increase of approximately 22 per cent compared to 2011, when only 27 such companies had clawback provisions. While not legally obliged to implement clawback policies, Canadian issuers regulated by the Office of the Superintendent of Financial Institutions (OSFI), such as banks and large life insurance companies, are strongly encouraged to implement compensation policies that are consistent with the international standards set by the Financial Stability Board, which in turn provide for contraction of variable compensation in response to subdued or negative financial company performance, including through the use of clawback arrangements. Our 2013 study of S&P/TSX 60 companies indicates that of the 13 companies that were neither dual-listed nor OSFI-regulated, seven had some form of clawback provision (as compared to only three in 2011). As such, as compared to 2011, it appears that the adoption of clawback policies has become more common, at least for large cap companies.

According to the same study, of the cases where the issuer made disclosure sufficient to make a determination, approximately 64 per cent of the clawbacks are triggered by a combination of both financial statements restatement and misconduct by executive officers; approximately 28 per cent may be triggered by the restatement of financial statements alone; approximately three per cent use the double trigger (i.e., restatement and misconduct) with respect to the CEO and CFO and the latter trigger (i.e., restatement only) with respect to other executives; and the remaining five per cent  use other triggers. In other words, a significant majority of the S&P/TSX 60 issuers surveyed employ provisions that resemble SOX clawbacks, in that they require both employee misconduct and the restatement of financial statements.

As in Canada clawbacks are not mandated by a legislative requirement which makes them binding, issuers wishing to voluntarily adopt clawbacks will wish to design contractual clawback provisions with sufficient clarity, having regard to applicable legal jurisprudence, so as to be enforceable under contract law.

The use of clawback provisions has become more common in Canada, particularly for very large issuers, over the past two years. This trend is likely due to the influence of guidelines such as those published by the OSFI, the upcoming implementation of the Dodd-Frank rules, and the general heightened sensitivity around executive pay after the 2008 financial crisis. However, there are no proposals for mandatory clawback mechanisms in Canada, and it remains to be seen how many issuers, other than large, dual-listed, or OSFI-regulated companies, will adopt clawback provisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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