Sales Agreement with Clawback Provision

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                                                 January 26, 2009

As a result of continuing intense scrutiny of executive compensation practices and the effect of
increased regulation under the Emergency Economic Stabilization Act of 2008 ("EESA"), two
compensation tools are gaining popularity: (i) "hold ‘til retirement" or "hold through retirement"
("HTR") policies and (ii) clawback provisions. 1           Although the new EESA executive
compensation requirements apply only to financial institutions participating in the EESA relief
programs, 2 all companies, not just financial institutions, should consider implementing HTR
requirements and clawbacks as components of their executive compensation policies since the
policies promote accountability and a focus on long-term performance.

What Are HTR Policies?

Traditional stock ownership guidelines require executives to acquire and retain a certain amount
of company stock (usually a multiple of salary or a fixed number of shares, typically based on
position). Less common, but arguably more effective, are HTR policies, which require
executives to keep a substantial part of their stock awards for the duration of their careers. HTR
requirements can take several forms:

         •        Retention Ratios: The most common form of HTR requirement is a retention
                  ratio, which establishes a percentage of earned equity awards (often 50-75%) that
                  must be retained until the executive leaves the company (or for a time period
                  thereafter). The retention ratio applies only to the "profit" or "gain" shares that
                  remain after payment of taxes and, in the case of stock options, the exercise price.
         •        Long-Term Vesting: Under the long-term vesting approach, a percentage of an
                  equity award (often a restricted stock award or restricted stock unit) will not even
                  vest until retirement.
         •        Temporary: Some companies implement HTR requirements only until traditional
                  stock ownership guidelines have been met. For example, the executive might be
                  required to retain all of his or her restricted stock and option shares until the
                  company’s traditional stock ownership guideline is met.

  HTR policies require a company’s chief executive officer and other senior executives to hold a substantial portion
of their stock awards until retirement or, in the case of "hold through retirement" policies, for a specified time period
past retirement. Clawback provisions provide for the recovery of bonus or incentive compensation paid to company
executives in the event of certain triggering events, such as financial restatements or misconduct. Unlike clawbacks,
HTR policies are not specifically required by EESA, but are an emerging best practice under the legislation’s risk-
adverse provisions.
  Note that the Auto Industry Financing and Restructuring Act contains similar restrictions on executive
compensation for participating automobile manufacturers.

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HTR policies can be more effective than traditional stock ownership guidelines because they
may result in an increased aggregate ownership requirement with each equity award grant. HTR
requirements also offer several additional benefits. First, they encourage executives to take a
long-term approach to stock ownership, thereby aligning their interests with those of other
shareholders. Second, they provide a visible means for executives to accumulate significant
amounts of company stock over the course of their careers. Finally, HTR policies address
investor concerns that executive stock ownership levels have not kept pace with increasing
equity awards and lessen the opportunities for executives to profit through the sale of stock at the
expense of outside investors.

What Are Clawbacks?

Clawback provisions provide a means for a company to recoup compensation from its executives
in the event of certain misconduct or other circumstances, such as the restatement of financial
statements. Section 304 of the Sarbanes-Oxley Act of 2002 ("SOX") generally requires public
company chief executive officers and chief financial officers to disgorge certain bonuses, other
incentive- or equity-based compensation and profits on sales of company stock if the company
has to issue a financial restatement because of material noncompliance, due to misconduct, with
financial reporting requirements under the federal securities laws. Section 304 is a somewhat
limited clawback provision:

       •         It only applies to a company's CEO and CFO;
       •         "Misconduct" is not defined, resulting in ambiguity regarding the triggering
       •         Recovery is limited to amounts received during the 12-month period preceding a
                 financial restatement; and
       •         It is enforceable only by the Securities and Exchange Commission.

As a result, although not required by the securities laws, many companies have taken steps to
adopt more expansive clawback provisions, either as general policies or in their employment
agreements and incentive plans and agreements.

Why Are HTR Policies and Clawbacks Advisable Now?

The EESA and its accompanying U.S. Treasury regulations impose significant new executive
compensation requirements on financial institutions participating in the Treasury’s Capital
Purchase Program. Among other restrictions, the new guidelines require that a participating
financial institution:

        •        Structure its executive compensation programs to exclude incentives for senior
                 executive officers to take unnecessary and excessive risks that threaten the value
                 of the institution; and
        •        Implement a policy for the recovery of any bonus or incentive compensation paid
                 to its senior executive officers if the payments were based on materially

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                 inaccurate financial statements or any other materially inaccurate performance
                 metric criteria. 3

Even companies not subject to the EESA requirements should consider the new standards in the
context of their compensation decisions for a number of reasons. First, the SEC and the investor
community are likely to expect discussions of the EESA compensation elements – including the
"excessive risk" and clawback provisions – in the Compensation Discussion and Analysis
("CD&A") section of 2009 proxy statements. Second, it is possible that some form of "Say on
Pay" legislation (requiring an advisory vote on executive compensation) may be enacted this
year. In the event that investors are given a vote on compensation, they will likely scrutinize a
company’s compensation disclosures in its proxy statement, including discussions of HTR
policies and clawbacks, to assess whether appropriate "checks" on compensation have been put
in place. Third, many commentators expect that the EESA executive compensation provisions
may be extended to apply in some fashion to other companies, either through future legislation or
"best practices."

HTR policies address the first EESA requirement because they detract from unnecessary and
excessive risk-taking by forcing the executives to focus on long-term value creation.
Institutional investors have actively begun encouraging the adoption of HTR policies. For
example, in its 2009 U.S. Corporate Governance Policy Updates, RiskMetrics Group listed HTR
policies as one of its "best pay practices." In addition, several institutional investors have
submitted shareholder proposals urging companies to extend the minimum period that senior
executives must hold shares obtained through equity awards. If a company acts quickly to adopt
an HTR policy, the policy and its expected benefits can be described in the 2009 proxy

Clawback provisions squarely address the second EESA requirement. As noted above, many
companies have already adopted some from of clawback or compensation recovery provision as
part of their equity compensation plans or as a general compensation policy. Many of these
companies are also already describing their clawback provisions in their CD&A discussions. 4
Those companies should compare their existing clawbacks to the new EESA standards, which
may be broader in scope. Companies that have not yet adopted clawback provisions should
consider doing so now or explain in the CD&A why such a policy is not necessary. In the past
few years, institutional shareholders and governance activists have focused on clawback
provisions as a significant corporate governance and executive compensation issue.

  For more information about the current EESA and Treasury requirements for executive compensation, please see
our clients alerts dated October 7, 2008 (available at and
October 23, 2008 (available at See also the Treasury’s interim
final rules for reporting and recordkeeping requirements issued January 16, 2009 (available at
Note also that the U.S. House of Representatives has recently passed a bill (H.R. 384) amending the executive
compensation provisions of the EESA. The text of the bill, currently under consideration by the U.S. Senate, is
available at
  SEC proxy rules call for CD&A disclosure of a company's policies and decisions regarding the adjustment or
recovery of awards or payments if the relevant company performance measures upon which they are based are
restated or otherwise adjusted in a manner that would reduce the size of an award or payment.

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What Should You Do Now?

Companies that already impose HTR requirements and/or clawback provisions on their
executives should discuss their policies -- and how they are intended to address concerns about
executive compensation in the current economic climate -- in the CD&A section of their 2009
proxy statements. Companies implementing new policies should consider a variety of issues:

HTR Policies

       •         The company must determine the type of HTR policy to best suit the company’s
                 needs and select the executives to be subject to HTR requirements. Normally, the
                 CEO and the other senior executive officers would be subject to the HTR policy.
                 HTR requirements may not be appropriate for lower-level management.
       •         Consider possible exceptions to the HTR policy such as estate planning
                 transactions and economic hardship. Also, determine how exceptions will be
                 considered and granted.
       •         Determine how the HTR policy will be implemented and enforced. For instance,
                 many companies' Boards of Directors have adopted policies imposing HTR
                 policies on past and future awards. If that approach is used, the Board should
                 consider how the policy will be enforced with respect to previously granted
                 awards that were not initially subject to the holding restrictions. Alternatively, the
                 HTR provisions may be included in the terms of award agreements.
       •         Because HTR policies are viewed favorably in the investor community,
                 companies should publicly announce the adoption of a new policy. Adoption of a
                 policy does not trigger a required Form 8-K filing, but a company may choose to
                 issue a press release and/or file a Form 8-K announcing a new policy. In addition,
                 a company may choose to post the policy on its website among its other corporate
                 governance documents.


       •         As with HTR policies, the company must determine who will be covered by the
                 clawback policy. Section 304 of SOX only covers CEOs and CFOs, but it may be
                 advisable to extend the clawback to other employees, for instance, to those whose
                 performance or job function may impact financial reporting.
       •         Like HTRs, the company must determine where to locate the clawback
                 provisions. Adding clawbacks to employment agreements and the relevant stock
                 and cash incentive plans will strengthen their enforceability, but some companies
                 have chosen to adopt stand-alone policies for greater visibility.
       •         The triggering events should be carefully considered. Many clawback provisions
                 are triggered by a "significant" or "material" restatement in order to avoid the
                 harsh penalty if a restatement is caused by an error not resulting from fraud or
                 misconduct. Some clawbacks, however, are triggered by any restatement
                 (regardless of whether misconduct was involved), ensuring that executives are not
                 allowed to keep compensation awarded on the basis of performance targets that
                 were not actually met.

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        •        Companies should announce their clawback provisions to the investor
                 community, both through press releases (in the event of newly-adopted policies)
                 and through proxy statement disclosure.

We are available to assist your Board and Compensation Committee in analyzing and
implementing HTR policies and clawback provisions. If you have questions, please contact
Meredith Burbank, the principal author of the alert. You may also contact the Womble Carlyle
attorney with whom you usually work or one of our Corporate and Securities Attorneys.

Womble Carlyle Sandridge & Rice Corporate and Securities Lawyers

Womble Carlyle client alerts are intended to provide general information about significant legal
developments and should not be construed as legal advice regarding any specific facts and circumstances, nor
should they be construed as advertisements for legal services.
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that
any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and
cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting,
marketing or recommending to another party any transaction or matter addressed in this communication (or in any

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