Clawback Provision

What is Clawbacks Provision?

A clawback provision in a contract is a special clause included in employment and financial contracts used for referring any money or benefits which have been given out but are required to be returned due to certain special circumstances that will be mentioned in the contract.

Clawback Provision

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Source: Clawback Provision (wallstreetmojo.com)

How does Clawback Provision Work? – Yahoo Case Study

Earlier in 2014, Yahoo issued a disclosure stating that hackers stole data on 500 million users.  Again, in December 2016, Yahoo announced that data theft might have affected more than a billion accounts. With the shareholders losing over $350 million due to these breaches, SEC is looking into whether Yahoo employees hid data breaches from their customers and shareholders.

Yahoo did have a clawback provision, and Marrissa Mayer (Yahoo CEO) pay is covered. However, as per the company policy, clawback can be implemented only in the event of reporting incorrect financials, basically only in case of accounting fraud. It implies that clawback doesn’t cover these hack incidents, and Marrissa Mayers may be safe.

Yahoo Clawback

source: Fortune.com

Clawback Provision Examples

Some examples of clawback provisions can be listed as follows:

  • In life insurance, a clawback provision might require payments to be returned if the policy is canceled at any time during the duration.
  • If dividends are received, they may be clawed back under specified circumstances, such as selling the shares within the lock-in period.
  • There can be clawback provisions in Pensions.
  • Government contracts with contractors may include clawback of payments to the contractors if certain requirements are not met.
  • In executive pay agreements, a clawback provision may require the executive to reimburse specified amounts back to the organization if the executive breaches a non-compete agreement and joins another competitor within a specific time frame after leaving the company.

Calculation of ClawBack in Private Equity

GP clawback provisions may require them to return excess emoluments if any of the below conditions are met:

  1. A Limited Partner (LP) has not been provided its Preferential Return, which is generally in the range of 8-11%
  2. The GP has received carried interest (profit in excess of the investment) in excess of the contractual rate (generally 20% but often less for real estate funds)
  3. Limited Partner has not received its share of profits for the “catch-up period.” Generally, post the preferred return, carried interestCarried InterestCarried interest, often known as "carry," is the portion of profit earned by a private equity firm or fund manager upon the fund's exit from an investment. This is the most important part of the Fund manager's total remuneration.read more is usually split as 20% to the LP and 80% to the GP (or in some cases, it may be a 50-50 split) until the GP has received 20% of the entire profit amount.

Clawback Provision Example – Wells Fargo

In September 2016, Wells Fargo was fined $185 million for engaging in fraud over the years, which included opening credit cards without a customer’s consent, creating fake email accounts to sign up customers for online banking services, and forcing customers to accumulate late fees on accounts they never even knew they had. Wells Fargo also fired 5,300 employees in relation to the scam.

Wells Fargo announced that it will “clawback” compensation of $41 million from their Chief Executive John G Stumpf.

The way forward

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This article has been a guide to Clawback Provisions. Here we discuss how does clawback clauses work along with practical examples of clawback provisions in Yahoo and Wells Fargo. You may learn more about Private Equity from the following articles –

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