Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes
Miriam A. Cherry
Saint Louis University - School of Law
University of the Pacific - McGeorge School of Law
August 23, 2009
Minnesota Law Review, Vol. 94, 2009
Pacific McGeorge School of Law Research Paper No. 10-01
In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term "clawback" was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term "clawback" reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of clawbacks that accounts for these seemingly variant usages. In the process, we distinguish between retroactive and prospective clawback provisions, and explore the implications of such provisions for contract law in general. Ultimately, we advocate writing prospective clawback terms into contracts directly, or implying them through default rules where possible, including via potential amendments to the law of securities regulation. We believe that such prospective clawbacks will result in more accountability for executive compensation, reduce inequities among investors in certain frauds, and overall have a salutary effect upon corporate governance.
Number of Pages in PDF File: 49
Keywords: clawbacks, TARP, executive compensation, corporate governance, Ponzi Scheme, Bernard Madoff, contracts
Date posted: August 24, 2009 ; Last revised: March 14, 2013
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