I have written several times on companies’ efforts to clawback, and shareholders’ attempts to force a clawback of, executives’ compensation as the law in this area continues to develop. One of the most prominent cases working its way through the courts in this area is The Hertz Corporation, et al. v. Mark P. Frissora, et al.
In 2014, Hertz, with the advice of its outside auditors, determined that a restatement of Hertz’s financials from fiscal years 2011, 2012, and 2013 was necessary. The restatement, and the accounting errors it identified, led to federal and state government investigations, a securities class action lawsuit against Hertz, and other incidental costs. In March of 2019, Hertz filed a lawsuit in the United States District Court for the District of New Jersey seeking to clawback compensation from its former CEO, Mark Frissora, former CFO, Elyse Douglas, and former General Counsel, John Jeffrey Zimmerman (the “Executives”). (The company filed a similar lawsuit in Florida against the former Group President for Rent-A-Car Americas.)
The lawsuit claimed that the gross negligence and misconduct of the Executive contributed to the need for the restatement. The lawsuit was based on three breach of contract theories and the Executives’ alleged misconduct related to their involvement in and knowledge of alleged accounting improprieties and irregularities. The lawsuit sought to recover approximately $70 million in incentive compensation paid to Frissora, Douglas and Zimmerman, and more than $200 million in damages incurred in connection with the financial restatement. In June 2021, the District Court for the District of New Jersey issued its decision in an unpublished opinion, Hertz Corp. v. Frissora , D.N.J., No. 2:19-cv-08927.
The company argued that it was entitled to recover certain incentive-based compensation and golden parachute payments it made to the Executives based on compensation clawback policies adopted by the company in 2010 and 2014. The company claimed that the 2010 clawback policy allowed it to recover incentive-based compensation paid to the Executives in fiscal years 2011, 2012, and 2013 and the 2014 clawback policy allowed the company to recover incentive-based compensation in the Executives’ golden parachutes. The Executives argued that the company should be estopped from claiming that they had acted grossly negligent and in violation of the company’s standards because the company had argued that no misconduct occurred in defense of itself in other litigation and before the SEC and its shareholders. On this point, the court ruled:
Although there are perhaps inconsistencies between the position taken by Plaintiffs in prior litigation and the position taken by Plaintiffs here, it is not so apparent that the positions are irreconcilably inconsistent, in light of the different claims in each litigation and the different pleading standards that apply to such claims. Relatedly, the Court is not prepared to determine that Plaintiffs changed their positions in bad faith. Again, the different claims at issue here may provide at least some explanation for the Plaintiffs’ positions.
The company also alleged that the Executives breached certain representations made at the time of their resignations in 2014 in their respective separation agreements. Specifically, the company alleged that the Executives falsely represented that they had not knowingly violated the company’s standards of business conduct, and that they did not facilitate or have knowledge of any financial or accounting improprieties or irregularities within the company. The company sought to recover amounts paid to the Executives in connection with the separation agreements. The court accepted the company’s argument on this alternative source of rescission or recovery, at least at the motion to dismiss stage, and allowed the company’s claims related to breach of the separation agreements to continue.
The court’s unpublished opinion in the Hertz case does not means that the company has prevailed in any of its claims for compensation recovery. It only means that the company’s claims have survived a motion to dismiss and now, generally, must go to trial. Stay tuned for further developments.
Another significant issue arising from the company’s attempts to clawback compensation issue — whether the Executives are entitled to indemnification and advancement of legal fees for the costs of defending against the company’s claims against them — is being decided in a different federal court. The company’s original lawsuit also sought a declaratory judgment denying the advancement of expenses to the former Executives. However, each of the Executives had filed suit in Delaware’s Court of Chancery claiming that he/she was entitled to the advancement of legal expenses from the company under its by-laws and other agreements. The Delaware court’s initial decision was that they were entitled to advancement of legal fees. This opinion from the New Jersey federal district court does not address the indemnification claims.
-Mike Melbinger, CompensationStandards.com June 22, 2021