TheCorporateCounsel.net

In response to listed company inquiries, NYSE’s annual Listed Company Compliance Guidance letter also includes a reminder to debt-only issuers that they, too, are required to adopt a clawback policy. Here’s an excerpt:

In adopting Rule 10D-1, […] the SEC did not provide any such exemption for issuers whose only listed securities are debt securities, including issuers of debt securities guaranteed by a parent company whose common equity securities are typically listed on the Exchange. In response to inquiries from listed companies and their advisors, NYSE Regulation has sought clarification from the SEC regarding the treatment of debt-only issuers under Rule 10D-1 and Section 303A.14.

As a result of those conversations, NYSE Regulation confirms that all debt only issuers listed on the NYSE are required to adopt a Recovery Policy, including, without limitation, those with guarantees from listed parents and those that are exempt from disclosure requirements pursuant to Exchange Act Rule 12h-5. To the extent an issuer has not put in place relevant procedures, it is out of compliance with NYSE rules.

This Davis Polk memo from a few weeks ago has more on this and explains the mechanics (or lack thereof) for some debt-only issuers.

A subsidiary of a public company (including an operating company or finance subsidiary) can itself be the issuer of debt securities or a guarantor of debt securities issued by its parent company. […] Under SEC rules, where the parent guarantees the debt, the subsidiary is exempt from ongoing SEC reporting (in accordance with Rule 12h-5 under the Securities Exchange Act of 1934), and the parent reporting company is not required to provide separate financial statements to the SEC for the subsidiary (in accordance with the exemption under Rule 3-10 of Regulation S-X). […] Subsidiary securities are sometimes listed on an exchange.

Subsidiaries with listed securities should adopt a clawback policy to comply with the listing standards. The good news is that under both NYSE and Nasdaq listing standards, if the subsidiary is not itself subject to SEC financial reporting requirements, there should be no events that would trigger recovery of compensation under the policy.

This is because under the clawback rules, recovery of compensation is only triggered by a financial restatement that the issuer is required to prepare due to the issuer’s (i.e., the subsidiary’s) material noncompliance with financial reporting requirements under the U.S. federal securities laws. If the subsidiary issuer is not subject to such financial reporting requirements, then it should never be required to prepare a restatement due to material noncompliance with such financial reporting requirements.

The memo goes on to say that the clawback policy “could simply state that the parent company’s clawback policy applies to the subsidiary” and even includes a sample resolution that could be adapted for this purpose as an annex. Finally, it clarifies that, for any such subsidiary that does not file an annual report on Form 10-K, Form 20-F or Form 40-F, there would be no need to file the clawback policy as an exhibit.

– Meredith Ervine