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Recovering money from corporate executives

We live in an era of intense scrutiny of the payments made to corporate executives such as Conrad Black. Our fascination with the astronomical salaries and bonuses paid to these select few explains the attention Black’s trial has attracted in the news media.

This is just one of numerous recent instances in which the activities of executives have come under the microscope. In Black’s case, one of the allegations is that he inappropriately received tens of millions of dollars in the form of non-competition payments that should have gone to his employer.
With many millions of dollars dedicated to salaries and bonuses for corporate executives, more companies are now wondering how to recover payments which later seem to have been undeserved. The road to recovery of these monies is not likely to be a smooth one.
It is important to note that Conrad Black has not been convicted of any wrongdoing. The prosecution faces a stiff challenge in proving he did anything for which he could be held criminally responsible.
According to recent published reports, some companies are adopting so-called “clawback policies”. These policies are intended to provide a basis for corporate governors to review and, in some instances, recover monies paid to executives.
The challenge for companies (boards of directors and shareholders alike) is to establish a structure which will provide a reliable basis for recovering undeserved payments. That is no small challenge and comes with the potential of very large litigation bills.
There are numerous grounds upon which an undeserving executive may be pursued for repayment. They arise out of the law of contract, the common law, and out of statutes. None of them are simple to execute and none are guaranteed to be inexpensive.
The first, and in my view the best, route for companies is to hire executives using employment contracts expressly contemplating repayment of undeserved payments. This is a proactive approach to resolving a future dispute. Putting agreed terms in an employment contract is a far more powerful, and reliable, approach than simply implementing a policy.
The terms upon which the salary and bonuses are to be earned and paid should be clearly defined in the employment contract. The contract should go on to identify, with specificity, the circumstances under which a payment may be reversed. Specificity is the key because a discretionary reversal will be difficult (and expensive) to enforce.
Ideally, the employment contract should be executed prior to the commencement of the employment. Employment contracts can be implemented after the commencement of the relationship but this method introduces complexities which require the guidance of an employment lawyer.
The second route to obtain repayment, arising out of the common law (judge-made law) requires the invocation of rules applicable to fiduciaries. A corporate fiduciary is usually in a senior executive position, one which carries with it the opportunity to exploit a corporate opportunity for personal gain.
In this particular context, a breach of fiduciary duty simply means the individual has obtained a personal benefit at the expense of her employer. It might, for instance, involve receiving a payment which was not earned by providing a corresponding service.
Obtaining a remedy against a corporate executive for a breach of fiduciary duty requires the commencement of a civil legal action. As a result, it necessarily involves expenditures on lawyers and is a less desirable option (than having a contract spelling out the circumstances in which payments, and reimbursements, are made).
Lawsuits involving allegations of breach of a fiduciary duty tend to be hotly contested. Even the question of whether or not the individual was a fiduciary will usually be the subject of dispute.
The third route for pursuing an offending executive is based on statutory grounds. Canada's Criminal Code, for instance, contains provisions making fraudulent activities a criminal offence.
It is worth noting, however, that criminal charges (even successful ones) will not result in repayment of money from the accused. The company will still have to sue in civil court to recover damages representing the wrongfully obtained money
All three options are highly likely to result in court actions, especially if sizeable amounts are in dispute. The first option (setting out the terms of payment and repayment in an employment contract), however, provides the greatest likelihood of an amicable result.
As cases like Conrad Black’s obtain more and more coverage in the news media, it seems likely that shareholders and directors will dedicate more attention to this topic. If they are wise, their attention will result in contractual clauses intended to address the rules of payment and repayment.