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Clawback Policies Gain More Ground in Canada

November 18, 2019

Despite a lack of legislative change over the past eight years, the use of “clawback” provisions—arrangements under which an employee forfeits previously awarded compensation—have become increasingly common in Canada.

Canadian public companies listed in the U.S. are subject to statutory clawbacks for certain employees. As well, certain Canadian financial institutions regulated by the Office of the Superintendent of Financial Institutions (OSFI) have adopted clawbacks as an OSFI-recommended best practice. Other Canadian public companies are not required to adopt clawbacks but are choosing to implement clawbacks through agreements with affected employees.

Our survey shows that 56 of the TSX/S&P 60 companies have clawback policies. Of these, only 24 are subject to U.S. securities laws or OSFI regulation, meaning 32 have adopted clawbacks without legal or regulatory compulsion.

Clawbacks can take various forms. The clawback of compensation can be triggered by misconduct or “bad behaviour”, or simply negative financial results, can apply to vested or unvested awards and other forms of compensation, such as annual bonus or longer-term equity or non-equity compensation.


  • Although not required, the use of compensation clawbacks are becoming more common in Canada
  • OSFI recommends use of clawbacks by certain financial institutions
  • Use of clawbacks by Canadian issuers is subject to disclosure requirements


Historically, contractual clawbacks have been used, in the U.S. in particular, to address “bad behaviour”. A common example is situations in which employees leave to join competitors. One use of such a clawback in a Canadian context was illustrated in the case of Nortel v. Jarvis, where Nortel imposed in its option grants a term providing for a recovery of gains on option exercises from employees who went to work for competitors within a specified period of time after option exercise. Nortel brought a claim to recover option exercise gains from an employee who joined a competitor. In that case, a Canadian court held that a properly drafted contractual clause providing for a recovery of option gains was enforceable, notwithstanding arguments made by the employee that the provisions were in the nature of a penalty and thus not enforceable.


Provisions in the U.S. Sarbanes-Oxley Act of 2002 (SOX), developed in response to instances where executives received bonuses based on financial results that later turned out to be inflated or illusory. Sections of the SOX provide that, in the event an issuer is required to prepare an accounting restatement due to material non-compliance of the issuer, as a result of misconduct, with any financial reporting requirement, the CEO and CFO shall reimburse the issuer for any bonus or other incentive-based compensation and any profits realized from a sale of securities of the issuer during the 12-month period following the issue of the misstated financial statements. This clawback is mandatory for S.E.C. issuers (including Canadian corporations, which are foreign private issuers under U.S. securities laws).

This clawback is restricted to the CEO and the CFO. To be triggered, it requires “an accounting restatement due to material non-compliance”, and the restatement must also be “as a result of misconduct”. Under the SOX provisions, the S.E.C. is the party entitled to bring an action to recover the amounts. U.S. litigation has established that the misconduct required to trigger the provision is not required to be that of the CEO or the CFO. The clawback relates to all types of compensation, but only that received in the specified time period of 12 months following the misstated financial statements.


The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) introduced a new, and additional, clawback provision for U.S. public companies, as well as Canadian companies who, for S.E.C. purposes, are foreign private issuers. The Dodd-Frank Act provides that the S.E.C. direct U.S. national securities exchanges and national securities associations to prohibit the listing of an issuer that does not comply with the Dodd-Frank Act’s clawback provisions. The provisions require that, in the event that the issuer must prepare an accounting restatement due to material non-compliance of the issuer with financial reporting requirements, the issuer will recover from any current or former executive officers who received incentive-based compensation (including stock options) during the three-year period preceding the date on which the issuer is required to prepare an accounting restatement, arising out of the erroneous data, in excess of what would have been paid to the executive officer under the accounting restatement. The issuer is required to disclose its policy in this regard. 

While the Dodd-Frank Act provisions do not affect the continued application of the SOX clawback provisions, they introduce a new mandatory clawback provision, which is generally broader in scope and application than the SOX clawback provision. Like the SOX provision, the Dodd-Frank Act provision applies if there is an accounting restatement due to material non-compliance with financial reporting requirements. However, the clawback applies to all current and former executive officers of the issuer and extends to the three-year period prior to the date of the restatement. The Dodd-Frank Act provision also does not have a “misconduct” requirement — the mere accounting restatement due to material non-compliance with financial reporting requirements triggers the provision. However, the Dodd-Frank Act provision restricts recovery to the excess that the executive officers were paid based on the erroneous data in the restatement, not all incentive-based compensation, as is the case under SOX. The Dodd-Frank Act provision, unlike the SOX provision, relies on the issuer to enforce the clawback against its employees.

In 2015, the S.E.C. proposed rules to implement the above Dodd-Frank Act provisions that have yet to be put into force. Despite this, companies appear to be implementing clawback provisions to be in line with these provisions.


The Financial Stability Board (FSB) is an international organization that coordinates the work of national financial authorities of various countries, such as the U.S., Canada and the United Kingdom. Canadian members are the Bank of Canada, OSFI and the federal Ministry of Finance. The FSB issued FSB Principles for Sound Compensation Practices – Implementation Standards (FSB Principles) in response to the 2008 U.S. financial crisis. The FSB Principles provide that subdued or negative financial performance of a firm should generally lead to a considerable contraction of the firm’s total variable compensation, including through “malus” or clawback arrangements. The principles go on to say that unvested portions of deferred compensation are to be clawed back in the event of negative contributions of the firm and/or the line of business.

The FSB released a report outlining the progress of the implementation standards, which highlights the use of more rigorous risk adjustment practices, including clawbacks, and clawbacks now cover more individuals under a broader range of circumstances at many banks.

Based on these principles, the member countries of the FSB (including Canada and the United Kingdom) have required, or recommended as a best practice, that financial institutions under their jurisdiction adopt some form of clawback provision.


Under the United Kingdom’s Financial Services Authority Remuneration Code, unvested deferred variable remuneration is reduced (i.e., clawed back) in the event (i) there is reasonable evidence of employee misbehaviour or material error or (ii) the firm or the relevant business unit suffers a material failure of risk management. The business must take into account all relevant factors (including, where the circumstances described in (ii) arise, the proximity of the employee to the failure of risk-management in question and the employee’s level of responsibility) in deciding whether, and to what extent, it is reasonable to seek recovery of any, or all, of their vested variable remuneration. Under these rules, businesses are required to apply clawbacks in either of the aforementioned instances up to seven years following the date of the award.


As noted above, there is no generally applicable requirement in Canada that public companies impose clawback provisions. However, Canadian issuers that are subject to S.E.C. requirements are subject to clawback provisions as described above.

As well, certain Canadian financial institutions regulated by OSFI are strongly encouraged by OSFI to implement clawback provisions reflecting the FSB Principles as a best practice. As the OSFI-regulated entities are not subject to a specific legislative provision, there is no prescribed form of clawback as in the U.S. and thus there is some variation in the form and manner of implementation of clawback provisions by Canadian financial institutions. As these are being implemented contractually, and not through binding legislation such as SOX or the Dodd-Frank Act, they are subject to the same enforceability concerns as any contractual form of clawback.

The Canadian Coalition for Good Governance (CCGG), an organization representing institutional investors and asset managers, has included discussion on clawback provisions in their Best Practices for Proxy Circular Disclosure. CCGG indicates that several issuers manage compensation risk through clawback policies, but these policies are often triggered only if there is a financial restatement and an executive is found at fault. CCGG best practices recommend companies adopt broader clawback policies, such as expanding the application of the policy to a broader range of executives or including a wider variety of triggering events, in order for them to be more effective in managing risk. A wider variety of triggering events can include a material breach by the executive of the issuer’s code of conduct or ethics, misconduct on the part of the executive that results in damage to the issuer’s financial situation or reputation or the engagement by the executive of fraud, theft, embezzlement or similar activities related to the issuer.  

Issuers that wish to consider voluntarily adopting clawback policies have flexibility to design these to meet their own circumstances and objectives. As noted, as these became part of the employment contract, they must be effected through agreement with affected employees. The agreement can be effected in a variety of ways—a general provision in an employment agreement covering all compensation or specific terms in award grants that clawback those particular awards (or gains from them) in specified circumstances.

Given the variety of clawback provisions, in developing clawback policies, issuers will need to consider which employees will be subject to such provisions, the triggering event for the clawback (e.g., financial statement restatement, business losses), the types of compensation to which the clawback will apply (e.g., annual bonuses, equity or other long-term compensation, and whether vested or unvested), the relationship of the employee to the triggering event (e.g., was there misconduct of the employee contributing to the financial restatement or not) and the relevant time period for the compensation to be clawed back.

Though there continues to be no legislative requirement in Canada to implement clawback provisions, proxy advisory services ISS and Glass Lewis view companies without such provisions negatively and see clawbacks as key mechanisms to manage risk, resulting in more favourable proxy voting recommendations when clawbacks are used.

As in Canada the clawback is not mandated by a legislative requirement to make it binding, issuers wishing to adopt clawbacks will need to draft contractual clawback provisions with sufficient clarity, and without being in the nature of a penalty, so as to be enforceable, unless the exercise is intended to be a cosmetic one.

Under Form 51-102F6 pursuant to National Instrument 51-102 Continuous Disclosure Obligations, there is a requirement for Canadian reporting issuers to disclose any “policies and decisions about the adjustment or recovery of awards, earnings, payments or payables if the performance goal or similar condition on which they are based are restated or adjusted to reduce the award, earning, payment or payable”. Accordingly, for Canadian reporting issuers that are subject to U.S. SOX or Dodd-Frank Act clawbacks, which are regulated by OSFI, or which adopt clawbacks voluntarily, there is a requirement to disclose any such arrangements in their proxy circulars.

In June 2019, the federal Parliament adopted amendments to the Canada Business Corporations Act (CBCA), which will, among other things, impose additional disclosure requirements on companies in relation to compensation clawbacks. Under these amendments, CBCA companies must disclose information respecting the recovery of incentive benefits or other benefits paid to directors and employees of the corporation who are “members of senior management”, as defined by regulation. These amendments have not yet been proclaimed in force and the regulations have not been published. 

For further information, please contact:

John Tuzyk                               416-863-2918
Jessie Dewdney                         416-863-2299

or any other member of our Capital Markets group.