McGeorge School of Law

Cherry, Wong: Put Claws Into Clawbacks

August 24, 2010

In "Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes, 94 Minn. L. Rev. 368 (2009)," Professors Cherry and Wong explore how prospective clawbacks may be the solution to prevent large executive bonuses to companies bailed out by public funds and remedies potentially available to defrauded investors in a Ponzi scheme.

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, Cherry and Wong propose a doctrine of clawbacks that accounts for these seemingly variant usages. In the process, they distinguish between retroactive and prospective clawback provisions, and explore the implications of such provisions for contract law in general. Ultimately, they 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.

Professors Cherry and Wong 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.