Halliburton shareholder litigation settlement: new best practices around clawbacks

The lawsuit, the consolidation of actions brought by two institutional shareholders and one individual shareholder against the company and its board individually, had alleged ‘the board’s failure to stop the activity caused the company to have to pay hundreds of millions of dollars in settlements and fines, and it damaged Halliburton’s reputation’.

The settlement is interesting for several reasons. Initially, it should be noted that Halliburton would not pay any monetary damages. For board members, the most interesting item was Halliburton agreed to make changes to its corporate governance structure ‘including a clawback of compensation for board members who were involved in or approved the activity, beefing up its compliance program and strengthening the roles of its board members.’

There were several specific provisions relating to clawbacks, which may well now become standard provisions for officers and directors of companies going forward. They related to both monetary compensation and non-monetary compensation, such as stock. All the provisions turn on the following:

1. If an officer or director is named for ‘substantially participating in a significant violation of the law’;

2. A company investigation determines the officer’s or director’s conduct was ‘not indemnifiable’;

3. The officer or director ‘does not prevail at trial, enters into a plea arrangement…or otherwise admits to the violation in a legal proceeding.’

4. Clawback is triggered.

Moreover, the settlement specifies several steps the audit committee of the board should take to enhance its role in the compliance function including holding more regular meetings and reporting to the full board on issues relevant to compliance and risk management in general. The settlement also specified that management compliance committees should be created with detailed investigation and reporting protocols for any ‘Significant Violation of federal or state laws’.