A federal appeals court has sealed off one loophole in the Sarbanes-Oxley Act regarding clawbacks of executive pay: No, a corporation cannot agree to cover future penalties for CEOs or CFOs who might run afoul of the rules.
The case, Cohen v. Viray, is the first to address whether a company can indemnify a CEO or CFO against liability under Section 304 of SOX, which requires those executives to repay certain incentive compensation if there’s a restatement based on misconduct. A lower court had approved a settlement of shareholder litigation against the leaders of defense contractor DHB Industries, including a clause that indemnified former CEO David Brooks and former Chief Financial Officer Dawn Schlegel from any liability under Section 304—despite objections from both the government and one of the shareholder holdouts, David Cohen.
