New SEC rule has effect on dual listings

Lizle Louw, Jesse Watson & Carine Murphy Webber Wentzel

Anew USSecurities Exchange Act ruletakes effect on January 27 2024 and affectsUS-listed private issuers anddual-listed companies.

The ruleprovides forthe return ofcompensation, paid erroneously to executive officers as a result of accounting restatements, tothe issuer and itsshareholders, regardless of the faultof the executive officer.

TheUS Securitiesand Exchange Commission (SEC) recently introduceda new Rule 10D-1 underthe Securities Exchange Act of 1934 (Rule 10D-1).

Thenew ruledirectsUS exchanges toestablish listing rulesthat wouldrequirelistedcompanies toadoptclawback policies for the recovery of incentive-basedcompen- sation awardedto executive officers whenthe financial information onwhich that compensation wasbased was materially misreported.

In this article, we provide SAprivate issuersthatare US-listed witha high-level understanding ofthe new Rule10D-1 anditsimplications for their businesses. It is essential for private issuers to

Rule Requirements

and officers’ insurance arrangements.That iseasier said thandone, asit will probablyentail thefollowing steps:

● Review where executive officers are based and consider what steps may be necessaryto ensureenforcement of clawbackis possible (eg consider whether scheme rulesrequire consentfrom participants where amendmentsaffect rightsofparticipantsandwhat isincludedin the participants’ terms and conditions of employment); suchpolicies. Onedifference is thatin the USclawback is mandatoryonce atrigger event has occurred. This is notthe casein SA,where itis typically discretionary. authorisedbody directsthe issuer to preparea restatement. full fiscal years pre-trigger) in excess of the amount that wouldhave beenreceived basedon therestatement, calculatedwithout regardto taxes paid. understandthat theircurrent malusand clawbackpolicies will probably not be sufficient to meet the new SEC requirements, due to the substantive differencesbetween theUS andSA regimesgoverning

Under Rule 10D-1, clawback mustbe triggeredwhen anissueris requiredtopreparean accountingrestatement thatcorrects amaterial error inpreviously-issued financialstatements (BigR restatement),on theone hand, or that would result in a materialmisstatement ifthe errorwas correctedinthe currentperiod orthatwould result ina materialmisstatement if it were left uncorrected in thecurrent period (little r restatement), on the other hand.

The new Rule10D-1 will apply to anycurrent or former executiveofficer, regardlessof misconduct,for compensation received in that capacity.

The definition of “ executive officer” will depend on the issuer,but it islikely to overlapwith the “senior management” group identified in annual reports.

SA private issuers with US listings thatfail tocomply withthe newRule 10D-1risk adverse disclosures, reputationalharm, andeven delisting. Issuerindemnification or insurance will not curb liability.

● Review documentation and identify necessary amendments, particularly to assesswhether thecurrent malus and clawbackpolicy is sufficient to satisfythe new rules.

● We believethat suchpolicies drafted in the SA context will requiresignificant amendment due to the differencesin theprevailing regimesin eachjurisdiction. Updates would thenflow to anyincentive planrules, bonusschemes, ordirector remuneration policies which may, in turn, require regulatory approval, forexample, in termsofSchedule 14tothe JSE’s listings requirements.

A trigger event is the earlierof (i)the dateon whichthe authorised body/person at the issuer concludes,or reasonablyshould haveconcluded, thatthe issueris required to prepare a restatementor(ii) thedateacourt, regulator,or otherlegally

The newrule appliesto incentive-based compensation, which is any compensation that is granted, earned or vestedbased whollyorin parton theattainment ofany financial reporting measure.

The amount subject to clawback isthe amountof incentive-based compensationreceived (duringthree

Consumer Bills

The US listing requirementsthat flowfromRule 10D-1will becomeeffective bynolater thanJanuary27 2024.

To ensurecompliance with the newRule 10D-1, SA private issuers will need to adoptan amendedclawback policy by the end of 2023 and reviewall theirexecutive remuneration anddirectors

● Remuneration Committee (RemCo)terms ofreference, ifany,may needtobeupdatedto reflecttheRemCo’ s obligationto applyclawback andmaintain arecordof clawback obligations.

With less thana year to assessimpacted policiesand agreementsfrom acorporate governance andemployment perspective, US-listedSA issuerswould bewell advisedto takeaction promptlyby briefingtheir stakeholders and identifying the impacted documents.