Hertz Settles with Former GC in Clawback Litigation, But Claims Against Former CEO Are Proceeding

Hertz and its former General Counsel entered into a settlement agreement resolving Hertz’ claims seeking the clawback of $56 million in incentive and severance pay he received prior to the discovery of financial misconduct.

In March 2019, Hertz filed suit in New Jersey federal court against former CEO Mark Frissora and former General Counsel John Zimmerman, alleging that they unlawfully inflated the company’s pre-tax income for 2011, 2012 and 2013, which required Hertz to restate its financial statements for those years.  The restatement triggered federal and state fraud investigations and a securities class action lawsuit.  The two former executives refused to comply with the clawback provisions in their incentive compensation and severance agreements, which required them to return all compensation paid to them if the company subsequently determined they engaged in gross negligence and intentional misconduct.

Although Frissora was initially the focus of the suit, in May 2020, Hertz amended its complaint to add additional allegations concerning Zimmerman, alleging that he was Frissora’s “right-hand subordinate” in the fraud.  Hertz alleged that Zimmerman failed to comply with his fiduciary and ethical duties to prevent or report the misconduct.  Hertz alleged that:

“Defendants significant compromised the company’s long-term security by pushing a counterproductive aggressive agenda, doing so despite knowing full well that Hertz was in a difficult and taxing period of corporate upheaval that strained the company’s already-inadequate internal controls.”

On Monday, Hertz filed a stipulation of dismissal stating that it had resolved its clawback claims against Zimmerman.  The terms of the settlement have not been disclosed.  The claims against Frissora are still pending.

Over the past several years, compensation clawbacks for executives have made headlines as high-profile corporate scandals have prompted companies to file suit seeking the recovery of compensation paid to the executives involved in the underlying financial fraud.  Publicly traded companies have been required to include clawback provisions in executive agreements since 2002, when Sarbanes-Oxley was enacted.  Increasingly, private companies have adopted clawback provisions, which prevent former executives from financially benefitting – to the detriment of shareholders and owners – from their own gross misconduct or willful misconduct.

If your private company is considering adopting a clawback policy voluntarily, you need to consider a number of factors, including:  (1) the types of compensation that will be covered; (2) the events will trigger a clawback; (3) how the determination will be made (e.g., the sole discretion of the board); (4) who will be subject to the policy; and (5) how far back the clawback will go.  Bertram LLP works with boards and executive leadership teams to design effective clawback policies and represents executives, boards and companies in disputes and litigation concerning clawback policies and provisions.

We will continue to monitor the pending Hertz litigation and will report any significant developments.