Dividend Clawback

What Is a Dividend Clawback?

A dividend clawback is a contractual provision by which investors in a project are required to repay their recently received dividends. This provision becomes effective in the event that the project being referred to experiences a cash shortfall, for example, by surpassing its budget.

Generally, dividend clawbacks are executed by shareholders buying more stock in the company, utilizing their past dividends to finance the purchase.

Figuring out Dividend Clawbacks

The purpose of a dividend clawback provision is twofold. To begin with, they aid project financing by assisting with guaranteeing projects will make due through periods of financial distress. Since shareholders are committed to giving extra equity capital if necessary, companies can abstain from raising debt financing that could involve covenants and different limitations.

Second, dividend clawbacks give an additional incentive to projects to stay reasonably affordable for them. Assuming shareholders realize that they will be responsible for contributing new capital in the event of a cost overrun, they are probably going to apply more oversight to guarantee that overruns don't happen.

The overall concept of a dividend clawback is likewise utilized in different sectors. For example, clawbacks are generally utilized in employee contracts or while arranging raises and bonuses. A chief executive officer (CEO) may receive a raise in anticipation of finishing an important project, yet this raise might be conditional on a clawback provision by which the funds are returned in the event that the project isn't completed to settled upon standards.

Contractors could be required to acknowledge a clawback clause by which a portion of their invoice is kept on the off chance that the service gave didn't meet contractual obligations.

Likewise, contractors may be required to acknowledge a clawback clause by which a portion of their invoice is kept on the off chance that the service they gave missed the mark regarding their contractual obligations.

Certifiable Example of a Dividend Clawback

Martin is one of three partners associated with an infrastructure partnership. As part of their partnership agreement, Martin and his partners are subject to a dividend clawback clause.

Through and through, the partnership raises $3 million similarly from the three investors, which it plans to spend in equivalent portions over the course of the next three years.

In year one, the partnership spends $1 million and is on target with its construction project, leaving it with $2 million in the bank. The next year, it accomplishes its construction milestones notwithstanding just spending $500,000. As needs be, the partners choose to pay a $500,000 dividend. This diminishes the partnership's excess cash balance to $1 million.

Nonetheless, in year three, the partnership finds that it needs somewhere in the range of $500,000 and $1.5 million a greater number of than initially expected. In light of their dividend clawback clause, the partners are required to pay back the $500,000 that they recently received as a dividend.

By joining the $1 million cash balance with the $500,000 "mauled back" from the partners, the partnership can complete its construction toward the finish of year three.

Features

• The overall concept of a dividend clawback is likewise utilized in different sectors — for instance, clawbacks are usually utilized in employee contracts or while arranging raises and bonuses.
• Dividend clawback provisions aid project financing by assisting with guaranteeing projects will get by through periods of financial distress.
• A dividend clawback is a contractual provision by which investors in a project are required to repay their recently received dividends.
• A dividend clawback provision can help boost owners to guarantee that projects are run on a careful spending plan and on time.