Dividend Clawback

A dividend clawback is an arrangement under which those financing, or investing in, a project agree to contribute, as equity, any prior dividends received from the project to cover any cash shortages. The investors may have received the dividends from the project as a profit payout and the dividend clawback is a promise to pay back those dividends should the need arise with the project down the road.

Dividend clawbacks are most commonly used in project financing to help keep a project running even through financial duress. A dividend clawback arrangement provides incentive for a project to remain on budget so that investors do not have to return dividends received prior to a cost overrun. When there is no cash shortfall, those investors who provided funding are able to keep their dividends. Despite the fact that the shortfalls may be a deficiency in cash, the dividend clawback stipulates that the investors will return dividends, not cash, to make up the difference and contribute equity to the project. A divided clawback amount does not provide capital for new project and is limited to the project’s cash capital at the start of funding.

A clawback is a term that may also be used in reference to a financial arrangement outside of just dividend clawbacks. In a regular clawback, a financial agreement is made to pay back money that has been given in return for services or performance, if the service or performance was not done according to the terms of the clawback contract. For example, clawbacks are commonly used in contracts for employee or company raises and bonuses. A CEO or a boss may receive a raise in anticipation of completing a satisfactory project with the stipulation built into the contraction that a clawback will be applied if the project is not completed to agreed-upon standards. Clawbacks can help protect inaccurate financial reporting and may help a company protect its assets in the event of a high-risk project.

As an example of a how a dividend clawback could work, consider a project that had 10 investors who  received 10 million dollars in dividends. If the project  encountered a 5 million dollar deficiency, the dividend clawback to fund the shortage is 5 million dollars. Should there be a situation where no investment shortfall occurs, then no dividend clawback is paid out.