Replies to post #23784 on AbitibiBowater, Inc. (fka ABWTQ)

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Give me a couple of hours....

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Reading latest Plan....

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A bankruptcy judge on Wednesday approved a $45.6 million incentive program for top executives and managers of the Tribune Company, overruling objections by a union and the bankruptcy trustee that the payout was too high and unwarranted.

The program for 2009 covers 10 top executives and 710 managers. Kevin J. Carey, the chief judge of the Delaware Bankruptcy Court in Wilmington, did not rule on two other incentive programs for 20 top executives that totaled about $20 million. In remarks before issuing his ruling, he suggested that the Tribune board consider rolling the remaining incentive plans into the reorganization plan under which the company would emerge from Chapter 11 bankruptcy protection.

The bonuses amount to about 11 percent of the company’s 2009 operating cash flow of $500 million. William Salganik of the Washington-Baltimore Newspaper Guild, which represents employees at The Baltimore Sun, a Tribune property, called the bonuses “unprecedented” compared with the previous high payout of 3.3 percent during a 12-year period. “It’s a greater reward for lower performance,” Mr. Salganik said, noting that the 2007 cash flow had been $1.2 billion.

He said the Tribune had laid off or bought out about 3,000 employees companywide.

In court papers, the bankruptcy trustee, Roberta A. DeAngelis, disputed Tribune’s claim that the incentive programs were bona fide awards “based on real performance targets that are intended to motivate superior performance.” She said Tribune officials failed to “back up their characterization” that cash flow targets were real and had failed to provide records of actual versus projected performance.

But in a 10-minute ruling from the bench, Judge Carey said he found the proposed bonuses were justified because “there is a reasonable relationship between the plan and its objective to restore profitability and let the company move forward.” The plan,” he said, “was developed over time by and among all the major constituents of the company and has their support.” He explained that the incentive was intended for the unsecured creditors and to “put more money in their pockets.”

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The New Law's High Hurdles. To give you a flavor of the restrictions BAPCPA added to Section 503(c) of the Bankruptcy Code, a debtor company must now prove the following before it can gain approval for payment of a retention bonus to an insider:

•the transfer or obligation is essential to retention of the person because the individual has a bona fide job offer from another business at the same or greater rate of compensation;
•the services provided by the person are essential to the survival of the business; and
•either

¦the amount of the transfer made to, or obligation incurred for the benefit of, the person is not greater than an amount equal to 10 times the amount of the mean transfer or obligation of a similar kind given to nonmanagement employees for any purpose during the calendar year in which the transfer is made or the obligation is incurred; or
¦if no such similar transfers were made to, or obligations were incurred for the benefit of, such nonmanagement employees during such calendar year, the amount of the transfer or obligation is not greater than an amount equal to 25 percent of the amount of any similar transfer or obligation made to or incurred for the benefit of such insider for any purpose during the calendar year before the year in which such transfer is made or obligation is incurred.
The requirement of a bona fide job offer in particular has led some to observe that if an officer of a company in Chapter 11 really had such an offer he or she would probably just take it, mooting the entire retention issue. In any event, these provisions have had their desired effect. It is now rare to find a debtor proposing a KERP that seeks to make retention payments to officers or other insiders.

Debtors Opt For Plan B. Despite these restrictions, debtors still usually want to keep their key officers and may worry that they will leave for more stable companies absent some incentives to remain with the debtor. So what are debtors doing? Since October 2005, they have shifted gears and are proposing not retention plans but incentive plans instead. To date, only a few decisions, discussed below, have addressed what is necessary for an incentive plan to pass muster. In other instances, incentive plans have been approved with little or no opposition. Perhaps the earliest such approval came in May 2006 when Judge Burton R. Lifland approved one in the Calpine Corporation Chapter 11 case.

The Dana Corporation Case. The first significant contested plan motion came shortly after the Calpine incentive plan's approval. Dana Corporation, whose Chapter 11 case was also pending before Judge Lifland, filed a motion seeking approval of a plan similar to that approved in the Calpine case. After considering objections filed by various creditors and others, however, in September 2006 Judge Lifland refused to approve Dana Corporation's proposed plan, finding that it was a prohibited retention plan. For an excellent and entertaining discussion of the circumstances leading to denial of that first effort in the Dana Corporation case, including why the Calpine plan was approved while the first Dana plan was not, be sure to read Steve Jakubowski's detailed post on the Bankruptcy Litigation Blog.

A few months later, on Dana Corporation's second try, Judge Lifland approved the revised incentive plan. In his second ruling, he found that with certain modifications the debtor's revised proposals met the sound business judgment test required for approval. In addition, he ruled that the new plan incentivized the key officers "to produce and increase the value of the estate" and, because the benchmarks in the plan were difficult targets to reach and not easy "lay-ups," the proposal was an actual incentive plan and not a retention plan in disguise.

Evaluating Incentive Plans. In evaluating whether the Dana plan represented the exercise of sound business judgment, Judge Lifland considered the following factors:

•Is there a reasonable relationship between the plan proposed and the results to be obtained, i.e., will the key employee stay for as long as it takes for the debtor to reorganize or market its assets, or, in the case of a performance incentive, is the plan calculated to achieve the desired performance? (emphasis added)
•Is the cost of the plan reasonable in the context of the debtor's assets, liabilities and earning potential?
•Is the scope of the plan fair and reasonable; does it apply to all employees; does it discriminate unfairly?
•Is the plan or proposal consistent with industry standards?
•What were the due diligence efforts of the debtor in investigating the need for a plan; analyzing which key employees need to be incentivized; what is available; what is generally applicable in a particular industry?
•Did the debtor receive independent counsel in performing due diligence and in creating and authorizing the incentive compensation?