Lifland also called attention to another bonus package based on Dana’s total enterprise value six months after the company exits bankruptcy protection. Under that plan, Burns would earn an added $6.2 million if Dana’s enterprise value remains at $2.6 billion. He would collect a “minimum completion bonus” of $4.1 million if the total enterprise value drops to $2 billion. The judge, however, held that the enterprise value bonuses are “more or less” guaranteed, which makes the pay plan “more akin to a retention bonus,” subject to the stricter bankruptcy code standards.
Efforts to retain executives through the course of a Chapter 11 reorganization is standard business procedure, and petitions for KERPs are one of the first submissions a debtor makes to a bankruptcy court, says William Lenhart, national director of Business Restructuring Services at BDO Seidman. Because the new law “severely” curbs KERPs, Lenhart expects companies to keep a close watch on which cases are approved and which are rejected.
So far, Nobex, Calpine, and Plaint received approval based on their bonus plans being deemed incentive pay.
At the same time, Lenhart contends, creditors are likely to object to the so-called “showing up” bonus, and will therefore push for bonuses aimed at generating improvements in operating and sales performance and a boost in total enterprise value. But the performance goals “should not be easily attainable,” says Lenhart, who contends that Dana seems to have reworked its incentive bonuses to make targets easy to hit.
Under the stricter legal regime, however, bankrupt companies will have to find a way to hold on to skilled management. A Chapter 11 company is generally worth more to creditors as a going concern than as a collection of liquidated assets, notes William Chipman, a bankruptcy attorney at Edwards, Angell, Palmer, and Dodge. Since “there is twice as much work when a company is in bankruptcy,” keeping good managers in place to help rehabilitate the company and create value for creditors is critical, he says.
What’s more, companies that are restructuring “don’t want key executives poached,” notes bankruptcy attorney Stephen Selbst of McDermott, Will and Emery. “That’s a risk for a company trying to emerge from Chapter 11.”
To mitigate such risk, Selbst predicts that some companies will venue shop before filing a bonus petition. That is, debtor companies will search for a court circuit that has already approved a bonus plan similar to their own. Companies can either choose to declare bankruptcy in the state where they are incorporated, or the state where their principle place of business operates, adds Selbst.