Legal Discussion Regarding KERP

Page updated: February 6, 2003

The hearing on the Motions to implement a Key Employee Retention Program (“KERP”) and to assume the employment contract of Glenn Tilton were scheduled for a court hearing on February 6, 2003.  AFA was the only party that filed objections to these motions. While the Creditors Committee had not publicly taken a position, it told United that there were substantial problems with the Motions which, if left unresolved, would force the Committee to oppose both Motions. Last week the Company began discussions with us and the Committee in order to address the Committee’s concerns as well as AFA’s objections.

While some progress was made on the assumption of Mr. Tilton’s employment contract, this Motion did not go forward on February 6th. The fact that there remain a number of open issues, the hearing was rescheduled for February 21st.Based upon these modifications to the KERP negotiated by AFA and the Creditors Committee, the Committee decided not to oppose the Motion.  As filed, the KERP consisted of two components, a payment schedule intended to retain key management employees, and an executive severance program for a limited number of United’s top officers. The Creditors Committee’s decision not to oppose the KERP Motion was based upon the following changes:

1. Originally, all 7500 managers were eligible to participate in the retention program. Although United claimed that it had selected approximately 320 individuals to participate, it had the discretion to expand that number to include all remaining eligible managers. The Committee convinced the Company that if it should increase the number of participants beyond 350 and the cost of the program by more than 8% it would have to provide notice to the Committee and approval of the Bankruptcy Court if an objection were filed. As a member of the Committee, we would also be notified of United’s intention to expand the program.

2. Under the severance plan, eleven senior vice-presidents were entitled to two years of severance pay. The Company agreed to limit this entitlement only to the three senior vice-presidents who report directly to Tilton. The other executives at this level will now receive eighteen months of severance pay.

3. Under the KERP as filed, executives receiving severance were also eligible for a bonus of an undisclosed amount. Under the terms of the understanding with the Committee, United eliminated this provision.

4. The KERP also provided senior officers who were furloughed with an indeterminate amount of pension credits. Now this benefit is limited to eleven individuals who are over age 50 and who would, in the event of their furlough, be treated as having attained age 55 for the purposes of the early retirement benefit computations. They would not, however, receive any pension accrual credits beyond their termination date.

In determining what position AFA should take at the hearing there were several critical considerations at play. First, the Committee’s support for the modified KERP Motion significantly increased the likelihood that the Court would approve it. This is particularly true since the Committee relied upon the advice of a firm that specializes in assessing executive compensation. It determined that the program in this case, as modified, was consistent with KERPs approved by other bankruptcy courts.

Second, one of the major objections of the Committee, as well as AFA, was that the KERP gave the Company, in effect, a blank check by permitting it to designate any or all of the 7500 managers as participants. That concern is now largely addressed by United’s agreement to limit the number of beneficiaries, as well as the cost of the program. In addition, the other components of the KERP which also gave the Company unfettered discretion – the bonus payment and the pension credits – were either eliminated or substantially reduced.

Third, to the extent the Company is required to demonstrate that a KERP is necessary, the Court would have looked beyond the recent experience of the Company. It would have instead focused on United’s argument that without a KERP other key managers will leave making a successful reorganization more difficult if not unattainable.

Finally, the Court would have to balance these considerations against the fundamental unfairness of a program that enriches executives while rank and file employees are subject to significant wage cuts and expected to suffer further concessions. Unfortunately, while the Court may have some appreciation for this disparity, it is principally concerned with assuring that the debtor emerges from bankruptcy. As such the Company’s request for the KERP and the Committee’s support for it would have allowed the Court to conclude that the KERP was necessary in this Chapter 11 proceeding.

Based upon this analysis, we concluded that the likelihood of AFA prevailing and convincing the Court to deny United’s motion was at best slim. In light of this assessment there was still one other factor we had to consider – what would be the Court’s perception of AFA if we were to decide to go forward with our opposition. In other words would our credibility with the court be enhanced or diminished by pursuing these objections. This is of particular concern since our standing before the court will be of critical importance, in the event, the Company files a Section 1113 application.

The Court would have undoubtedly been troubled by the fact that we were alone in our opposition; that no other party, not even another union, had joined us in fighting the KERP. Moreover, it would question why we had persisted when, based upon the advice of experts, the Creditors Committee had agreed to support the Motion. We concluded that putting our credibility at risk in a hearing where success was so unlikely was not prudent. Finally, withdrawing the objection hopefully conveyed to the Court that we appreciated the ”realities” of the case and were not doctrinaire. Thus, at the hearing on February 6th, we advised the Court that based upon the modifications achieved through discussions with the Company and the Creditors Committee we were, with great reluctance, withdrawing our objections. While we remained greatly disturbed by the fundamental unfairness of the KERP we also understood that there will be other opportunities for the Court to consider the balance of equities in this case.

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