Bankruptcy Court Approves Management Incentive Plan and Sales Bonus Plan as Proper Exercise of Debtor's Business Judgment and Holds That Plans Were Not KERPs That Were Subject to 11 U.S.C. § 503(c)
In re Global Home Prods., LLC, Case No. 06-10340 (KG), 369 B.R. 778 (Bankr. D. Del. 2007) (Judge Kevin Gross)
The debtors proposed bonus plans for management and certain sales staff, which were based on performance and incentives. The debtors’ unionized employees objected to the plan, characterizing it as a Key Employee Retention Plan (KERP), approval of which was subject to the rigorous requirements of 11 U.S.C. § 503(c). The court approved the plans, finding that section 503(c) was inapplicable, as the plans were primarily incentivizing, rather than retentive or in the nature of severance. Accordingly, the court measured whether the plans were formulated according to a proper exercise of the debtors’ business judgment, and finding that they were, approved them under the less exacting business judgment standard of 11 U.S.C. § 363.
Debtor Global Home Products, LLC filed a motion for an order approving and authorizing a management incentive plan and a sales bonus plan. Under these plans, the debtor would pay management bonuses based on performance and incentives, and eligible sales staff would receive an incentive-based bonus plan.The debtors’ fiscal year began on April 1, 2006 (ten days before the debtors commenced their cases) and would end on March 31, 2007. The management plan would award each eligible employee, on a quarterly basis and as a percentage of their base salary, up to four (4) potential incentive payments payable if the Management Plan's minimum EBITDAR and/or Cash Flow objectives are met at the end of each of four relevant periods within the fiscal year. The management plan was comprised of two components: EBITDAR goal objectives and cash flow goal objectives. The components were both weighted to count for 50% of each potential quarterly payment. To remain eligible to receive payments, eligible employees were required to be employed with the debtors as of the last day of the particular quarter on which the requisite EBITDAR and/or cash flow objectives were actually achieved.
As to Mark Eichhorn, the debtors’ Interim Chief Executive Officer and President of debtor Anchor Hocking, in lieu of quarterly payments, the management plan provided for an amortization based upon a formula of Eichhorn’s existing obligations owed to debtors in the amount of $310,000 in respect of a prepetition loan and relocation allowance advanced to him prepetition in connection with expenses incurred pursuant to his relocation from Illinois to Ohio. The Debtors and Eichhorn agreed to quarterly amortizations of the relocation obligation based upon a formula. Under no circumstances would the total amortization ever exceed the amount of the relocation obligation. However, unlike other Eligible Employees, Eichhorn was not entitled to any additional benefit if the debtors exceed 100% of the EBITDAR and Cash Flow objectives.
Debtors estimated that the total cost of the management program would range between $890,000 up to a maximum of $2,700,000.
Under the sales plan, eligible sales managers were entitled to receive up to (i) 30% of their annual salaries based on the annual percentage increase of annual sales for their division calculated at the end of the 2007 fiscal year over the prior year, plus (ii) a 15% bonus payment pursuant to the same terms and conditions applicable to the management plan.
Unionized employees of the debtors objected to the plans, characterizing them as so-called Key Employee Retention Programs that were subject to the strictures of 11 U.S.C. § 503(c)(1) and (3).
The court overruled the objections, finding that 11 U.S.C. § 503(c) was inapplicable as the plans were not primarily to retain personnel, and were not in the nature of severance. Instead, the court found that the plans were meant to motivate employees. In so concluding, the court took guidance from Judge Burton Lifland’s findings in the Dana Corporation bankruptcy case in the United States Bankruptcy Court for the Southern District of New York. In Dana, the court rejected the debtor’s first proposed incentive plan, finding it to be nothing more than a KERP. However, Judge Lifland approved a revised plan, finding that it was similar to bonus programs offered by the Dana debtor pre-petition, and was therefore within Dana’s ordinary course of business, and a proper exercise of Dana’s business judgment.
The Delaware court adopted the analysis employed by Judge Lifland to determine whether the bonus plans were a proper exercise of the debtors’ business judgment, considering (1) whether there was a reasonable relationship between the plan proposed and the results to be obtained; (2) whether the cost of the plan was reasonable in the context of the debtors’ assets, liabilities and earning potential; (3) whether the scope of the plan was fair and reasonable, i.e., whether it applied to all employees, or discriminated unfairly; (4) whether the plan was consistent with industry standards; (5) what were the due diligence efforts of the debtors in investigating the need for a plan, analyzing which key employees needed to be incentivized, what was available, and what was generally applicable to the debtors’ particular industry; and (6) whether the debtor received independent counsel in performing due diligence and in creating and authorizing the incentive compensation.
The court found that all of these requirements were met, with the exception of consultation with independent counsel. However, because the bonus programs were almost identical to plans previously used by the debtors, and were approved by the debtors’ compensation committee and board of directors, the lack of proof of that factor did not favor a finding that the plans were improper. The court was satisfied that the plans were primarily incentivizing, and any retentive effect was coincidental because the same plans were used prepetition, when retention was not the motive. Although the debtors conceded that all compensation is retentive, the court was satisfied that the primary goal of the plans was to create value for the debtors by motivating performance. Accordingly, the court approved the plans as a proper exercise of the debtors’ business judgment under 11 U.S.C. § 363.
