This week, we celebrate the Declaration of Independence – the document that set out the principles on which the United States claimed its independence from Great Britain. Since then, while we’ve crafted a “special relationship” with our former colonial master, we’ve gone our own way in some particulars – such as getting rid of extra vowels in some of our words and changing some spellings, and driving on the right.
One way in which our two nations are similar, however, is that severance pay that is perceived as excessive can stir public controversy.
American Airlines’ CEO, Tom Horton, moved one step closer to receiving the $20 million severance payment he’s negotiated with the bankrupt airline. On Tuesday, the bankruptcy judge hearing American’s case allowed the payment to stay in the airline’s disclosure statement (approval of the statement is a predicate step to ultimately “reorganizing” and exiting bankruptcy). The approval comes over strenuous objections by the U. S. Trustee, who argued that Horton’s payment violated bankruptcy law. The judge’s decision isn’t final, and the issue can be revisited down the road, but the fact that it stayed in the disclosure statement (and will be presented to the airlines’ creditors for approval) is one more hurdle cleared for Horton.
We’ve written about this payment here, here, and here. And, no, we don’t write about it so much because we’re jealous of the substantial payment Horton may receive; it’s what this case says about severance and golden parachutes generally. Although the lifetime of free travel he and his wife would also receive under his severance agreement is, frankly, kind of cool.
You might think that a company in bankruptcy wouldn’t be able to give its CEO a multi-million-dollar severance payment.
But just because a company is in bankruptcy doesn’t necessarily mean it doesn’t have any money – it just means it doesn’t have enough to pay all of its debts, or to function as a continuing concern. The company may, in fact, have the means to make a rather generous severance payment – like the $20 million American Airlines is proposing to pay its CEO, Tom Horton, as the airline comes out of Chapter 11 and into a merger with US Airways.
This proposed payment, though, has aroused more objection than a lost bag or a missed connection. Indeed, we’ve written about this dispute before at Suits-by-Suits, but like a three-mile-long runway it just keeps going on and on in bankruptcy court. In advance of a hearing on the payment scheduled for tomorrow, it’s time to take a look at where this case has been and what it can teach executives and companies about the turbulence that can happen when bankruptcy law meets severance agreements. In short, executives should know that unlike their seat cushions, their severance agreements may or may not keep them afloat in the event their employer has a crash landing.
Late last week, Rutgers announced that it reached a $475,000 settlement with former men’s basketball coach Mike Rice and that no cause for Rice’s termination would be provided. Recently-publicized videotapes show Rice at practices hitting, kicking and throwing basketballs at his players and taunting them with obscenities and anti-gay slurs (not to be confused with this shocking video of Middle Delaware State women’s basketball coach Sheila Kelly throwing toasters at her players). The announcement came more than two weeks after Rutgers President Robert Barchi told reporters that Rice was fired, but not for cause. And that announcement came several months after Rice was suspended from work for three days, following an internal investigation by outside counsel, resulting in this report.
This week, Heinz sounded a lot like American did last week (as we noted) in justifying the size of a golden parachute for its CEO upon the completion of a merger. Heinz’s spokesperson claimed that payments to its CEO William Johnson totaling $56 million "reflect Mr. Johnson’s success in creating billions of dollars in shareholder value," including "the 19% premium" that Heinz shareholders are to receive for their shares when Heinz is acquired by Berkshire Hathaway and 3G Capital. For those of us who consider $56 million to be a whole lot of money – no matter what they guy did for ketchup sales – the spokesperson might also have said that only about $17 million of that amount (okay, still a whole lot of money) is really a golden parachute.
On Friday, we reported on American Airline CEO Tom Horton’s golden parachute in the merger agreement between American and US Airways. American is asking the court overseeing its bankruptcy to approve the merger agreement, which includes a letter agreement between American and Horton. The letter agreement provides that Horton’s employment with American will be terminated at the time of the merger, and – so long as he agrees to release American and US Airways from any claims – he will be paid severance totaling nearly $20 million in cash and stock.
Why would any company agree to such a thing? According to American, its agreement with Horton is “in recognition of [his] efforts in leading [American’s] restructuring and his role in enhancing the value of [American] and overseeing the evaluation and assessment of potential strategic alternatives that culminated in the Merger.” In other words, to compensate him for helping to make possible a good merger and then getting out of the way. The new company created by the merger can only have one CEO, and it is best for the new company not to be distracted by disputes with former executives of the old company.
Document discovery in litigation is a way for parties to learn about the actual facts underlying a dispute. Sometimes, however, parties intentionally destroy documents in advance of litigation (which is called “spoliation”). Spoliation can have very serious consequences, including a court-imposed “adverse inference” instruction. When a court gives such an instruction, it tells the jury that it may assume that documents deleted in advance of discovery would have been bad for the party who deleted them.
This happened to Janet Murley, a former vice president of marketing for the Hallmark Group. As a result, she is now hundreds of thousands of dollars poorer.
For a high-level executive leaving a company under less-than-ideal conditions, it’s as common as handing in keys to security and shutting down the computer for the last time. In exchange for a severance payment, the executive is asked to sign the typical general release: “I hereby release my employer from any claims, liabilities, demands, or causes of action . . .”
Unsurprisingly, once an employee signs a general release, if he later sues, he is likely to face a quick motion to dismiss.
As the regulatory and business environments in which our clients operate grow increasingly complex, we identify and offer perspectives on significant legal developments affecting businesses, organizations, and individuals. Each post aims to address timely issues and trends by evaluating impactful decisions, sharing observations of key enforcement changes, or distilling best practices drawn from experience. InsightZS also features personal interest pieces about the impact of our legal work in our communities and about associate life at Zuckerman Spaeder.
Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.
John J. Connolly
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Andrew N. Goldfarb
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Sara Alpert Lawson
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