American Airlines won bankruptcy-court approval to merge with US Airways at a hearing in Manhattan this morning, but Judge Sean Lane shot down a proposed $20 million severance payment to AMR CEO Tom Horton.
Lane made his ruling after a lengthy back-and-forth between the U.S. Trustee in the case and AMR’s lawyers regarding the proposed severance package for Horton, consisting of $10 million in cash and $10 million in stock. Although creditors anticipate a full recovery as a result of the merger – an outcome that Judge Lane called a “truly tremendous result” – the U.S. Trustee objected that the proposed bonus violates the Bankruptcy Code and should not be granted.
In his ruling, Lane clarified that the proposed severance package was not off the table for good, but he would not approve it today as part of the merger.
Skadden partner Jack Butler, representing the official committee of unsecured creditors in the case, said the payment to Horton – consisting of $10 million in cash and $10 million in stock – was labeled a severance payment, but is in fact “much more than that.” The $20 million figure incorporates a number of incentives that the committee preferred be rolled into a single payment. Butler did not elaborate on each of the incentives in play.
Following an extended lunch break during which negotiations between AMR’s lawyers and the Trustee took place out of court, AMR said it was prepared to add yet another threshold to the severance payment. The bonus was already contingent on approval of a reorganization plan and completion of the merger, but AMR would also agree to subjecting the payment to a vote by the new board of directors of the merged company. AMR lawyer Stephen Karotkin, a partner at Weil, Gotshal & Manges, said doing so would make the board accountable to its new shareholders, putting the decision well outside the realm of the Bankruptcy Code.
The U.S. Trustee disagreed, calling the bonus issue “incredibly troubling.” A lone American Airlines pilot was among the parties to speak at today’s hearing, reading a prepared statement that decried the large bonus and general lack of leadership among company management over the past decade. He proposed an alternative offer for Horton: $500,000 and free coach tickets for life.
The airlines have said they expect the $11 billion merger deal to close in the third quarter of this year, a timetable that could be met with a plan filed by or near the end of May.
Judge Lane today also granted the company’s request for a final extension of its exclusive right to file a reorganization plan, through May 29, and to solicit votes on a plan, through July 29. The extension will give AMR time to formulate and propose a Chapter 11 plan that will implement the merger with US Airways, the company said in its motion seeking exclusivity.
American has not yet revealed when it will actually file its plan, but has said it is currently “in the process of formulating” it. AMR lawyer Stephen Karotkin told Judge Lane at one point during today’s hearing that “between now and confirmation of a plan will likely be six months.” – John Bringardner