In re Hawker Beechcraft, Inc.

• Decision Date: 24 August 2012
• Docket Number: No. 12–11873 (SMB).,12–11873 (SMB).
• Citation: 479 B.R. 308
• Parties: In re HAWKER BEECHCRAFT, INC., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

479 B.R. 308

56 Bankr.Ct.Dec. 259

In re HAWKER BEECHCRAFT, INC., et al., Debtors.

No. 12–11873 (SMB).

United States Bankruptcy Court, S.D. New York.

Aug. 24, 2012.

Kirkland & Ellis LLP, James H.M. Sprayregen, Esq., Paul M. Basta, Esq., Patrick J. Nash, Jr., Esq., Ross M. Kwasteniet, Esq., Of Counsel, New York, NY, for the Debtors and Debtors in Possession.

Tracy Hope Davis, Paul K. Schwartzberg, Esq., Of Counsel, New York, NY, United States Trustee.

Lowenstein Sandler PC, Sharon L. Levine, Esq., Paul Kizel, Esq., Of Counsel, Roseland, NJ, for the International Association of Machinists and Aerospace Workers, AFL–CIO.

MEMORANDUM DECISION DENYING DEBTORS' MOTION TO IMPLEMENT A KEY EMPLOYEE INCENTIVE PLAN

STUART M. BERNSTEIN, Bankruptcy Judge.

The Debtors filed a motion seeking approval of their proposed key employee incentive plan (the “KEIP”) and their non-insider key employee retention plan (the “KERP”).( See Debtors' Motion for Entry of an Order Approving the Debtors' Key Employee Incentive Plan and Key Employee Retention Plan and Granting Related Relief, dated on July 13, 2012(“ Motion ”)(ECF Doc. # 349).)Following an evidentiary hearing, the Court approved the KERP from the bench, and reserved decision on the KEIP.Although the KEIP includes elements of incentive compensation, when viewed as a whole, it sets the minimum bonus bar too low to qualify as anything other than a retention program for insiders.Accordingly, the Court concludes that the Debtors have failed to sustain their burden of proof and denies the KEIP part of the Motion without prejudice.

BACKGROUND

A.Introduction

At all relevant times, the Debtors have been engaged in the business of manufacturing and servicing business jets, trainer/attack aircraft and propeller and piston aircraft under the Hawker and Beechcraft brands.( See Declaration of Robert S. Miller(I) In Support of the Debtors' Chapter 11 Petitions and First Day Motions and (II) Pursuant to Local Bankruptcy Rule 1007–2, dated May 4, 2012, at ¶¶ 6, 13(“ Miller First Day Declaration ”)(ECF Doc. # 22).)Burdened with excessive secured and unsecured debt, they filed chapter 11 petitions in this Court on May 3, 2012(the “Petition Date”).( Motionat ¶ 4.)

Prior to the Petition Date, the Debtors had entered into a Restructuring Support Agreement (the “RSA”)¹ with the majority of their creditors (the “Consenting Creditors”) which, in substance, would convert 100% of their prepetition debt into equity (the “Standalone Transaction”).The Debtors also agreed prior to the Petition Date but in contemplation of bankruptcy to (a) file a plan of reorganization and disclosure statement by June 30, 2012, (b) obtain an order approving the disclosure statement by August 31, 2012, (c) confirm the plan by November 15, 2012 and (d) consummate the plan by December 15, 2012.( Miller First Day Declarationat ¶ 60.)The Debtors met the first deadline, and scheduled the hearing to approve their disclosure statement for August 30, 2012.The latter hearing (and presumably, the August 31 deadline) has been adjourned, on consent, to September 27, 2012.

The RSA did not preclude the Debtors and their advisors from engaging in a marketingprocess to pursue a sale or other strategic transaction with a third party(“Third–Party Transaction”).( SeeRSA at§ 11.)The Debtors proceeded on a dual track pursuing the plan contemplated by the Standalone Transaction (the “Standalone Plan”) while contemporaneously seeking a Third–Party Transaction that would provide greater value to the estates.( See Transcript of the hearing held July 26, 2012(“ 7/26 Tr.”)at 31:3–32:10 (ECF Doc. # 432).)On or about July 2, 2012, the Debtors received a Second Revised Proposal from Superior Aviation Beijing, Co., Ltd.(“Superior”) to purchase substantially all of the Debtors' assets (excluding its defense business) on a cash free, debt-free basis for $1.79 billion in cash (the “Superior Proposal”).²The Superior Proposal was subject to several conditions including a 45 day exclusive access period during which the Debtors would cease soliciting or negotiating with other third parties, the parties would execute a definitive agreement, the Debtors would hold a bankruptcy auction and the parties would obtain the necessary regulatory approvals.³

On July 10, 2012, the Debtors filed the Superior Exclusivity Motion which sought Court authorization to grant the 45 day exclusivity sought by Superior.Following an evidentiary hearing, the Court granted the Superior Exclusivity Motion over the objection of the International Associations of Machinists and Aerospace Workers, AFL–CIO (“IAM”), the union that represented 45% of the Debtors' workforce as of the Petition Date.( Miller First Day Declarationat ¶¶ 6, 21.)

B.The Motion

The Debtors historically maintained incentive plans that paid certain key employees additional compensation through an annual cash incentive program based on certain cash and percentage profit targets and through equity-based awards.( Declaration of Robert S. Miller in Support of the Debtors' Motion for Entry of an Order Approving the Debtors' Key Employee Incentive Plan and the Key Employee Retention Plan and Granting Related Relief, dated July 13, 2012(“ Miller KEIP Declaration ”),⁴ at ¶ 11;see7/26 Tr.at 25.)The Debtors did not pay any bonuses to senior management under the 2011 plan because it failed to meet its targets.( 7/26 Tr.at 54.)There is also the structure for an incentive program in place for 2012, but the objectives have not been developed due to the instability in the business.( Id. at 26.)

As they contemplated bankruptcy, the Debtors opted to develop a senior management incentive program, and retained Towers Watson, executive compensation experts, to assist in its development.According to the testimony of Nick Bubnovich, a former director of Towers Watson who testified as an expert, the Debtors' senior management's base salary stood at 58% below the market median, ( id. at 78), substantially below market.( Id. at 84.)Working in conjunction with the Official Committee of Unsecured Creditors(the “Committee”) and the Consenting Creditors, the Debtors' developed the KEIP and filed the Motion seeking its approval.⁵

The KEIP applies to eight “insiders” within the meaning of 11 U.S.C. § 101(31), denominated as the senior leadership team, or SLT.They include the Debtors' Chairman, the Executive Vice President of Operations, the Vice President of Human Resources, the Vice President of Engineering, the Executive Vice President and General Counsel, the Senior Vice President of Global Customer Support, the Chief Financial Officer and the Executive Vice President of Customers.( Motionat ¶ 18.)The KEIP offers two mutually exclusive paths for awarding bonuses to the SLT depending on whether the Debtors consummate the Standalone Plan or a Third–Party Transaction.To be eligible to receive payment of any award, the SLT member must be employed on the effective date of the plan unless the SLT member has been terminated without cause or resigned for good reason prior to the date that payment is due.( Id.at ¶¶ 27, 30.)

1.The Standalone Plan

Each member of the SLT can earn up to 200% of his annual base salary, or the aggregate amount of $5,328,000, in the event the Debtors' consummate the Standalone Plan (the “Standalone Transaction Award”).The award is comprised of two independent components with 50% based on the timing of the consummation (the “Consummation Award”) and 50% based on the achievement of financial targets (the “Financial Performance Award”).The Consummation Award provides for a sliding scale of recovery under which the SLT members can earn a bonus if the Debtors consummate the Standalone Plan on or before December 15, 2012.The earlier the consummation, the greater the award.The following table, taken from the Motion, illustrates the target dates, and the percentage of base salary and total payouts under the Consummation Award:

+----------------------------------------------------------------------------+
                ¦Level¦Date of Plan Consummation               ¦% of Base Salary¦Total Payout¦
                +-----+----------------------------------------+----------------+------------¦
                ¦     ¦After 12/15/12                          ¦0%              ¦$0          ¦
                +-----+----------------------------------------+----------------+------------¦
                ¦1    ¦After 12/8/12, but on or before 12/15/12¦50%             ¦$1,332,000  ¦
                +-----+----------------------------------------+----------------+------------¦
                ¦2    ¦After 12/1/12, but on or before 12/8/12 ¦62.5%           ¦$1,615,000  ¦
                +-----+----------------------------------------+----------------+------------¦
                ¦3    ¦After 11/24/12, but on or before 12/1/12¦75%             ¦$1,938,000  ¦
                +-----+----------------------------------------+----------------+------------¦
                ¦4    ¦After 11/17/12, but on or before 11/24/ ¦82.5%           ¦$2,131,800  ¦
                ¦     ¦12                                      ¦                ¦            ¦
                +-----+----------------------------------------+----------------+------------¦
                ¦5    ¦Stretch Goal—On or before 11/17/12      ¦100%            ¦$2,664,000  ¦
                +----------------------------------------------------------------------------+
                

( Id.at ¶ 21.)These dates can be extended without notice or Court approval at the discretion of the Debtors and with the agreement of the Consenting Creditors and the Committee.( Id.)In addition, the target consummation dates will automatically be extended by the number of days (but not to exceed 30 days) beyond August 31, 2012, in which the Debtors have not resolved the treatment of their three defined benefit pension plans.( Id.)

The second component of the Standalone Transaction Award is the Financial Performance Award.The computation of this award is set out in a complicated chart at paragraph 23 of the Motion; it is based on a sliding scale of targets relating to the Debtors' cumulative net...