Litigation Drums Beat Over UAL's Proposed Post-Confirmation Corporate Governance and Management Equity Incentive Plan
As large cases go, the relationship between UAL and the Creditors' Committee has been pretty good, with most disputed matters having been resolved consensually between the parties without wasteful litigation fanfare and posturing. When it comes to post-confirmation corporate governance issues, however, the parties appear ready to duke it out over the proposed management equity incentive plan (which offers up to 15% of the equity of Reorganized UAL to about 400 management employees), creditor representation on Reorganized UAL's board of directors, and UAL's proposed inclusion of a "blank check" preferred stock "poison pill" defense in its post-confirmation corporate charter.
The dispute officially surfaced in the Committee's objection to confirmation of UAL's proposed reorganization plan (objection available here; UAL's plan and other related filings available here) over the "size and terms of the Management Equity Incentive Program [and] the composition of the post-emergence Board of Directors and other corporate governance issues." Still, the Committee assured the Court (and the markets), "the Committee fully supports the Debtors' intention to emerge from Chapter 11 in February 2006."
In gearing up for a fight over these issues, the Committee recently filed an emergency motion to retain Yale Law School's Professor Jonathan R. Macey (at $800/hour, for those curious about the going rate) to serve as the Committee's "Corporate Goverance Expert." (Motion here; Macey Affidavit here). The Committee explains the basis for bringing this emergency motion as follows:
On December 13, 2005, the Committee filed Creditors Committee's Objection to Plan Confirmation and Approval of Related Plan Supplement Documents. Among the Committee's specific objections were objections to the Debtors' proposed board composition and their proposal for implementation of poison pill provisions. The Committee has engaged in in-depth discussions and negotiations with the Debtors regarding the appropriateness of their proposed corporate structure, including, but not limited to, corporate governance, board composition and the availability of a poison pill. However, at this time no resolution of these issues has been achieved and the Committee requires an expert in preparation for the confirmation hearing to provide expert testimony and provide an expert report. The Committee is currently engaged in extensive preparation for the confirmation hearing scheduled to commence January 18, 2006. Expert reports are due January 2, 2006 and depositions must be completed by January 9, 2006. Therefore, the Committee seeks the relief requested herein on an emergency basis.
UAL today filed an objection (available here) to the Committee's application to retain Professor Macey, arguing that his services "are at worst completely irrelevant and unnecessary and at best wholly duplicative of the services already provided by Heidrick & Struggles, the Committee's previously-retained consultant on the composition and structure of United's board."
UAL's objection to the Committee's emergency motion provides an introduction to UAL's arguments in support of the management equity incentive plan and UAL's proposed post-confirmation corporate governance provisions. UAL describes the Committee's core confirmation objections regarding corporate governance issues as follows:
The Committee has raised three very specific confirmation objections that are germane to this Application. First, the Committee argues that United has declined to provide "fair board representation" to creditors, despite the fact that United and the Committee have been engaged in good faith discussions for months on the proper makeup, membership, and composition of a post-emergence board, including multiple high-level discussions between United's lead director and the chairman of the Creditors' Committee. In support of its argument the Committee cites Bankruptcy Code Section 1129(a)(5), which simply requires the disclosure of the post-emergence directors before confirmation and also that the appointment of those directors be consistent with the interests of creditors and public policy. Second, the Committee somehow suggests that United's proposed charter violates Bankruptcy Code Section 1123(a)(7), which essentially requires that a plan provide for the election and replacement of board members consistent with applicable corporate law, although the Committee does not allege how United's proposed charter violates applicable (Delaware) corporate law. Third, the Committee objects to a provision in United's proposed corporate charter that authorizes the issuance of "blank check" preferred stock. The Committee does not challenge the legality of this provision, but instead argues that it could be used to adopt a "rights plan," which, so the argument goes, may depress United's future share price in certain scenarios.
UAL then argues that Professor Macey's expert testimony on the issues of (1) the propriety of United's proposed corporate governance and policy, (2) board composition, and (3) the necessity of blank check preferred stock and rights plans is irrelevant to confirmation, stating:
The Committee has argued that it requires Mr. Macey's consulting services and expert testimony to support the Committee's "corporate governance" objections to confirmation. However, the Committee has not demonstrated, nor can it demonstrate, that Mr. Macey's services or testimony are in any way relevant to -- or remotely necessary to support -- those objections.
The Committee's first potential "corporate governance" objection is that United's purported refusal to give creditors an undefined "fair representation" on the post-exit board is inconsistent with creditors' interests and public policy. See 11 U.S.C. § 1129(a)(5)(A)(ii). However, Section 1129(a)(5)(A)(ii)'s confirmation standard basically requires that the bankruptcy court find that the proposed board members are qualified and honest as a matter of fact. See Colliers on Bankruptcy � 1129.03[b] ("public policy requirement would enable [the court] to disapprove plans in which demonstrated incompetence or malevolence is a hallmark of the proposed management."); Bank of America, Illinois v. 203 North LaSalle Street Partnership, 195 B.R. 692 (Bankr. N.D. Ill. 1996), aff'd, 126 F.3d 955 (7th Cir. 1997), rev'd on other grounds, 526 U.S. 434 (1999) (rejecting argument that proposed management of reorganized debtors was incompetent for purposes of Section 1129(a)(5)(A)(ii) because of management's failure to pay real estate taxes during case). United cannot see how the expert opinion of Mr. Macey would be relevant to the Court's factual inquiry into the competency and integrity of the specific individuals proposed to serve on United's post-emergence board. The Committee is free to put United to its burden of proof on this point, but expert testimony is completely irrelevant.
And to the extent that the Committee needs specific advice regarding the individuals proposed to serve on the post-exit board, the Committee is already receiving that advice from Heidrick & Struggles, who was retained in May, 2004 as the Committee's special board consultant, among other things, to conduct "a review and analysis of the appropriate structure and composition of the UAL board of directors to be implemented upon the Debtors' exit from bankruptcy." Order Approving H&S Retention at � 2(a). Further, Heidrick & Struggles was engaged to report to the Committee regarding the independence of United's board, whether the board and its committees are ideally structured within the industry, the impact of Sarbanes-Oxley legislation on the board composition, and any other matters requested by the Committee relating to board composition and operations. H&S Application at p. 6. Heidrick & Struggles already has charged United's estate $275,000 in fees through September, 2005 interviewing current members of United's board and other potential candidates for the post-exit board and communicating its findings to the Committee, among other things. Given this, United fails to see the need for an additional consultant on the issue of whether certain individuals are, as a factual matter, qualified to serve on United's board post-emergence for purposes of Section 1129(a)(5)(A)(ii).
The Committee's second potential "corporate governance" objection is that United's charter does not contain provisions consistent with the interests of creditors and public policy for the selection and replacement of members of the board, as required by 11 U.S.C. § 1123(a)(7). However, Section 1123(a)(7) merely requires that a corporate debtor's proposed post-emergence corporate charter provide for the election and replacement of board members consistent with applicable corporate law. See In re Eagle Bus Mfg., Inc., 134 B.R. 584 (Bankr. S.D. Tx. 1991) (plan satisfied Section 1123(a)(7) where selection of officers of reorganized debtors would be in the control of board of directors in accordance with applicable corporate law); In re Machne Menachem, Inc., 304 B.R. 140 (Bankr. M.D. Pa. 2003) (plan failed Section 1123(a)(7) where selection and removal of post-emergence directors violated state corporate law). Here, the Committee has not suggested that United's proposed corporate charter violates Delaware corporate law in any respect. Therefore, there is no need for any evidence on this issue.
But even if the Committee were to suggest that United's proposed charter violated Delaware corporate law in some way, then that would be a straight-forward legal issue for which Mr. Macey would be incompetent to testify as an expert, as this Court has recognized. See In re UAL Corporation et al., 02-B-48191, Hrg. Transcript p. 17, line 13 (Bankr. N.D. Ill. July 1, 2003) (excluding testimony of Explorer Pipeline's expert witness and holding that, "[t]here is a distinction made generally between expert testimony as to complicated facts, which the court is required to adjudicate on one hand, and legal arguments, which, although they may be unfamiliar to the court, nevertheless, are appropriately a subject of briefing and not expert testimony."); see also Good Shepherd Manor Foundation, Inc. v. City of Momence, 323 F.3d 557 (7th Cir. 2003) (expert testimony as to legal conclusions that will determine the outcome of the case is inadmissible); Vann Houten-Maynard v. ANR Pipeline Co., No 89 C 0377, 1995 WL 311367 at *3 (N.D. Ill. May 19, 1995) ("It is well settled that decisions regarding questions, interpretation, and explanation of applicable law are the province of the court.").
The Committee's third potential "corporate governance" objection is that United's charter provides for the issuance of "blank check" preferred stock, which according to the Committee potentially could be used in the future to support a "rights plan" that potentially could impair the stock price of reorganized United in the future. The Committee, however, has failed to articulate how the inclusion of this provision in the charter renders United's plan unconfirmable under Section 1129. Nor has the Committee suggested that such a provision in any way violates Delaware corporate law. Rather, the Committee is merely objecting because it thinks that this provision, although certainly appropriate, should be different. The Committee's wish that United's charter should be different is simply a "deal point" in United's proposed plan, but is not a proper basis for a plan objection: "So long as the mandatory types of [plan] provisions appear, the plan's ultimate structure, form, and effect are left to the plan's proponent." Colliers on Bankruptcy � 1129.01. Instead, it is for those individual creditors voting on the plan to decide whether to accept a plan of reorganization and a post-emergence charter allowing for the issuance of such preferred stock. Simply put, the Committee's desire that United's proposed charter -- which the Committee does not suggest violates the Bankruptcy Code or Delaware corporate law -- be different is not a basis for a plan objection, and it is certainly not a basis to retain an expert witness in these proceedings.
A hearing on the matter is set for December 27, 2005 at 9:30 am. With about $300 million in aggregate legal and professional fees and costs expected to have been incurred by confirmation, it's hard to see Judge Wedoff denying the motion on the basis of cost. Also, he's likely to give the Committee the opportunity to let Professor Macey prepare and be deposed on his expert report, so as to have a solid foundation for determining whether Professor Macey's testimony should be excluded.
This battle is shaping up into a real barn-burner, with the Committee identifying its preliminary list of potential witnesses for the January 18, 2006 confirmation hearing here, and UAL identifying its list of potential witnesses here.
© Steve Jakubowski 2005
I am a lawyer and I have not yet been disbarred. I am available to testify in this matter for a mere $400/hr.