Management Incentive Plans Remain Hotly Contested Issue in Chapter 11, According to December ABI Journal Article
Alexandria, Va. — Issues surrounding management incentive plans (MIPs) are among the most hotly negotiated by practitioners, strategic investors and stakeholders involved in a chapter 11 reorganization, according to an article in the December ABI Journal. “Finding agreement on the terms of an MIP can be among the most daunting obstacles toward building consensus around a restructuring plan,” Brian M. Resnick, Ron M. Aizen and Adam L. Shpeen of Davis Polk & Wardwell LLP (New York) write in their article, “Management Incentive Plans Under a Microscope.” “The timing of negotiating the terms of an MIP may itself be the subject of negotiations, with certain parties seeking to forge agreement early in restructuring negotiations and others seeking to defer committing to MIP terms until a new board of directors is seated.”
Resnick, Aizen and Shpeen write that MIPs are generally intended to serve the same purposes as equity incentive plans adopted by financially healthy companies — to attract and retain executives and other key employees and incentivize them to improve the business results of the reorganized company by providing them with an opportunity to acquire a proprietary interest in the company’s success. The Bankruptcy Code makes no reference to MIPs specifically, the authors point out, saying that § 1123 (b)(6) is seen as the provision that generally covers MIPs. “This general catch-all provision is thought to authorize a debtor to include an MIP as part of a reorganization plan, most often in the form of a plan supplement,” they write.
The authors find that the most hotly negotiated issues related to MIPs often pertain to “(1) the size of the MIP pool [maximum amount of shares reserved for issuance under the MIP], (2) the form and amount of any emergence grants, (3) the definition of a “change-in-control” transaction that triggers accelerated vesting of awards and (4) the circumstances by which awards vest or are forfeited when an employee is terminated.”
“As companies seek to build consensus among creditor constituencies in order to avoid the costs that are associated with protracted chapter 11 cases, MIPs will remain at the forefront of restructuring negotiations, requiring practitioners and bankruptcy participants to consider how to best structure an MIP and resolve certain hotly negotiated issues.”
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