American-US Airways court approval hinges on CEO compensation

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Bankruptcy court approval of the proposed American Airlines and US Airways merger hangs on a possible $19.9 million payout to American chief executive Tom Horton.

Judge Sean Lane heard arguments for approval of the merger from lawyers for American, the unsecured creditors committee, the ad-hoc committee of AMR creditors and US Airways, as well as arguments against the payout from the US Trustee at the US Bankruptcy Court for the Southern District of New York today.

Stephen Karotkin, a lawyer at Weil, Gotshal & Manges representing AMR, says that the payment is an obligation of the new company and not of the debtor, that would only be paid after the airline exits bankruptcy and the merger is consummated. He calls the US Trustee's objection "fundamentally flawed".

"The debtors manipulated the timing of payments in order to avoid 503C," says Susan Golden, an attorney at the US Justice Department representing the US Trustee. She adds that the new company will be the reorganised entity with US Airways as a subsidiary based on the plans filed with the court.

Section 503C of the US bankruptcy code limits severance payments to executives as part of chapter 11 reorganisations.

Under what lawyers refer to as a "merger bonus", Horton would receive $19.9 million in cash and stock as well as a lifetime of free first-class tickets for himself and his wife on American.

The trustee also objects to certain short-term and long-term incentives in the deal that are designed to bring the compensation of American managers close to parity with their counterparts at US Airways.

"This merger is truly a tremendous result," says Lane, noting that there are no objections against the actual deal. He says that he would prefer to see the compensation issue included with the final reorganisation plan, which is due by 29 May, but adds that he must rule on the objections brought by the US Trustee.

Karotkin warns that both parties would have the right to terminate the deal if it is approved without the compensation agreements.

"We would not expect either airline to exercise their termination rights," says John Butler, a partner at Skadden representing the unsecured creditors committee.

There is widespread support of the merger, despite the objections. AMR cites the fact that its motion to approve the proposed merger with the court went out to roughly 300,000 parties and there were fewer than 20 comments filed against it with none coming from parties with an economic stake in the deal.

Separately, Lane approves AMR's motion to extend the exclusivity date for it to file a reorganisation plan to 29 May. That would be open to comments for 60 days before the judge could issue a ruling.

This is the last extension of its filing deadline that AMR will request from the court, says Karotkin.

Bankruptcy court approval of the merger could come as early as the end of July under ideal circumstances, based on the above timeline.