Is the FAIR Act Fair to Companies Trying to Reorganize

Sen. Evan Bayh (D-Ind.) and Rep. John Conyers
(D-Mich.), ranking member of the House Judiciary Committee, introduced
legislation this spring to "limit executive compensation
agreements and require corporations to provide a more accurate picture
of their holdings." These identical bills, S. 2556 and H.R. 5113,
entitled the "Fairness and Accountability in Reorganizations Act
of 2006" (FAIR Act), have the stated goal of ensuring that workers
are treated more fairly during bankruptcy reorganizations. However, it
is questionable whether they would, if enacted in their present form,
have that practical effect. </p><p>The FAIR Act has two primary provisions.
It extends the requirements imposed on retention payments by the
Bankruptcy Abuse Prevention and Consumer Protection Act to include a
requirement of an evidentiary finding that an executive has another
job offer, and that their services are essential to the survival of
the business for eligibility for bonuses and other incentives. The
legislation also limits the amount of these payments to 10 times the
amount paid to non-management employees during the calendar year, or
no more then 25 percent of any similar executive benefit in the
preceding calendar year. With respect to foreign affiliates, the bill
requires the bankruptcy court to take into account "the ongoing
impact on the debtor of the debtor's relationship with all subsidiaries
and affiliates, regardless of whether any such subsidiary or affiliate
is a debtor entity" in determining whether or not a company can
modify its existing collective bargaining agreement and retiree health
benefits." </p><p>Both provisions place new burdens on the bankruptcy
judge. With respect to bonus compensation, the bankruptcy judge would
have to make evidentiary findings that the executive has another offer
and that his services are essential to the business, and determine
that the payment is "reasonable." These provisions may
appear "fair" to those who believe that executive compensation
in general is no longer related to worker's pay, and that executives
should be subject to the same sacrifices that workers are forced to
make in the reorganization process. However, as Robin Jeweler of the
Congressional Research Service has pointed out, opponents may contend
that "lengthy compensation proceedings will substantially
increase the costs of bankruptcy administration...and may diminish
managerial zeal for reducing non-management employee benefits in the
course of reorganization." </p><p>The practical effects of the proposed
legislation on the bankruptcy process are also questionable. According
to ABI's Immediate Past-President <b>John Penn</b> of Haynes and Boone
LLP (Fort Worth, Texas), "FAIR seems to be 'feel good'
legislation in that it might make someone feel good to propose it, but
it probably would not have a material effect on KERPs." (See
analysis in the Affairs of State column, above.) </p><p>The requirement in
the proposed legislation to take foreign affiliates into account
before modifying collective bargaining agreements and retiree health
benefits feeds workers' concerns that foreign entities compete for
American jobs. As a practical matter, the language currently in the
bill appears unworkable for a number of legal and functional reasons
relating to corporate law and the realities of the insolvency
situation. Thus, the "fairness" of this aspect of the
proposal cannot even be measured at this point in the legislative
process. </p><p>Sen. Bayh and Rep. Conyers are now focused on reaching out
to colleagues to build support for their proposal. The Senate bill has
seven co-sponsors, all Democrats, while the House bill has 26
co-sponsors, all Democrats. Given the short timeframe remaining in the
session and the partisan orientation of this legislation, the
probability of enactment in this Congress now appears slim. </p>