Pg 1 of 10 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------------------------X : In re: : Chapter 11 : Case No. 14-13200 (SHL) AEREO, INC., : : Debtor. : ----------------------------------------------------------------------------X BROADCASTERS OBJECTION TO THE MOTION FOR ENTRY OF AN ORDER APPROVING KEY EMPLOYEE INCENTIVE PLAN Broadcasters 1 respectfully submit their Objection to Aereo, Inc. s ( Aereo or the Debtor ) November 20, 2014 Motion for Entry of an Order Approving Key Employee Incentive Plan (the Motion ). 2 INTRODUCTION The Court should deny the Motion for two reasons. First, Aereo s proposed Key Employee Incentive Plan ( KEIP ) is a disguised retention, not incentive, plan that is prohibited under 11 U.S.C. 503(c)(1). Under the proposed KEIP, Key Employees receive a bonus if they are still working for Aereo at the time Aereo closes a Qualified Transaction, or if they have left Aereo s employ before any such closing, at Aereo s request. (Motion 23.) KEIPs that are structured around events in the chapter 11 case, as opposed to incentivizing performance targets, are disfavored. As one court in this district 1 Broadcasters are WNET, THIRTEEN, Fox Television Stations, Inc., Twentieth Century Fox Film Corporation, WPIX, LLC, Univision Television Group, Inc., The Univision Network Limited Partnership, Public Broadcasting Service, KSTU LLC, Fox Broadcasting Company, KUTV Licensee, LLC, American Broadcasting Companies, Inc., Disney Enterprises, Inc., CBS Broadcasting Inc., CBS Studios Inc., NBCUniversal Media, LLC, NBC Studios, LLC, Universal Network Television, LLC, Telemundo Network Group LLC, and WNJU-TV Broadcasting LLC. 2 In addition to filing their own Objection herein, the Broadcasters join in the Objection of the United States Trustee to Debtor s Motion For Entry of an Order Approving Key Employee Incentive Plan. (Dkt. 55, the U.S. Trustee s Objection. )
Pg 2 of 10 explained, triggering bonus awards solely on the basis of a sale transaction, confirming a reorganization plan or exiting bankruptcy are not sufficient to shift consideration of a plan providing for payments to insiders from section 503(c)(1) to section 503(c)(3). In re Residential Capital, LLC, 478 B.R. 154, 168 (Bankr. S.D.N.Y. 2012) (emphasis added). Accordingly, because Aereo has not explained how its proposed KEIP satisfies 503(c)(1) s demanding standards, the Motion should be denied. Second, even were the KEIP a true incentive plan, this Court should not approve it because it is not justified by the facts and circumstances of this case. There is no legitimate business justification for spending nearly $1 million of scarce estate resources on bonuses to insiders, particularly in light of substantial increases in salary already given to certain insiders. BACKGROUND On November 20, 2014, the Debtor filed its chapter 11 petition. That same day, it filed its Motion, seeking this Court s authorization for a KEIP. It described the KEIP as follows: Key Employees may earn a bonus (the Transaction Bonus ) in the lesser amount of: (a) a Key Employee s respective share of 3% of gross Qualified Transaction proceeds (calculated as the percentage of a Key Employee s annual base salary as compared to total aggregate amount of all Key Employees annual base salaries), or (b) 50% of a Key Employees [sic] Annual Base Salary (the Maximum Transaction Bonus ), to be paid within 21 days following closing of a Qualified Transaction to Key Employees who either (x) remain employed by the Debtor on the date of the closing of the Qualified Transaction, or (y) are involuntarily terminated without cause prior to the closing of such Qualified Transaction. (Motion 23.) A Qualified Transaction is any transaction accepted by the Debtor without financial benchmarks. The Key Employees are the Debtor s officers and senior managers. (Id. 21.) The maximum amount payable to all of the Key Employees is $940,500. (Id. 24.) In addition to this proposed bonus plan, Aereo has already increased the salary of its CFO 400% (from $50,000 to $200,000) and its Deputy General Counsel by over 900% (from $20,000 to $185,000). (Id. at 17 n.4.) While Aereo has reduced the salary of other employees, it appears 2
Pg 3 of 10 Aereo s CEO will be backstopping these salary reductions with the opportunity to potentially earn consulting fees or other income for work at his personal think tank/incubator. (Id.) Thus, in addition to the bonuses proposed by Aereo, two executives will be receiving salary increases, and it is unclear whether the other Key Employees will actually have their salaries reduced. To put this proposed payment in perspective, according to the Debtor s Schedules, the Debtor currently has only $3 million in cash. (See Bankr. Dkt. 43, Sch. B.) The Broadcasters have significant claims against the estate over the past two years, Aereo has been infringing the Broadcasters copyrights on a daily basis, twenty-four hours a day, seven days a week. For that reason, the Broadcasters justifiably are concerned about any unnecessary or unwarranted cash payments to insiders. ARGUMENT The Motion should be denied for two reasons: (1) Aereo s proposal is a KERP disguised as a KEIP; and (2) even if a KEIP, it is not justified under the facts and circumstances of this case. I. The KEIP Should Not Be Approved Because It Is A Disguised Retention Plan. Section 503(c)(1) of the Bankruptcy Code strictly limits the payment of retention bonuses to a debtor s insiders. Section 503(c) was added to the Bankruptcy Code in 2005 as part of the BAPCPA amendments to eradicate the notion that executives were entitled to bonuses simply for staying with the [c]ompany through the bankruptcy process. In re Velo Holdings, Inc., 472 B.R. 201, 209 (Bankr. S.D.N.Y. 2012) (citing In re Global Home Prods., LLC, 369 B.R. 778, 783 84 (Bankr. D. Del. 2007)). The effect of adding the section was to put in place a set of challenging standards and high hurdles for debtors to overcome before such payments could 3
Pg 4 of 10 be paid. In re AMR Corp., 490 B.R. 158, 166 (Bankr. S.D.N.Y. 2013) (quoting Global Home Prods., 369 B.R. at 784 85). Given the history and intent of section 503(c), courts disfavor attempts to bypass the requirements of section 503(c). Id. Section 503(c)(1) establishes strict evidentiary standards that a debtor must satisfy before a bankruptcy court may authorize payments to an insider for the purpose of inducing that person to remain with the debtor s business. In re Dana Corp., 351 B.R. 96, 100 (Bankr. S.D.N.Y. 2006). Specifically, under 503(c)(1), a court may not allow a retention payment unless it finds, based on evidence the Debtor has placed in the record, that: (a) the individual has a bona fide job offer from another business at the same or greater rate of compensation; (b) the services provided by the individual are essential to the survival of the debtor s business; and (c) the payments meet the strict monetary tests set forth in 503(c)(1)(C). 11 U.S.C. 503(c)(1). Debtors like Aereo often mischaracterize a retention program as an incentive program to escape 503(c)(1) s exacting requirements. Attempts to characterize what are essentially prohibited retention programs as incentive programs in order to bypass the requirements of section 503(c)(1) are looked upon with disfavor.... Velo, 472 B.R. at 209. If it walks like a duck (KERP) and quacks like a duck (KERP), it s a duck (KERP). Dana, 351 B.R. at 102 n.3. For a bonus plan to be incentivizing, it should be tied to significant goals that are difficult to achieve. For example, in In re Hawker Beechcraft, Inc., 479 B.R. 308 (Bankr. S.D.N.Y. 2012), the bankruptcy court determined that the debtors proposed KEIP plan was more properly categorized as a KERP and held that it could not survive the strict requirements for KERPs under 503(c). According to the court in Hawker, it was required to examine a proposed KEIP mindful of the practice that Congress sought to eradicate and, at the risk of oversimplification, determine whether the proposed targets are designed to motivate insiders to rise to a challenge or 4
Pg 5 of 10 merely report to work. Id. at 313. Under this strict standard, the bankruptcy court determined that the debtors proposed KEIP was actually a KERP. It found that although the KEIP include[d] incentivizing targets, the lowest levels [were] well within reach. Id. The Hawker court found that, while the targets in that plan may not have been lay-ups, they were more like free throws than half court flings at the buzzer the threshold of incentives impliedly required to be properly classified as a KEIP is that a trigger must be based upon financial targets which demonstrate a substantial modicum of success rather than a mere event without any baseline. Id. at 313 n.7. The court reasoned that the sale price target in the proposed KEIP did not seem to be much of a challenge, and noted that the executives would still receive a bonus under the plan, even if the sale was achieved at a substantially reduced price. Id. at 313-14. In other words, he has to stay for his pay. Id. at 14. Here, Aereo has failed to show that Aereo s proposed sale of its assets requires any work worth incentivizing its Key Employees. Residential Capital is instructive. The court in Residential Capital held that a proposed KEIP was not primarily incentivizing and therefore was subject to 503(c)(1) when nearly two thirds of the KEIP award vested upon closing of a series of 363 sales, with no additional financial hurdles to meet. 478 B.R. at 171-73. The court rejected the debtors argument that the KEIP plan was necessary to incentivize new responsibilities that would require a significant amount of time and effort from the KEIP participants. Id. at 168. The debtors cited significant regulatory issues that needed to be addressed, as well as the increased demands of managing the sale and bankruptcy processes simultaneously. Id. The court noted that such burdens would also be true in virtually all chapter 11 cases and that section 503(c) requires more than increased responsibilities to justify increased pay for insiders. Id. And it observed that several decisions within the Southern 5
Pg 6 of 10 District of New York have made it clear that triggering bonus awards solely on the basis of a sale transaction, confirming a reorganization plan or exiting bankruptcy are not sufficient to shift consideration of a plan providing for payments to insiders from section 503(c)(1) to section 503(c)(3). Id. at 172. Those concerns apply equally to Aereo s entire KEIP. It is linked solely to the closing of a 363 sale. Aereo has not demonstrated that paying nearly $1 million in cash bonuses to the Key Employees out of scarce resources is primarily incentivizing, id., let alone designed to motivate insiders to rise to a challenge rather than merely report to work, Hawker, 479 B.R. at 313. As pointed out by the U.S. Trustee s Objection, it appears that the principal purpose of the Bonus Plan is simply to ensure that the Debtor s insiders remain with the Debtor through its tenure in Chapter 11, and fulfill the very fiduciary duties that they are already required to fill under the Bankruptcy Code. (U.S. Trustee s Objection, Dkt. 55 at p. 13). Accordingly, Aereo has failed to establish that its proposed plan is designed primarily to incentive any work over and above the work already required of the Key Employees. See Dana, 351 B.R. at 102 (citing Clarkson Co. Ltd. V. Shaheen, 660 F.2d 506, 512 (2d Cir. 1981). Moreover, the Broadcasters have concerns that the Debtor is attempting to use the sale as a means to not only protect the Debtor s assets from the substantial liability likely to result from the District Court Litigation, but also work out an insider deal. In its Bidding Procedures Motion, Aereo notes that it has a so-called net loss carryover for Federal tax purposes of approximately $90 million to $100 million. (Bankr. Dkt. 15, Bidding Procedures Motion 16.) Aereo describes this tax attribute as an asset that some parties would find of significant value in connection with a reorganization or other transaction that would preserve the future use of that attribute under applicable law. (Id.). Thus, Aereo s proposed sale process appears to be 6
Pg 7 of 10 designed in a way that will allow the insiders to retain control of the company and to take advantage of the net loss carryover. Assuming this is the case, Aereo already knows whether a sale of its assets for at least $31.35 million, (Motion 24.), is a lay-up, or more like free throws than half court flings at the buzzer. See Hawker, 479 B.R. at 313 n.7. Because the proposed KEIP is just a disguised retention plan, Aereo must instead satisfy the requirements of section 503(c)(1): (1) that each insider have a bona fide job offer at the same or greater compensation; (2) that the insiders are essential to the survival of the business; and (3) that the proposed retention payments are either less than ten times the mean of similar payments made to non-management employees during the calendar year or less than 25 percent of the amount of any similar payments made in the prior year. 11 U.S.C. 503(c)(1). Aereo has the burden to prove these facts (see Dana, 351 B.R. at 100) and has not suggested in its Motion that it will be able to do so. Accordingly the Motion should be denied. II. Even If A KEIP, The Proposed KEIP Is Not Justified By The Facts And Circumstances Of This Case. Aereo correctly cites the factors that courts use to determine whether a proposed bonus plan passes muster under section 503(c)(3). (Motion 32.) Generally, courts examine, among other factors: (a) Is there a reasonable relationship between the proposed plan and the results to be obtained, i.e., will the key employee stay for as long as it takes for the debtor to reorganize or market its assets, or in the case of a performance incentive, is the plan calculated to achieve the desired performance? (b) Is the cost of the cost of the plan reasonable in the context of the debtor s assets, liabilities and earning potential? (c) Is the plan or proposal consistent with industry standards? 7
Pg 8 of 10 Global Home Prods., 369 B.R. at 786 (citing In re Dana Corp., 358 B.R. 567, 576-77 (Bankr. S.D.N.Y. 2006). Although it identifies the factors, Aereo cannot satisfy them. The answers to these questions clearly indicate that the proposed KEIP is not justified by the facts and circumstances of this case. First, as discussed above, Aereo has not demonstrated that the KEIP primarily incentivizes the Key Employees. Aereo has not demonstrated what additional work will be required of the Key Employees, outside of what is already required of them as part of their employment with, and fiduciary duties to, Aereo. In addition, payments of nearly $1 million in bonuses to Key Employees at a time when it is highly uncertain (if not completely unlikely) whether general unsecured creditors will receive meaningful distributions is not appropriate or justified. Moreover, although Aereo has reduced the salary of some its employees (albeit, with unclear compensation being instead paid by the CEO out of his personal think tank/incubator ) the salary increases of the CFO and Deputy General Counsel demonstrate just how unreasonable and unnecessary these bonuses will be to incentive these employees to do any work not already required of them. Second, Aereo has provided no evidence that the cost of the KEIP is reasonable given its scarce assets and substantial liabilities, including the significant liability to Broadcasters for copyright infringement. Third, Aereo has provided no direct evidence that the KEIP is consistent with industry standards or that it investigated the need for a KEIP, outside of its bare allegations that it engaged in appropriate efforts and consulted with its advisors. (Motion 40.) It is hard to fathom how paying $1 million in bonuses to insiders, for a proposed sale of copyright infringing 8
Pg 9 of 10 assets that may, ostensibly, only benefit the very insiders identified as Key Employees, is within any industry standard or sound business judgment. 9
Pg 10 of 10 WHEREFORE, for the reasons set forth herein, the Broadcasters respectfully request that the Court deny the Debtor s Motion and grant such other relief as may be just. Respectfully submitted, /s/ Patrick S. Trostle Richard L. Stone (pro hac vice pending) Julie A. Shepard (pro hac vice pending) Amy M. Gallegos (pro hac vice pending) JENNER & BLOCK LLP 633 West Fifth Street Los Angeles, CA 90071 Tel: (213) 239-5100 Fax: (212) 239-5199 Catherine Steege (pro hac vice pending) JENNER & BLOCK LLP 353 North Clark Street Chicago, IL 60613 Tel: (312) 222-9350 Fax: (312) 527-0484 Patrick S. Trostle JENNER & BLOCK LLP 919 Third Avenue New York, NY 10022 Tel: (212) 891-1600 Fax: (212) 891-1699 Counsel for WNET; THIRTEEN; Fox Television Stations, Inc.; Twentieth Century Fox Film Corporation; WPIX, LLC; Univision Television Group, Inc.; The Univision Network Limited Partnership; Public Broadcasting Service; KSTU LLC, Fox Broadcasting Company, and KUTV Licensee, LLC /s/ Bruce P. Keller Bruce P. Keller M. Natasha Labovitz Michael Potenza DEBEVOISE & PLIMPTON LLP 919 Third Avenue New York, NY 10022 Tel: (212) 909-6000 Fax: (212) 909-6836 Counsel for American Broadcasting Companies, Inc.; Disney Enterprises, Inc.; CBS Broadcasting Inc.; and CBS Studios Inc. /s/ Michael V. Blumenthal Michael V. Blumenthal Jennifer A. Christian THOMPSON & KNIGHT LLP 900 Third Avenue 20th Floor New York, NY 10022-4728 Tel: (212) 751-3001 Fax: (212) 751-3113 Counsel for NBCUniversal Media, LLC; NBC Studios, LLC; Universal Network Television, LLC; Telemundo Network Group LLC; and WNJU-TV Broadcasting LLC Dated: December 12, 2014 New York, New York 10