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Retaining Key Executives during the Bankruptcy Process

business bankruptcy.jpgChapter 11 bankruptcy is to designed to help companies reorganize their obligations so that they can emerge stronger and healthier. If a business is going to keep operating after going through bankruptcy, then it is critical that the company is able to keep important talent. If too many key employees leave during the restructuring process, the company will have a much harder time going forward. The entire purpose of reorganizing may be undermined. An experienced San Jose business bankruptcy attorney can help your company devise strategies to retain important executives.

Retention Payments

Companies usually wish to retain the services of important executives, but the executives might not have much incentive to stay with the company through bankruptcy. This becomes a major issue, because these executives often have compensation packages that are tied directly to the company's performance levels. Therefore, their compensation incentives may not offer any value during the bankruptcy process. However, when devising a retention plan, companies need to be aware of federal regulations. Legislators have concerns that insider executives might use employee retention plans in order to extract money from a dying business. Therefore, when dealing with an insider executive, a retention plan must conform to the standards of the Bankruptcy Abuse Prevention and Consumer Protection Act. There are several important requires, including:

  • A payment to an insider executive must be essential to retain that employee. For example, if an employee has a job offer at another firm, which is for a higher rate of pay, a retention payment may be justifiable;
  • The services of the insider employee must be necessary in order to ensure the recovery of the business; and
  • The amount of the retention payment cannot be grossly out of step with retention payments offered to other employees, or to that specific employee in the past.

Incentive Based Plans May Offer More Leeway

It can be difficult to get retention based payments to key executives approved by bankruptcy courts. Federal law clearly requires conformity to some very stringent standards. However, payments to executives may be structured in a manner that is designed to 'incentivize' performance instead of merely 'retain' the employee. An incentive-based retention plan can often be assessed under the business judgement rule, instead of the bankruptcy abuse prevention law. That gives companies far more latitude for crafting retention plans that meet their own unique needs.

Ultimately, constructing a plan that conforms to all legal requirements, and that meets the specific needs of the business, will be a very complex process. You should always seek the assistance of an experienced business bankruptcy attorney. You attorney can comprehensively review your company's individual case.

Contact Our Office Today

If your Northern California business is entering the restructuring process, and you are looking for ways to retain key executives, the experienced San Jose business law attorneys at Diemer, Whitman & Cardosi, LLP can help. Please contact our San Jose office today by calling 408-971-6270 to schedule your free initial legal consultation.

Sources:

https://www.congress.gov/bill/109th-congress/senate-bill/256

https://www.law.cornell.edu/wex/business_judgment_rule

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