WSJ Examiners — Insider Pay in Bankruptcy

The Wall Street Journal’s Bankruptcy Beat recently focused on the ever-controversial topic of executive pay. Reflecting on a number of recent bankruptcy cases that involved the “redaction” of key employee names or compensation figures, the question for the Examiners was this: when it comes to pre-bankruptcy insider pay, how much disclosure is enough?

As Brett Miller points out, the answer to this question will depend on who you are in relation to the bankruptcy process. He advocates balancing competing interests on a case-by-case basis.

Practitioners Sharon Levine, Shaunna Jones, and Richard Chesley point out the quid pro quo nature of enhanced disclosure, describing it as a cost that firms must pay in order to access the benefits of bankruptcy protection. As Ms. Jones puts it, the benefits of the bankruptcy process “are not without a price, and one cost is the requirement that the debtor be transparent about how it uses its assets”.

Ms. Levine, along with Lisa Donohue, voiced concerns that a lack of transparency breeds mistrust and will make negotiations more difficult, conflicting with the consensual objectives inherent in the Chapter 11 procedure. Anders Maxwell makes the analogous point that disclosures are needed to “more adequately inform an ongoing debate” on executive pay generally which, if “left unaddressed, has the potential to sap public confidence in business and markets.”

Mark Roe also considers the wider context of Chapter 11 practice and history, particularly in relation to Key Employee Retention Plans (“KERPs”) and fraudulent conveyances. Ultimately, he says, disclosure is “a matter for judicial decision, not executive discretion.” J. Scott Victor makes the further point that unilateral redaction “unfairly benefits large debtors while requiring other debtors to follow the rules.”

Businesspeople who commented—Jack Butler and Marc Leder—sounded a contrary note, pointing out that the debate focuses only on public disclosure, as parties in the case generally have access to the business’ financial information. Mr. Butler highlights the risk of harassment that executives might face, while Mr. Leder states, in concurrence with Perry Mandarino, that “compensation data without any context can cause outside observers . . . to leap to uninformed and incorrect assumptions”.

(This post was drafted by Samuel Parsons, L.L.M. ’16.)