Corporate Restructuring & Bankruptcy Blog

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On Tuesday, Lear Corporation sought bankruptcy court approval of a proposed key management incentive plan, which was developed with the assistance of Towers Perrin. Lear filed for bankruptcy protection on July 7th in the Southern District of New York and is pursuing a pre-negotiated plan of reorganization to emerge quickly from bankruptcy protection with a significantly de-leveraged balance sheet.

According to the motion filed with the bankruptcy court yesterday, the pre-negotiated plan of reorganization, which is supported by 68% of Lear's pre-bankruptcy secured lenders and a majority of Lear's noteholders, expressly contemplates Lear's implementation of the proposed key management incentive plan (or KMIP). The proposed KMIP is intended to replace Lear's pre-bankruptcy equity-based long-term incentive plan and annual incentive plan because the awards under both programs now have minimal value as a result of the downturn in the automotive industry and Lear's bankruptcy filing. The reduced value of those awards has caused the compensation levels for Lear's senior management employees to be "materially below the automotive supply industry average" according to a comparison of 40 comparable companies prepared by Towers Perrin in March of 2009.

29 of Lear's managerial employees, including five insiders (as that term is defined in the Bankruptcy Code), would be eligible to participate in the proposed KMIP. Awards for each participant would be based upon a percentage of each such employee's base compensation and would be paid for "achieving key milestones in the Chapter 11 Cases and for certain quarterly financial goals." Of the total potential award, 75% would be based upon meeting chapter 11 milestones and the remaining 25% would be based on meeting financial goals. The total amount potentially payable under the KMIP would be $20.6 million

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