© 2014 The Texas Lawbook.
By Glenn West and Stephen Youngman
Special Contributing Writers to The Texas Lawbook
“Our people, our customers and the communities we serve around the world have been anticipating the arrival of the new American. We are taking the best of both US Airways and American Airlines to create a formidable competitor, better positioned to deliver for all of our stakeholders. We look forward to integrating our companies quickly and efficiently so the significant benefits of the merger can be realized.”
– Doug Parker, Chief Executive Officer of American Airlines Group, Inc., Dec. 9, 2013
(June 19) – On Dec. 9, 2013 AMR Corporation, parent of American Airlines, Inc. (“American”), and related debtor entities, emerged from Chapter 11, marking the most successful Chapter 11 reorganization of an airline in recent history. American exited chapter 11 as the world’s largest airline as a result of its merger with US Airways Group, Inc., generating tremendous value that not only enabled creditors to receive a full recovery on their claims (plus postpetition interest), but also provided a substantial distribution to stockholders.
This momentous accomplishment required an interdisciplinary legal effort that took approximately 24 months, and Weil, Gotshal & Manges played a major role in every facet of American’s successful reorganization. Weil’s “One Firm” approach included attorneys from Business Finance & Restructuring, Corporate/M&A, Tax, Litigation, and Executive Compensation and Employment and was handled through multiple offices, including Glenn West, a partner in Corporate/M&A and Alfredo Perez and Stephen Youngman, partners in Business Finance & Restructuring, from Weil’s Texas offices.
The Initial Days of the Chapter 11 Cases
At the outset of the Chapter 11 cases, the first priority was helping American stabilize itself and develop a viable business plan. During the pendency of the Chapter 11 cases, which involved $24.7 billion in assets and $29.5 billion in liabilities, Weil assisted American while it achieved the highest revenues in the company’s history (approximately $26.7 billion in 2013); added new and expanded routes in international markets with strong growth products; took delivery of 75 new aircraft; entered into new collective bargaining agreements with its unions; and evaluated and/or negotiated more than 700 facility leases and over 9,000 vendor and supplier agreements which achieved balance sheet improvements of approximately $2.5 billion and resulted in estimated principal and interest savings of approximately $1.3 billion over five years.
American Labor Cost Restructuring under Section 1113
Weil, in conjunction with Paul Hastings and other legal advisors, guided American through its efforts to brings its labor costs in line with other U.S. based network carriers that had substantially reduced their labor costs through renegotiated collective bargaining agreements as a result of Chapter 11 restructurings.
Section 1113 of the Bankruptcy Code (“Section 1113”) permits a debtor to reject a collective bargaining agreement if the debtor satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains Bankruptcy Court approval. Weil and other legal advisors assisted American when it commenced the Section 1113 process with its labor unions on Feb. 1, 2012, and negotiated in good faith toward consensual agreements that would achieve the necessary level of labor cost reductions. On March 27, 2012, because consensual agreements had not been reached, American filed a motion pursuant to Section 1113 to reject the collective bargaining agreements with the labor unions (the “1113 Motion”).
New Collective Bargaining Agreements with Allied Pilots Association, Association of Professional Flight Attendants, and Transport Workers Union
The bankruptcy court hearing regarding the 1113 motion began on April 23, 2012, and concluded the week of May 21, 2012. Weil assisted American as it continued round-the-clock negotiations with each of the labor unions to achieve consensual agreements while the bankruptcy court considered whether to grant the 1113 Motion. By mid-August 2012, American reached new consensual agreements with the Association of Professional Flight Attendants and all seven workgroups represented by the Transport Workers Union, each of which was approved by the Bankruptcy Court on Sept. 12, 2012. On Dec. 7, 2012, after intense additional negotiations between American and the Allied Pilots Association regarding the terms of a new consensual agreement, the Allied Pilots Association announced that its membership had voted to ratify a new collective bargaining agreement. On the same day, Weil assisted American to file a motion with the Bankruptcy Court seeking, among other things, approval to enter into the new collective bargaining agreement, which was subsequently approved by the bankruptcy court on Dec. 19, 2012.
Airport and Facility Restructuring
Weil assisted American in its efforts to review its use and occupancy rights at a number of airport facilities. During the Chapter 11 cases, American undertook various initiatives, including filing motions to modify or reject airport agreements, in order to restructure its operations at many of those facilities and reduce costs and establish an airport footprint to serve its future network plans.
Executory Contracts and Unexpired Leases
AMR, American, and its related debtor entities were also party to over 28,000 executory contracts and unexpired leases of nonresidential real property and personal property. Under section 365 of the Bankruptcy Code, the debtors may assume, assume and assign, or reject executory contracts and unexpired leases, subject to the approval of the bankruptcy court and satisfaction of certain other conditions. Weil assisted American in the complex process of reviewing its executory contracts and unexpired leases and negotiating more favorable business terms and cure amounts with counterparties whenever possible. Weil also drafted numerous motions to assume or reject executory contracts and unexpired leases, in addition to motions to approve compromises and settlements with counterparties.
Intercompany Claims
In addition to the operational and balance sheet improvements, Weil assisted American in reaching a comprehensive resolution in the Chapter 11 plan of complex issues involving intercompany claims and enforceability issues among (i) those creditors holding claims that were obligations of both AMR Corporation and American Airlines, Inc. and (ii) those creditors having claims only against American Airlines, Inc. An analysis of whether intercompany claims are properly characterized as debt or equity contributions (and subject to the claims of creditors), is a very fact-intensive undertaking. This was an issue that was hardly free from doubt and there were countervailing arguments that the intercompany claims should be recharacterized as capital contributions. Weil, in coordination with other advisors, assisted American in reaching a settlement that was fully supported by the economic stakeholders, including the Creditors’ Committee, which resolved extremely complex factual and legal issues and avoided significant litigation costs for American, in addition to expediting the confirmation and consummation of the Chapter 11 plan.
The Merger Agreement
After the balance sheet had stabilized and new collective bargaining agreements with the labor groups were approved, Weil assisted American in its formulation of an exit strategy with the involvement of the Creditors’ Committee. American and its advisors engaged in an exhaustive evaluation of a merger with US Airways, including a full analysis of potential synergies to be realized, integration risks, costs attendant to implementation of a merger, and a host of other factors as well as evaluating the merger proposal against alternative restructuring options. From those efforts came the beginning of American’s proposed $11 billion merger with US Airways Group Inc., which was approved by both companies in February 2013. The negotiations were complex from the beginning because, unlike many M&A deals, there were three parties at the table, American, US Airways, and the Creditors’ Committee.
Attorneys from Weil were in constant communication to make sure that decisions made in the M&A transaction would not create unforeseen problems with Chapter 11 related matters, in addition to the tax, employee benefits, and labor considerations associated with such a complex transaction.
The collaboration extended beyond the firm. Weil was constantly in discussions with attorneys for the Creditors’ Committee, US Airways, and the unions, as well as addressing the proposed transaction before the Bankruptcy Court. The pace of the transaction was intense, with countless meetings and round-the-clock negotiations.
The equity split between the two companies — with 72 percent of the new entity’s equity for existing AMR shareholders, unsecured creditors, unions and other stakeholders and 28 percent going to US Airways shareholders — was a major negotiating point. Even after the equity split was eventually agreed upon, the value also had to be divided up among all the various stakeholders in American and complex intercreditor and intercompany issues had to be resolved.
The merger also had to minimize labor issues as the two workforces were combined and to make sure the combined company would have a competitive cost structure that was efficient and streamlined. Ultimately, the pragmatic efforts of the parties working together to resolve these economic issues culminated in a chapter 11 plan that was based upon a merger with U.S. Airways.
The Chapter 11 Plan
Weil, in coordination with American and its other advisors, proposed a Chapter 11 plan based on the proposed merger that was specifically tailored to accommodate the myriad interests of the various stakeholders. American’s Chapter 11 plan also utilized a unique and perhaps unprecedented market-based test based on the actual trading value of the new common stock issued under the plan to determine the allocation of value distributed under the plan to creditors and existing stockholders.
Unlike most Chapter 11 plans, which are based on valuation metrics provided by investment bankers, the parties involved in the plan negotiations determined that the actual trading price of the common stock after emergence of the new merged entity would be the most accurate barometer of value and would provide the most equitable manner to determine the allocation of value under the plan to economic stakeholders.
The Department of Justice Antitrust Lawsuit
As the parties were preparing for plan confirmation, the U.S. Department of Justice filed a lawsuit seeking to enjoin the merger on the basis that it violated Section 7 of the Clayton Act. The lawsuit alleged that the merger would substantially lessen competition for commercial air travel in local domestic markets and result in higher fares for passengers.
Weil, along with American’s antitrust counsel, Jones Day, helped American to navigate this difficult obstacle. The DOJ eventually settled its complaint and allowed the merger to proceed in exchange for the combined airline handing over departure gates and 138 takeoff and landing slots at seven key airports to competitors such as Southwest and JetBlue.
American also overcame a private plaintiff lawsuit that attempted to enjoin the merger on account of alleged antitrust violations. Indeed, on the eve of closing, the U.S. Supreme Court refused to hear an appeal of the denial of stay by the U.S. Court of Appeals for the Second Circuit.
The New American
As a result of the plan and the merger to form American Airlines Group Inc., creditors received a full recovery on their claims and stockholders received a guaranteed minimum distribution of 3.5% of the common equity of the parent of the merged airlines, with the potential to receive additional shares. This result is unprecedented in airline chapter 11 cases, and extraordinary in any Chapter 11 case.
The new American has a robust global network with nearly 6,700 daily flights to more than 330 destinations in more than 50 countries and more than 100,000 employees worldwide. The combined airline has the scale, breadth and capabilities to compete more effectively and profitably in the global marketplace and is expected to generate more than $1 billion in annual net synergies by 2015. With an expanded global network and a strong financial foundation, American will deliver significant benefits to consumers, communities, employees and stakeholders.
Glenn West is the managing partner of Weil’s Dallas office and a member of the firm’s management committee. He focuses his practice on M&A and private equity.
Stephen Youngman is a partner in Weil’s Dallas office. He focuses his practice on business reorganizations and debtors’ and creditors’ rights.
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