The Bailout of the Automakers

The White House has agreed to a short term bailout of Chrysler and GM.  In addition to providing around $17 billion in loans, the terms require the car companies to accept limits on executive compensation and eliminate perks such as corporate jets.  The provisions largely track what would have been in the bailout had Congress acted.  According to the GM term sheet, these limits include: 

• Executive Privileges and Compensation: Until such time as the Facility is repaid in full and the UST ceases to own any equity securities of the Company acquired pursuant to this Facility (including any Warrants and underlying Equity Interests acquired by the UST upon exercise thereof) (the “Relevant Period”), the following restrictions on executive privileges and compensation shall apply to the “Relevant Companies,” as defined on Annex A:

• 1. The Relevant Companies shall be subject to the executive compensation and corporate governance requirements of Section 111(b) of the EESA and the UST’s guidelines that carry out the provisions of such subsection for systemically significant failing institutions as set forth in Notice 2008-PSSFI;
• 2. The Relevant Companies and their respective SEOs (as defined below) shall modify or terminate all benefit plans, arrangements and agreements (including golden parachute agreements) to the extent necessary to be in compliance with Section 111(b) of the EESA and the guidelines set forth in Notice 2008-PSSFI;
• 3. The Relevant Companies shall comply in all respects with the limits on annual executive compensation deductibles imposed by Section 162(m)(5) of Internal Revenue Code of 1986, as amended, as applicable;
• 4. None of the Relevant Companies shall pay or accrue any bonus or incentive compensation to the 25 most highly compensated employees (including the SEOs) (collectively, the “Senior Employees”) except as approved by the President’s Designee;
• 5. None of the Relevant Companies shall adopt or maintain any compensation plan that would encourage manipulation of their reported earnings to enhance the compensation of any of its employees; and
• 6. The Relevant Companies shall maintain all suspensions and other restrictions of contributions to Benefit Plans that are in place or initiated as of the Closing Date.

• At any time during the Relevant Period, the Lender shall have the right to require any Relevant Company to claw back any bonuses or other compensation, including golden parachutes, paid to any Senior Employees in violation of any of the foregoing. Within 120 days of the Closing Date, the principal executive officer (or person acting in a similar capacity) of each Relevant Company shall certify in writing, under penalty of perjury, to the Lender’s Chief Compliance Officer that such Relevant Company’s compensation committee has reviewed the compensation arrangements of the SEOs with its senior risk officers and determined that the compensation arrangements do not encourage the SEOs to take unnecessary and excessive risks that threaten the value of such Relevant Company. Each Relevant Company shall preserve appropriate documentation and records to substantiate such certification in an easily accessible place for a period not less than three (3) years following the Maturity Date.

The limitations likewise included restrictions on corporate aircraft, the penalty for having flown back from the original meeting over a bailout in private jets.  According to the term sheet:

• With respect to any private passenger aircraft or interest in such aircraft that is owned or held by any Loan Party or any subsidiary immediately prior to the Closing Date, such party shall demonstrate to the satisfaction of the President’s Designee that it is taking all reasonable steps to divest itself of such aircraft or interest. Further, no Loan Party shall acquire or lease any such aircraft or interest in such aircraft.

The restrictions are somewhat tougher than those in TARP, imposing limits on bonuses for the top 25 most highly compensated employees. With respect to the deductibility limits under Section 162(m), there are doubts about the IRS's ability to enforce the provision.

Nonetheless, there is an interesting addition that demonstrates the increased frustration with, and intrusion into, the Delaware approved process for approving executive compensation.  The Term Sheet imposes a SOX like certification requirement on the CEO.  The CEO must certify, under penalties of perjury, that the compensation committee of the board has reviewed the compensation arrangements of the senior executive officers (SEOs) with its senior risk officers and determined that the compensation arrangements do not encourage the SEOs to take unnecessary and excessive risks that threaten the value of the company. 

Thus, in order to ensure that the board does its job, the CEO has to confront the risk of perjury.  The requirement is steeped in irony.  Boards are supposedly independent of the CEO, yet it is left to the CEO to ensure that the board acts properly.  In other words, the term sheet recognizes the defacto control by the CEO of the board.    

Comments

[Sam Leeds]

This bailout "loan" is no loan at all. The government will supposedly loan GM and Chrysler this money, but will only be an equity owner in the automakers. When GM and Chrysler fail to return the money in March (the set date when the loan will be called) they are going to have to file bankruptcy, at which point the government's interest will take the lowest priority and what will most likely happen is that the government will not get paid back.

Congress KNOWS this, but is fashioning this bailout in the shape of a "loan" to trick the American public. The reality is that american automakers are not competitive with their japanese counterparts when it comes to technology, quality, or reliability. In addition, the labor unions have pretty much tied the hands of the big three, forcing them to pay a premium price for sub-par workmanship. This bailout will not save the big 3, but it will cost Americans another $17 billion.