=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2002/12= /10/BU202746.DTL ---------------------------------------------------------------------- Tuesday, December 10, 2002 (SF Chronicle) Taking stock of United/Workers have chance at money Kathleen Pender It's almost a given: In a bankruptcy, stockholders get squat. That's probably what will happen with United Airlines, and I don't want = to hold out any false hope for shareholders of parent company UAL. But legal experts can imagine some scenarios in which United employees, who own close to two-thirds of UAL through their employee stock ownership and 401(k) plans, could end up with something in a reorganized company. The overriding bankruptcy law states that all creditors must be "provided for payment in full" before stockholders get a penny. If a company is insolvent, meaning its debts exceed its assets, shareholders typically get zip. Creditors, meanwhile, get paid in the following pecking order: -- Secured creditors -- which have made loans to the bankrupt company backed by some asset -- get paid first, but only to the value of their collateral. For example, if they've loaned $100 million backed by a plane, and now t= he plane is worth only $75 million, they get $75 million to fulfill their secured claim. The remaining $25 million becomes an unsecured debt. -- Administrative creditors get paid next. These are people and companies that provide products and services the company needs to continue operating, such as employees, bankruptcy lawyers and suppliers of jet fuel, airline meals and other necessities. -- Next comes a handful of specific priority creditors. These are mainly taxing authorities and employees who are owed wages and benefits earned up to 90 days before the bankruptcy filing. -- Next in line are general unsecured creditors. These include unsecured bondholders, unpaid trade creditors and a wide variety of others. Some unsecured creditors may be subordinated, which means they get paid after unsubordinated creditors. If there's anything left, it goes to preferred stockholders, then common stockholders. STOCKHOLDER WIPEOUT If a company can't pay all its creditors in full, it usually will swap some of its debts for stock in the new, reorganized company. When this happens, creditors take control of the new company and stockholders get wiped out. Their stock in the old company is worthless, and they get no stock in the new company. To leave stockholders with nothing, a company and its creditors must convince a court the company is undeniably insolvent. This is harder than it sounds, because the value of a company's assets depend on how much they can earn in the future. Forecasting earnings is a highly imprecise science. In the 1980s, bankrupt companies thought it would be difficult or impossible to prove insolvency, and most gave shareholders something to stop them from tying up a reorganization in bankruptcy court. That changed in the late 1980s after Evans Products convinced a judge in one day that it was insolvent, says Lynn LoPucki, a UCLA law professor. Since then, shareholders of bankrupt companies have typically gotten nothing. The few exceptions are companies with a strong underlying business whose solvency was threatened by a big legal judgment. This was the case with Texaco and Dow Corning. Each company restructured its legal debts in bankruptcy court and emerged with old shareholders owning 100 percent of the new company, says Peter Chapman, president of Bankruptcy Creditors' Service. UNITED'S CASE That won't be the case with United. In its bankruptcy filing, the company listed $22.8 billion in assets and $21.2 billion in debts. But with the company losing money, its assets are worth less than they would have been. There are several scenarios under which United employees might salvage something. One is if United's assets are valuable enough to pay off creditors, with something left for shareholders. In this situation, employee-shareholders would get the same deal as non-employee shareholders, says Michael Tuchin, an attorney with Klee, Tuchin, Bogdanoff & Stern. Even if United is insolvent, employees might be able to convince the company and its creditors that they are so crucial to United's continuing success that they deserve some equity in the new company, even though they are not entitled to any, says Tuchin. In this case, continuing employees might get a very small stake in the n= ew airline. Public shareholders, including retired and soon-to-retire employees, likely would get nothing. A third option is for employees to win a place at the negotiating table. In Chapter 11, a company's future is hammered out by management and committees representing secured and unsecured creditors and -- in some cases -- shareholders. If a company is clearly insolvent, a bankruptcy trustee will not appoint= a shareholder committee. But if it's not clear, a trustee may appoint one. Bankrupt companies must pay the legal expenses for their shareholder and creditor committees. If shareholders get a committee, they almost always get something substantial, even if the company is really insolvent, LoPucki says. Shareholder committees are rare, but they have been appointed recently in the Kmart and Adelphia Communications bankruptcies. Whether shareholders get a committee depends in part on where the case is filed and how much publicity it gets. In the Enron bankruptcy, employees made so much noise they got a committ= ee to represent them as workers (not shareholders). In short order, the committee persuaded the company to cough up $13,000 per employee in back pay and severance benefits, instead of the $4,000 allowed by law. The fact that United employees are well organized, control a majority stake in United and are represented by leaders who negotiate for a living could increase their chance of getting a shareholder committee. "Employees should try and get a committee," LoPucki says. "If you get a committee, you have power."=20 ---------------------------------------------------------------------- Copyright 2002 SF Chronicle