Key Employee Retention Plans are a common feature in restructurings occurring under the Companies’ Creditors Arrangement Act.  The basis for a KERP is simple and easily explainable.   The value of almost any debtor company will be maximized through a sale or restructuring transaction that preserves it as a going-concern business and avoids a piecemeal and costly liquidation of assets at depressed prices.   Employees are critical to maintaining going-concern value but may be anxious about their future role in an insolvent entity or lack motivation to continue employment with a struggling debtor, particularly if the employees hold an equity position in the company that is likely to be wiped out on exit from the insolvency proceedings.  These concerns can be reasonably expected to cause employees to cease employment and result in a loss of value to the business.  A secured retention payment buttresses this by incentivizing employees, notwithstanding the inherent uncertainty in a CCAA filing, to continue employment and maintain the value of the enterprise for the ultimate benefit of creditors and other stakeholders.

The CCAA does not provide statutory authority to grant a KERP and the jurisdiction to create a KERP is therefore found within the broad and inherent supervisory powers of a court managing a CCAA proceeding.  The justification for a KERP will naturally vary with the facts of any particular case and the nature of the debtor’s business.  Specific factors to be considered in whether to grant a KERP, as identified by Madam Justice Fitzpatrick in the Walter Energy matter, are as follows:

• Whether the beneficiaries of the KERP are important in the restructuring process;

• Whether the beneficiaries of the KERP have specialized knowledge that cannot easily be replaced;

• Whether the KERP is developed through a consultative process involving the Monitor and other professionals;

• Whether the Monitor supports the KERP and associated priority charge; and,

• Whether the employee will consider other employment options if the KERP is not approved.

As a starting point, an applicant who seeks a KERP will generally have to demonstrate that the proposed beneficiaries serve essential or critical roles within the company and will likely contribute to a successful reorganization or sale.  A well-advised debtor company will engage with the Monitor and its significant creditors on major terms when formulating a KERP so as to solicit their support on the application and concurrently satisfy multiple points arising from Walter Energy.

Evidence of alternative employment can present challenges to an applicant, particularly if the debtor’s business is cyclical and is experiencing heavy job losses throughout the entire industry.   The language used in Walter Energy clearly states that the proper question is whether other employment options may be considered if the KERP is not approved; the prospect of competing opportunities will be a relevant consideration in any KERP application but does not operate as a firm requirement.  As was explained by Justice Newbould in Grant Forest Products, the court should not be “…hamstrung by any such rule in a matter that is one of discretion depending upon the circumstances of each case.” The mere potential loss of members of senior management of a debtor company can justify a KERP being granted because KERP’s are designed to operate as a “…prophylactic measure, rather than a reactionary one.”  These authorities are consistent with the basic policy rationale for a KERP as it is designed to preserve value by ensuring key employees remain with the company over the course of the proceeding even if other opportunities are limited by market conditions.  It follows from this logic that KERP rights are necessarily and properly flexible in nature and should not be restricted to persons who have actively sourced alternative employment or hold job offers from industry competitors.