FirstEnergy Solutions – Court Rejects KERP as Outside Sound Exercise of Business Judgment

September 18, 2018 – The Court hearing the FirstEnergy Solutions case denied the Debtors’ motion for authority to continue its “2018 FENOC Key Employee Retention Plan” [Docket No. 1398]. In its memorandum of law, the Court concluded, “The Debtors bear the burden of proving that the 2018 FENOC KERP is a sound exercise of their business judgment and is justified by the facts and circumstances of the case. Among several criteria that courts review in evaluating whether debtors have made such an evidentiary showing are whether the plan bears a reasonable relationship to its purpose, whether it is fair and reasonable or instead discriminates unfairly, and whether it is consistent with industry standards. The evidence does not show that the Debtors satisfy these criteria in this case, and the Court finds that the Debtors’ own caginess in presenting their evidence is a significant reason for that….The 2018 FENOC KERP excludes employees the Debtors expressly found to be critical, marketable, and difficult to replace. The plan also leaves the Debtor with too much discretion to choose KERP participants without meaningful disclosure of those decisions to the creditors or the Court. Finally the evidence supports a finding that the Debtors’ 2018 FENOC KERP relies too often on stereotypes instead of reasonable judgment….It is undisputed that the proposed KERP discriminates between union and non-union personnel, with more than 70 percent of non-union employees qualified to receive bonus payments equal to at least 60 percent of their annual salary, while no union employees would receive any bonus….The evidence also suggests that the bonuses the Debtors propose to pay to participants in the 2018 FENOC KERP are higher than those offered to participants in other comparable retention plans in the nuclear industry, in particular, where a nuclear plant shutdown looms. At the same time, the Debtors’ proposed retention plan excludes more employees that other electricity producers appear to do in similar situations….For these reasons, the Court will not approve the 2018 FENOC KERP as being a reasonable exercise of the Debtors’ business judgment or justified by the facts and circumstances of their bankruptcy cases. However, the Motion is denied with leave to amend.”