The Arizona Stock Exchange (AZX), an electronically enabled stock exchange for carrying out eTrading after usual stock market hours, was founded by Steve Wunsch, a former Kidder Peabody Vice President. Founded in 1990 as Wunsch Auction Systems, the headquarters of the company was based in New York. The technology trading center was originally based in Minnesota and built and run by a group of former Cray Research Supercomputer technologists that included Christopher Moran, Gray Lorig, Kerry Yndestad and Paul Sustman.
In early 1992 the company was recast as AZX or the Arizona Stock Exchange and both the headquarters and technology trading center were moved to Phoenix, Arizona.
Restricted to use by large institutional users only, participants could conduct screen based trades of equity and other products through either direct dial-up or internet access. The Arizona Stock Exchange was structured as a proprietary "Single Price" electronic call market. Unique to the Arizona Stock Exchange was the ability to discover the best or "single" price for a stock during the auction based upon supply and demand utilizing both an open book and reserve book of equity orders. Operating under a de minimis exemption, it was not required to be registered or regulated as a stock exchange with the U.S. Securities and Exchange Commission (SEC).
The general philosophy behind the Arizona Stock Exchange was to let natural buyers and sellers of equities trade directly with one another without intermediation by a broker or dealer. The AZX sought to reduce transaction costs for its participants, remove volatility from the market and determine more robust and fair pricing for equities traded.
While the idea behind AZX was ahead of its time in the 1990s and anticipated the more successful electronic communication networks such as Archipelago, it had to close down in October 2001, due to lack of volume.
EMPLOYEE RETENTION & SEVERANCE PROGRAMS
help curtail what many critics suggest is unbridled judicial discretion to approve the
arguably unwarranted payment of pre-petition claims.
I. SEVERANCE AND RETENTION PROGRAMS
A. In General
Severance payments are generally a form of compensation offered after an
employee is terminated and serves as replacement income for the employee while
he or she searches for new employment.3 Employers offer retention bonuses to their
employees as a reward or incentive for remaining with a company during a period
of downsizing, merger, or reorganization and to compensate them for any related
opportunity costs and risks associated with remaining with the company.4 It is a
common practice for employers to provide severance or retention payments to their
employees. According to a recent survey, almost 80% of employers offer their
employees some type of severance package.5 Likewise, recent research indicates
that more than three-fourths of companies in the ten major industry sectors6
surveyed nationwide report the existence of some type of employee severance
policy.7 Since severance pay is not mandated by federal law, it most frequently is
provided voluntarily by employers.8 As a result, benefits provided by programs may
vary dramatically from employer to employer.
While the type of severance and retention benefits program that businesses offer
their employees varies significantly, the programs contain certain common aspects.
Most employers appear to base some or all of their severance payments on the
length of service the employee has with the company.1l The most common
employee service requirements range from six months to one year, and the typical
formula used to calculate the severance amounts is a week of pay for each year of
employee service."1 Typical severance packages can range anywhere from $2,000 to
$100,000, with "key" or highly compensated employees typically receiving larger
packages with increased benefits. 12
Employee retention bonuses vary more dramatically from company to company
than do severance programs. Almost a third of all companies award employee
bonuses that simply consist of an extended period of typical severance benefits.
However, 28% use a more complicated formula based on a certain percentage of the
employee salary, while the remaining 40% use an individualized formula based on
factors such as length of service and position within the company. 13
B. Retention Plans In Chapter 11 Cases
It has become common for debtors to seek court permission to give bonuses to
key or "mission critical" employees to encourage them to remain with the company
after the business files for bankruptcy. 14 Indeed, recent research suggests that almost
half of all employers who file a petition for relief under chapter 11 of the
Bankruptcy Code offer retention (also called "pay-to-stay") bonuses to ensure the
continued service of their employees. 15 In addition, it is increasingly common for a
company to offer selective retention bonuses to certain individuals if the company
anticipates that it will file for bankruptcy. 16 Companies provide this benefit both to
retain the employee and to help ensure the employee's loyalty during the company's
EMPLOYEE RETENTION & SEVERANCE PROGRAMS
reorganization efforts.17 However, the advent of high-profile mega-filings within the
last two years"8 has brought into question the propriety of this practice. While
critics object to both severance and retention programs, the most scrutiny, by far,
has been on the judicial approval of key employee retention programs. As a result,
companies who offer selective retention bonuses only to management (i.e. key
employees) during their reorganizations increasingly have been criticized by the
media, legislators, and the general public.
II. JUDICIAL APPROVAL OF EMPLOYEE RETENTION AND SEVERANCE PROGRAMS
Bankruptcy courts derive their authority to approve a debtor's request to
maintain or implement a retention or severance program from section 363(b) of the
Bankruptcy Code. Section 363(b) gives a trustee or debtor-in-possession the
authority to use, sell or lease, "other than in the ordinary course of business,"
property of the estate only upon court approval. 9 Bankruptcy judges traditionally
employ a two-part test when asked to approve a proposed retention or severance
program. First, the court looks at whether the debtor exercised proper business
judgment in formulating the program, i.e., whether a sound business practice
justifies the request. Second, the court considers whether the proposed program is
fair and reasonable.2 0 Given the discretionary nature of this test, the decision to
approve these plans necessarily will vary according to the circumstances of each
individual case.21 Courts typically interpret section 363(b) liberally in order to give
bankruptcy judges "substantial freedom to tailor" orders to "meet differing
circumstances," and to avoid shackling the judge "with unnecessary rigid rules. ' 22
A. Rationale for Approving Retention or Severance Programs
While the court is given wide flexibility under section 363(b) to determine
when to approve requests to use, sell, or lease a debtor's property outside theordinary course of business, the debtor is required to articulate a business
justification other than the "mere appeasement of major creditors"2 3 and must do
more than just "follow the hue and cry of the most vocal special interest groups. ' 24
Debtors often argue that they need to implement a retention program to appease key
or mission-critical employees who might otherwise abandon the firm during the
"thankless phase of rebuilding or dismantling an ailing enterprise. 25 In addition,
debtors maintain that they need to implement the plan to assuage employees' fears
that remaining with the company would either force them to work in a materially
adverse work environment or would impose severe limitations on their career
opportunities, or that the employees need a "cushion" to fall back on if they are
terminated because of a failed reorganization.26
Debtors also argue that implementing a retention program saves them the cost
of having to replace key employees. They argue that the cost to the business if
critical employees leave includes: the intangible loss of expertise or experience that
employees take with them; the direct costs of paying headhunter fees to find and
hire replacement workers; the need to pay hiring bonuses or relocation fees for new
employees if old employees leave the company; and, the time-cost involved with
bringing new employees up to speed within the business.2 7 These costs, debtors
contend, can be avoided by offering retention or severance payments to entice key
management to stay.
Debtors also seek to implement or maintain severance or retention programs for
equitable reasons. That is, debtors seek approval of these programs to reward
employees for their hard work and dedication to the business.
LEGISLATIVE RESPONSE To RETENTION AND SEVERANCE PROGRAMS
A. Analysis of Legislation
The recent highly publicized mega-filings and the perception that highly paid
executives have been allowed to benefit at the expense of shareholders and
employees have caused Congress to question the continued validity of allowing
courts to exercise broad discretion when deciding whether to approve retention or
severance bonuses. Congress recently considered legislation, the "Employee Abuse
Protection Act of 2002" ("Act"), 52 that would place restrictions on a court's ability to
approve retention or severance programs under section 363(b). The last version of
the Act that Congress considered 53 focused on the payments of retention and
severance bonuses to key employees and on the protection of lower-level rank and
file employees and sought to limit the courts' discretion to approve key employee
retention plans.54
Section 10455 of the Act would prohibit a court from approving retention
programs that propose to transfer estate property to employees unless three specific
factors are met.56 First, the court must find that "the transfer or obligation isessential to the retention of the person. 5 7 Next, the court must not only determine
that the employee would have left but for the retention bonus, but must also
determine that "the services provided by [that] person are essential to the survival of
the business. 5 8 Finally, the court would not be permitted to approve a retention
bonus payment to a debtor's employee that is greater than 10 times the mean
payments to non-management employees during the same calendar year. 59 If no
bonuses were paid to non-management employees during that year, then the court
could approve payments only if the payments did not exceed twenty-five percent of
the amount of payments given to that person during the preceding calendar year.60
Section 104 also regulates a debtor's ability to implement a post-petition
severance program. This section prohibits courts from approving severance
payments unless two conditions are met. First, the payment must be made as part of
a program that is applicable to all full-time employees. 61 Second, the amount of the
payment to any key employee must not exceed ten times the mean severance pay
given to non-management employees during the same calendar year.
In early 1992 the company was recast as AZX or the Arizona Stock Exchange and both the headquarters and technology trading center were moved to Phoenix, Arizona.
Restricted to use by large institutional users only, participants could conduct screen based trades of equity and other products through either direct dial-up or internet access. The Arizona Stock Exchange was structured as a proprietary "Single Price" electronic call market. Unique to the Arizona Stock Exchange was the ability to discover the best or "single" price for a stock during the auction based upon supply and demand utilizing both an open book and reserve book of equity orders. Operating under a de minimis exemption, it was not required to be registered or regulated as a stock exchange with the U.S. Securities and Exchange Commission (SEC).
The general philosophy behind the Arizona Stock Exchange was to let natural buyers and sellers of equities trade directly with one another without intermediation by a broker or dealer. The AZX sought to reduce transaction costs for its participants, remove volatility from the market and determine more robust and fair pricing for equities traded.
While the idea behind AZX was ahead of its time in the 1990s and anticipated the more successful electronic communication networks such as Archipelago, it had to close down in October 2001, due to lack of volume.
EMPLOYEE RETENTION & SEVERANCE PROGRAMS
help curtail what many critics suggest is unbridled judicial discretion to approve the
arguably unwarranted payment of pre-petition claims.
I. SEVERANCE AND RETENTION PROGRAMS
A. In General
Severance payments are generally a form of compensation offered after an
employee is terminated and serves as replacement income for the employee while
he or she searches for new employment.3 Employers offer retention bonuses to their
employees as a reward or incentive for remaining with a company during a period
of downsizing, merger, or reorganization and to compensate them for any related
opportunity costs and risks associated with remaining with the company.4 It is a
common practice for employers to provide severance or retention payments to their
employees. According to a recent survey, almost 80% of employers offer their
employees some type of severance package.5 Likewise, recent research indicates
that more than three-fourths of companies in the ten major industry sectors6
surveyed nationwide report the existence of some type of employee severance
policy.7 Since severance pay is not mandated by federal law, it most frequently is
provided voluntarily by employers.8 As a result, benefits provided by programs may
vary dramatically from employer to employer.
While the type of severance and retention benefits program that businesses offer
their employees varies significantly, the programs contain certain common aspects.
Most employers appear to base some or all of their severance payments on the
length of service the employee has with the company.1l The most common
employee service requirements range from six months to one year, and the typical
formula used to calculate the severance amounts is a week of pay for each year of
employee service."1 Typical severance packages can range anywhere from $2,000 to
$100,000, with "key" or highly compensated employees typically receiving larger
packages with increased benefits. 12
Employee retention bonuses vary more dramatically from company to company
than do severance programs. Almost a third of all companies award employee
bonuses that simply consist of an extended period of typical severance benefits.
However, 28% use a more complicated formula based on a certain percentage of the
employee salary, while the remaining 40% use an individualized formula based on
factors such as length of service and position within the company. 13
B. Retention Plans In Chapter 11 Cases
It has become common for debtors to seek court permission to give bonuses to
key or "mission critical" employees to encourage them to remain with the company
after the business files for bankruptcy. 14 Indeed, recent research suggests that almost
half of all employers who file a petition for relief under chapter 11 of the
Bankruptcy Code offer retention (also called "pay-to-stay") bonuses to ensure the
continued service of their employees. 15 In addition, it is increasingly common for a
company to offer selective retention bonuses to certain individuals if the company
anticipates that it will file for bankruptcy. 16 Companies provide this benefit both to
retain the employee and to help ensure the employee's loyalty during the company's
EMPLOYEE RETENTION & SEVERANCE PROGRAMS
reorganization efforts.17 However, the advent of high-profile mega-filings within the
last two years"8 has brought into question the propriety of this practice. While
critics object to both severance and retention programs, the most scrutiny, by far,
has been on the judicial approval of key employee retention programs. As a result,
companies who offer selective retention bonuses only to management (i.e. key
employees) during their reorganizations increasingly have been criticized by the
media, legislators, and the general public.
II. JUDICIAL APPROVAL OF EMPLOYEE RETENTION AND SEVERANCE PROGRAMS
Bankruptcy courts derive their authority to approve a debtor's request to
maintain or implement a retention or severance program from section 363(b) of the
Bankruptcy Code. Section 363(b) gives a trustee or debtor-in-possession the
authority to use, sell or lease, "other than in the ordinary course of business,"
property of the estate only upon court approval. 9 Bankruptcy judges traditionally
employ a two-part test when asked to approve a proposed retention or severance
program. First, the court looks at whether the debtor exercised proper business
judgment in formulating the program, i.e., whether a sound business practice
justifies the request. Second, the court considers whether the proposed program is
fair and reasonable.2 0 Given the discretionary nature of this test, the decision to
approve these plans necessarily will vary according to the circumstances of each
individual case.21 Courts typically interpret section 363(b) liberally in order to give
bankruptcy judges "substantial freedom to tailor" orders to "meet differing
circumstances," and to avoid shackling the judge "with unnecessary rigid rules. ' 22
A. Rationale for Approving Retention or Severance Programs
While the court is given wide flexibility under section 363(b) to determine
when to approve requests to use, sell, or lease a debtor's property outside theordinary course of business, the debtor is required to articulate a business
justification other than the "mere appeasement of major creditors"2 3 and must do
more than just "follow the hue and cry of the most vocal special interest groups. ' 24
Debtors often argue that they need to implement a retention program to appease key
or mission-critical employees who might otherwise abandon the firm during the
"thankless phase of rebuilding or dismantling an ailing enterprise. 25 In addition,
debtors maintain that they need to implement the plan to assuage employees' fears
that remaining with the company would either force them to work in a materially
adverse work environment or would impose severe limitations on their career
opportunities, or that the employees need a "cushion" to fall back on if they are
terminated because of a failed reorganization.26
Debtors also argue that implementing a retention program saves them the cost
of having to replace key employees. They argue that the cost to the business if
critical employees leave includes: the intangible loss of expertise or experience that
employees take with them; the direct costs of paying headhunter fees to find and
hire replacement workers; the need to pay hiring bonuses or relocation fees for new
employees if old employees leave the company; and, the time-cost involved with
bringing new employees up to speed within the business.2 7 These costs, debtors
contend, can be avoided by offering retention or severance payments to entice key
management to stay.
Debtors also seek to implement or maintain severance or retention programs for
equitable reasons. That is, debtors seek approval of these programs to reward
employees for their hard work and dedication to the business.
LEGISLATIVE RESPONSE To RETENTION AND SEVERANCE PROGRAMS
A. Analysis of Legislation
The recent highly publicized mega-filings and the perception that highly paid
executives have been allowed to benefit at the expense of shareholders and
employees have caused Congress to question the continued validity of allowing
courts to exercise broad discretion when deciding whether to approve retention or
severance bonuses. Congress recently considered legislation, the "Employee Abuse
Protection Act of 2002" ("Act"), 52 that would place restrictions on a court's ability to
approve retention or severance programs under section 363(b). The last version of
the Act that Congress considered 53 focused on the payments of retention and
severance bonuses to key employees and on the protection of lower-level rank and
file employees and sought to limit the courts' discretion to approve key employee
retention plans.54
Section 10455 of the Act would prohibit a court from approving retention
programs that propose to transfer estate property to employees unless three specific
factors are met.56 First, the court must find that "the transfer or obligation isessential to the retention of the person. 5 7 Next, the court must not only determine
that the employee would have left but for the retention bonus, but must also
determine that "the services provided by [that] person are essential to the survival of
the business. 5 8 Finally, the court would not be permitted to approve a retention
bonus payment to a debtor's employee that is greater than 10 times the mean
payments to non-management employees during the same calendar year. 59 If no
bonuses were paid to non-management employees during that year, then the court
could approve payments only if the payments did not exceed twenty-five percent of
the amount of payments given to that person during the preceding calendar year.60
Section 104 also regulates a debtor's ability to implement a post-petition
severance program. This section prohibits courts from approving severance
payments unless two conditions are met. First, the payment must be made as part of
a program that is applicable to all full-time employees. 61 Second, the amount of the
payment to any key employee must not exceed ten times the mean severance pay
given to non-management employees during the same calendar year.