AA Bankruptcy Court Update March 27, 2013

The Merger Agreement provides that, subject to and effective upon the confirmation and consummation of a chapter 11 plan of reorganization, Merger Sub, a wholly owned subsidiary of AMR formed for the purpose of effecting the merger, will be merged with and into US Airways, with US Airways continuing as the surviving entity as a direct, wholly owned subsidiary of AMR (the “Merger”). As consideration for the Merger, US Airways’ shareholders will receive 28% of the diluted equity of the merged enterprise. The remaining 72% of the diluted equity of the merged enterprise will be distributed to the stakeholders of the Debtors pursuant to a plan of reorganization.

The value of the aggregate diluted equity of the parent of the merged airlines to be distributed to the stakeholders of the Debtors as a result of the Merger is approximately $8 billion (based upon the implied equity value of US Airways’ stock as of February 13, 2013). Immediately after the effectiveness of the Merger, AMR will be named “American Airlines Group Inc.” and the combined company will operate under the “American Airlines” name.

The Official Committee of Unsecured Creditors (the “UCC”), an Ad Hoc Group of AMR Corporation Creditors (the “Ad Hoc Committee”), consisting of substantial prepetition unsecured creditors of the Debtors, both support the Motion. Further, in connection with the Merger Agreement, the Debtors entered into a Support and Settlement Agreement, dated February 13, 2013 (the “Support Agreement”), with certain members of the Ad Hoc Committee and certain other large creditors collectively holding approximately $1.2 billion of prepetition unsecured claims. Pursuant to the Support Agreement, these creditors have agreed to support a plan of reorganization implementing the Merger, incorporating a compromise and settlement of certain very complex issues and guaranteeing a minimum distribution of 3.5% of the common equity of the parent of the merged airlines to the holders of AMR’s existing equity interests with the potential to receive additional shares.

The Debtors submit that The Merger Agreement and the related relief requested in this Motion represents a proper and appropriate exercise of the Debtors’ business judgment and are in the best interest of the Debtors and their stakeholders is the product of extensive, arm’s-length, and good-faith negotiations among the Debtors, the UCC and US Airways, and is entirely consistent with the objectives of chapter 11 and the Debtors’ restructuring goals. Also, as provided in the Merger Agreement, the consummation of the Merger is conditioned on the filing, confirmation and consummation of a plan of reorganization which will, among other things, implement the Merger, in accordance with the requirements of the Bankruptcy Code.

The office of the United States Trustee (the “UST”) filed an objection to that part of the Motion related to certain so-called “Employee Arrangements” which  consist of (i) short term incentive plans, long term incentive plans, alignment awards, severance arrangements, a retention program, and the so-called “American CEO Letter Agreement”, because, among other things, these Employee Arrangements fail to comply with section 503(c) of the Bankruptcy Code which, among other things, subjects certain senior officer treatment to a high level of scrutiny. The Debtor counter, in part, by arguing that this treatment is intended to be paid only after confirmation of a plan of reorganization by the merged company and not by a Debtor – so section 503(c) does not apply.

On March 27, 2013, the Court granted the Motion approving the Merger Agreement but did not approve today the treatment of Mr. Horton pursuant to the American CEO Letter Agreement. The Court intends to issue a written opinion.

Lowenstein Sandler LLP
Sharon L. Levine
S. Jason Teele
Paul Kizel