Dividends and US companies awarded payouts to executives ahead of bankruptcy filings

In these times of COVID, we know that some companies benefit from the economy, but some companies will and have filed for Chapter 11 bankruptcy. It does does not mean the company will not exist, but it does mean they can be restructured and come back to life. The issue to investors and the public is what kind of compensation should be given. The theory is in Chapter 11, company executives can or will move to other companies, should they be given extra compensation to stay?

In an article by Mike Spector and Jessica Dinapoli of Reuters, under a 2005 US bankruptcy law, companies are banned with few exceptions, from paying executives retention bonuses while in bankruptcy. But there is a loophole, granting payments before they file. Reuters examined 45 companies which have filed for Chapter 11 and 32 of them paid bonuses within 6 months of filing and half of them authorized payments within 2 months.

8 companies including JC Penny and Hertz approved bonuses 5 days before filing for bankruptcy. Hi-Crush paid 2 days before filing. JC Penny had 85,000 employees and approved nearly $10 million in bonuses. JC Penny President Jill Soltau received $6.2 million while the annual pay of the company’s median employee was $11,482. At its peak, JC Penny had 200,000 workers and 1,600 stores.

Neiman Marcus Group closed all of its 67 stores and 11,000 employees but paid $4 million in bonuses to Chairman and CE Geoffroy van Raemdonck.

Whiting Petroleum Corp paid $14.6 million in bonus to executives days before filing for Chapter 11.

Chesapeak Energy paid $25 million in bonuses.

Firms paying prebankruptcy bonuses know they would face scrutiny in court on compensation proposed after filings, said Clifford J White III, director of the US Trustee Program, a Justice Department division charged with monitoring bankruptcy proceedings. The trustees have no power to halt the payments paid even days before the filings.

Linking to dividend paying stocks, many times investors should know the company is not doing well, fortunately with dividend paying stocks the time begins when a company cuts the dividend. After a company cuts their dividend, you can determine how long will it be or what conditions must happen before they raise it. As dividend buyers you get to “love” your stocks, when they cut the dividends be prepared to find alternatives.

There are more questions than answers, till the next time – to raising questions.

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