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Northwest Airlines Pension Plan for Salaried Employees (Salaried Plan) [08/19/2003]
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Volume 68, Number 160, Page 49792-49808
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption (PTE) 2003-26, Exemption Application
Numbers D-11137, 11138, and 11139]
Northwest Airlines Pension Plan for Salaried Employees (Salaried
Plan), the Northwest Airlines Pension Plan for Pilot Employees (Pilot
Plan), and the Northwest Airlines Pension Plan for Contract Employees
(Contract Plan) (Collectively, the Plans), Located in Eagan, MN
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Grant of individual exemption.
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SUMMARY: This document contains a final exemption issued by the
Department of Labor (the Department) from certain prohibited
transaction restrictions of the Employee Retirement Income Security Act
of 1974 (ERISA or the Act) and from certain taxes imposed by the
Internal Revenue Code of 1986 (the Code).
The exemption permits: (1) The in-kind contribution(s) of the
common stock of Pinnacle Airlines Corp.\1\ (Pinnacle Stock) to the
Plans by Northwest Airlines, Inc. (Northwest), a party in interest with
respect to such Plans; (2) the holding of the Pinnacle Stock by the
Plans; (3) the sale of the Pinnacle Stock by the Plans to Northwest;
(4) the acquisition, holding, and exercise by the Plans of a put option
(the Put Option) granted to the Plans by Northwest; and (5) the
guaranty to the Plans by Northwest Airlines Corporation (NWA Corp.) of
Northwest's obligation to honor the Put Option (the Exemption
Transactions). The exemption affects participants and beneficiaries of,
and fiduciaries with respect to, the Plans.
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\1\ Pinnacle Airlines Corp. is the holding company of Pinnacle
Airlines, Inc.
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DATES: This exemption is effective as of January 15, 2003.
FOR FURTHER INFORMATION CONTACT: Wendy M. McColough of the Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, telephone (202) 693-8540. (This is not a
toll-free number.)
SUPPLEMENTARY INFORMATION: On January 17, 2003, the Department
published a notice in the Federal Register (68 FR 2578) of a proposed
individual exemption (the Proposed Exemption). The Proposed Exemption
was requested in an application filed on
[[Page 49793]]
behalf of Northwest pursuant to section 408(a) of the Act and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (55 FR 32836, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978 (5 U.S.C. App. 1, 1995) transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Accordingly, this final exemption is issued
solely by the Department.
The notice set forth a summary of the facts and representations
contained in Northwest's November 6, 2002 application for exemptive
relief (Application) and referred interested persons to the Application
for a complete statement of the facts and representations. The
Application has been available for public inspection at the Department
in Washington, DC.
The notice also invited interested persons to submit comments on
the proposed exemption and/or to request that a public hearing be held.
In response to the solicitation of comments from interested persons,
the Department received over 1,700 letters, e-mails, faxes and phone
calls, of which more than 1,000 requested that a public hearing be held
on the Proposed Exemption. Many of the commenters expressed concern
about the effect of the Proposed Exemption on the Plans. The concerns
expressed generally related to the proposed contribution of Pinnacle
Stock instead of a cash contribution to the Plans; the value and method
of valuation of the Pinnacle Stock; the effects of the proposed
transactions on the Plans; and the adequacy of the proposed safeguards
that are intended to protect the Plans' interests. In view of the
comments requesting a hearing, on March 11, 2003, the Department
published in the Federal Register (68 FR 11589) a notice of hearing on
the Proposed Exemption. The hearing on the Proposed Exemption was held
on May 5 and 6, 2003 at the Department of Labor (the Hearing). Upon
consideration of all of the comments received and testimony offered at
the Hearing, the Department has determined to grant the proposed
exemption subject to certain modifications. These modifications and the
major comments are discussed below.
Discussion of the Comments
Northwest March 3, 2003 Comment
By letter dated March 3, 2003, Northwest described the Northwest
contribution of Pinnacle Stock made to the Contract Plan on January 15,
2003 (the March 3 Comment). Northwest represents that the contribution
was effected after the date on which the Department had completed work
on the Proposed Exemption. The details of the Pinnacle Stock
contribution were provided in the March 3, 2003 letter. Northwest also
provided more detail about the final terms of the transactions as
agreed to by Northwest and the Plans' independent fiduciary, Aon
Fiduciary Counselors, Inc. (Fiduciary Counselors or Independent
Fiduciary). Northwest states that, in this regard, some refinements
were made to the provisions of the ``Term Sheet'' when the parties
negotiated and entered into the final ``Omnibus Agreement'' (executed
on January 15, 2003). The changes incorporated into the Omnibus
Agreement were requested and approved by Fiduciary Counselors. In this
regard, Northwest believes that this provided even more favorable terms
for the Plans than those reflected in the Term Sheet.\2\
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\2\ Northwest notes that the Omnibus Agreement, while consistent
with the Term Sheet, provides specific terms for: the contribution
transactions; transferability of Pinnacle Stock; corporate
governance; voting rights; the Put Option; representations and
warranties; and a number of other matters.
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Contribution of Pinnacle Stock
Northwest reported that the Omnibus Agreement was executed between
Pinnacle Airlines Corporation (Pinnacle), Northwest Airlines, Inc.
(Northwest), Northwest Airlines Corporation (NWA Corp.) and Aon
Fiduciary Counselors, Inc (Fiduciary Counselors). Pursuant to the terms
of the Omnibus Agreement, Northwest contributed Pinnacle Stock to the
Contract Plan. The Omnibus Agreement provided for two contributions to
be made to the Contract Plan on January 15, 2003. An ``Initial
Contribution'' was made in the amount of $41,149,911. The Initial
Contribution was comprised of 1,819,833 shares valued at $22.61 per
share.\3\ The amount of the Initial Contribution is equal to the amount
that was required to meet the quarterly funding requirements under
ERISA section 302 and Code section 412(l) for the Contract Plan due on
January 15, 2003. The Omnibus Agreement also provided for an
``Additional Initial Contribution'' to the Contract Plan in the amount
of $2,671,983 (118,167 shares valued at $22.61 per share).
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\3\ Northwest represents that the amount of shares necessary to
satisfy the required contribution was based upon a final valuation
of Pinnacle by Fiduciary Counselors, relying on a valuation report
prepared by Eclat Consulting. Northwest notes that, while Fiduciary
Counselors received and reviewed valuation information provided by
Morgan Stanley & Co. Inc. (Morgan Stanley), Fiduciary Counselors
retained Eclat to provide valuation services.
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The Term Sheet did not provide for the Additional Initial
Contribution. This additional contribution was agreed upon as a result
of a technical concern raised by Fiduciary Counselors regarding
covenants in Northwest's $1.125 billion Credit and Guarantee Agreement
dated October 24, 2000, as amended under which Northwest is the
borrower (the Credit Agreement), with Northwest's bank lenders. The
Additional Initial Contribution served to provide the Plans with added
protection until Northwest obtained written assurances from the bank
lenders that the Put Option does not violate the Credit Agreement. On
February 14, 2003, Northwest obtained formal written confirmation from
the bank lenders that none of the rights afforded to the Plans in the
Omnibus Agreement nor the exercise of such rights would violate the
Credit Agreement. Accordingly, Northwest notes that, consistent with
the Omnibus Agreement's terms, the Additional Initial Contribution will
be treated as a credit balance and be applied toward future
contributions to the Contract Plan.
The total value of the Initial Contribution and Additional Initial
Contributions made to the Contract Plan was $43,821,894. Pinnacle Stock
in that amount was transferred to State Street Bank, the trustee for
the Northwest Master Trust for Defined Benefit Plans that holds the
assets of all of the Northwest Plans (the Master Trust). Northwest
instructed State Street Bank to establish an ``Investment Fund'' in
connection with the Plans' Master Trust. The Investment Fund holds
Pinnacle Stock on behalf of the Contract Plan and the Salaried Plan. As
a result of instructions given to State Street, after the contribution
was made to the Investment Fund, the Contract Plan owns 83.5% of the
Investment Fund, while the Salaried Plan owns 16.5% of the Investment
Fund. Each Plan's percentage ownership reflects the relative size of
each Plan to each other. At that time, the Pilot Plan did not
participate in the Pinnacle Stock Investment Fund.\4\
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\4\ Northwest states, as noted in the Proposed Exemption, that
the Master Trust is established in a manner such that all Plans hold
an undivided and commingled interest in the assets of the Trust.
Since Northwest was prohibited from investing the Pilot Plan's
assets in employer stock, the Pilot Plan at that time, did not
participate in the investment fund. However, Northwest notes that it
has received the consent of the Air Line Pilots Association (ALPA),
the union representing Northwest pilots, to permit the Pilot Plan to
hold Pinnacle Stock (see below for discussion of the Northwest and
ALPA Letter Agreement).
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[[Page 49794]]
Description of the Put Option
Northwest noted that the description of the Put Option in the first
and second columns at 68 FR 2580 of the Federal Register notice
accurately describes the structure of the Put Option as described in
Northwest's Application. However, as noted in Northwest's Application,
the final terms of the Put Option were subject to negotiation with
Fiduciary Counselors. Northwest believes that the final terms for the
Put Option, which are more favorable to the Plans, are more completely
and accurately stated in the description of the Put Option contained in
the description of the Term Sheet as set forth at 68 FR 2587.
Fair Market Value of Pinnacle Stock
Northwest noted that, as reflected in the Term Sheet, Fiduciary
Counselors will determine the fair market value of the Pinnacle Stock
contributed to the Plans on an annual basis and in advance of each
contribution to the Plans. Fiduciary Counselors will also determine
fair market value at the time it exercises the Put Option so long as
the shares of Pinnacle Stock are not publicly traded. Accordingly, the
reference in the first column at 68 FR 2585 to quarterly valuations is
no longer correct. Northwest notes that quarterly valuations were
contemplated in the Application, but a change to annual valuations was
made when Northwest and Fiduciary Counselors agreed to the Term Sheet.
Corporate Governance Rights
Northwest explained that the Omnibus Agreement granted the Plans
additional rights in order to protect their interest in the Pinnacle
Stock. Omnibus Agreement at section 7.2, Certain Approval Rights. In
this regard, beginning at such time as the Plans hold more than 50% of
the issued and outstanding Pinnacle Stock, and until the earlier of (i)
the date the Plans hold less than 25% of such shares or (ii) the Put
Option with respect to such shares has terminated, the affirmative vote
of the Plan s director will be required to (1) approve the election,
appointment and compensation of any new Chief Executive Officer (CEO),
(2) approve any modification or other changes to the Note Pinnacle has
issued to Northwest (3) approve any amendment to Pinnacle s bylaws that
affects the Plans shares of Pinnacle Stock in a manner different from
other shares of Pinnacle Stock or otherwise amends the Series A
Preferred Stock, and (4) unless Pinnacle is publicly traded, approve
the issuance of shares of capital stock of Pinnacle or otherwise effect
changes in the capital structure of Pinnacle. Thus, the fourth bullet
point in the second column at 68 FR 2585 (describing certain voting
rights) should be modified accordingly.
The requirement (detailed in the last bullet point in the second
column of the Proposed Exemption at 68 FR 2585) that Plan shares of
Pinnacle Stock be voted in favor of certain corporate actions is now
set to expire upon the occurrence of an Early Termination Event. See
Omnibus Agreement at section 7.3.
Independent Directors
Northwest noted that the second bullet point in the third column at
68 FR 2585 (respecting the obtainment of fairness opinions) has been
revised. In this regard, section 11.3(b) of the Omnibus Agreement now
provides that at the request of a majority of Pinnacle's independent
directors, a fairness opinion will be obtained from an investment bank
respecting certain Affiliate Transactions. The Term Sheet originally
placed the right to request this fairness opinion solely on the Plans'
director, who asked that this duty be placed on the independent
directors of which the Plans' director is a member.
Valuation in Connection With the Right of First Refusal
Northwest noted that the Omnibus Agreement added certain valuation
details that expand the discussion of the Right of First Refusal at 68
FR 2586. The description of Northwest's right of first refusal with
respect to Pinnacle Stock is accurate; however, if the Plans negotiate
the sale of Pinnacle Stock to a third party for non-cash consideration,
the Omnibus Agreement includes a specific valuation mechanism with
respect to such consideration. See Omnibus Agreement at section 6.2.
First, the Plans must provide Northwest with an ``Offer Notice'' which
shall contain an independent valuation of the consideration by a
nationally recognized valuation expert acceptable to Fiduciary
Counselors and Northwest. If Fiduciary Counselors and Northwest are
unable to agree on the valuation expert, the Omnibus Agreement sets
forth a dispute mechanism to arrive at a final determination. In this
process, Northwest and Fiduciary Counselors each select their own
nationally recognized valuation expert (Principals' Experts), which
experts submit their appraisals to a third expert chosen by the
Principals' Experts. The third expert then determines which of the two
assessed values should be assigned to such non-cash consideration.
Modification of Final Deferral Rule
Northwest observed that the Term Sheet, as reflected in the
Proposed Exemption, allows Northwest to defer the closing date with
respect to Pinnacle Stock repurchased pursuant to the Put Option (such
delay, a ``Deferral''). The length of the Deferral varies based upon a
function of (1) the ``liquidity'' of Northwest (as defined in the
Omnibus Agreement) and (2) the value of Pinnacle Stock contributed to
the Plans. In the Proposed Exemption, it was noted that the length of
the Deferral would be shortened if Pinnacle Stock was publicly traded
at the time that the Put Option is exercised. As with the Term Sheet,
the final Omnibus Agreement provides that the Deferral shall be
shortened if Pinnacle Stock is publicly traded. However, the Omnibus
Agreement revises this provision to provide that, if Pinnacle Stock is
publicly traded, the Deferral will be reduced, in each case, by thirty
days except that in no event shall Northwest have less than a 30 day
Deferral in which to close the transactions contemplated by the Put
Option. This change generally reduces the length of the available
Deferral when the Plans hold more than $325 million in Pinnacle Stock
(measured as of the date of each contribution). See Omnibus Agreement
at section 8.2.
Fiduciary Counselors March 5, 2003 Comment
On March 5, 2003, Jones Day submitted comments on behalf of
Fiduciary Counselors, the Independent Fiduciary (the March 5 Comment).
Restrictions on Transfer and Voting
The Independent Fiduciary notes that the Proposed Exemption, in the
first column of 68 FR 2580 (first full paragraph), makes reference to
voting restrictions and limits on the ability of the Plans to dispose
of the Pinnacle Stock, except pursuant to an initial public offering
(IPO) initiated by Northwest or by exercise of the Put Option. In
addition, as reflected in the Omnibus Agreement, the Independent
Fiduciary has negotiated a lapse of all transfer restrictions on the
Pinnacle Stock held by the Plans on July 1, 2006, and upon an ``Early
Termination Event'' (including a breach of the Omnibus Agreement by
Northwest or Pinnacle or Northwest's failure to honor its Put Option
obligations, but excluding violations of the ``scope clause''
limitations in certain of Northwest's collective bargaining agreements
\5\). A
[[Page 49795]]
breach of the Omnibus Agreement by Pinnacle constitutes an Early
Termination Event if such breach continues because Northwest fails to
exercise its rights as a stockholder to cause the Pinnacle directors to
cure the breach or to replace such directors. See Omnibus Agreement,
Definition of ``Early Termination Event'' at section 1.1.
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\5\ Section 1C of the Northwest Pilots Agreement, the Collective
Bargaining Agreement between Northwest and the Air Line Pilots
Association dated as of September 13, 1998, as amended, or any
successor agreement. This Section requires that all ``revenue
flying'' for Northwest and its affiliates must be performed by
pilots on the integrated Pilots System Seniority List in accordance
with the collective bargaining agreement, except for revenue flying
by an airline that at all times operates only aircraft that are
certified with a maximum passenger capacity of 60, and a maximum
gross takeoff weight of less than 70,000 pounds.
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Eclat Consulting Valuation
The Independent Fiduciary represents that the description of the
valuation by Eclat Consulting (Eclat) of Pinnacle in the Proposed
Exemption commencing in the second column of 68 FR 2580 (the Eclat
Report) should be updated to reflect Eclat's valuation of Pinnacle as
of January 15, 2003. The January 15, 2003 Eclat valuation report
(January 15, 2003 Valuation) was attached to the Independent
Fiduciary's report submitted to the Department on April 25, 2003 (see
below for a discussion of these documents).
Put Option
As previously mentioned in the March 3 Comment, the changes to the
description of the Put Option in the Proposed Exemption are noted by
the Independent Fiduciary who adds that the Proposed Exemption should
be revised in accordance with the definition of ``Market Value'' in
section 1.1 and the language of section 8.3 of the Omnibus Agreement.
In particular, subparagraph (i) at 68 FR 2580 of the Proposed Exemption
should reflect that, prior to an IPO, the Plans will be entitled to the
greatest of (1) the value of the stock when contributed, (2) the fair
market value of the stock on the date that the determination of fair
market value is made (e.g., with respect to the Put Option, the date
the Put Option is exercised), or, if greater, (3) the value as of the
closing date of the Put Option.
Similarly, subparagraph (iii) at 68 FR 2580 should reflect that,
after an IPO, the Plans will be entitled to the greatest of the value
of the stock at the time of the contribution, or the average of the
closing price for the Pinnacle Stock on the public market for the 10
trading days (or such other number if fewer than 10) preceding the
exercise date, or as of the last trading day before the closing date of
the Put Option.
In addition, in the paragraph immediately following subparagraph
(iii) in the second column of 68 FR 2580, the reference to the price of
Pinnacle Stock being determined as of the exercise date should be
expanded to reflect these concepts. Similarly, in the second column of
68 FR 2588 (third full paragraph), the reference in subclause (II) to
the closing price of Pinnacle shares on the closing date should refer
to the last trading day before the closing date.
Plan Director
As also mentioned in the March 3 Comment, the Independent Fiduciary
notes that at the fifth paragraph of the ``Voting Provisions'' section
in the Proposed Exemption at column 2 of 68 FR 2585, the description of
the required affirmative vote of the director designated by the Plans
should be expanded to include the approval of: amending the Note,
amending Pinnacle's charter or by-laws in certain respects,
implementing certain changes in Pinnacle's capital structure, or
issuing capital stock prior to an IPO, as set forth in the Omnibus
Agreement. See Omnibus Agreement at section 7.2. Additionally, the
Independent Fiduciary corrects language in the fifth paragraph of the
``Voting Provisions'' of the Proposed Exemption that states a majority
of Pinnacle's board is needed for the approval of compensation of
Pinnacle's CEO. Section 7.2(b) of the Omnibus Agreement requires only
that the appointment of a new CEO be approved by a majority of
Pinnacle's board (excluding the Northwest Director), and does not make
reference to the compensation of Pinnacle's CEO.
Additional Comments
The Independent Fiduciary reports that it negotiated the following
additional requirements.
1. A comprehensive set of representations and warranties relating
to both Pinnacle, Northwest and its affiliates. See Omnibus Agreement
at sections 5.1 and 5.2.
2. An additional provision that would prohibit Northwest from using
its rights under the Series A Preferred Share to block a Transfer of
Pinnacle Stock following an Early Termination Event. See Omnibus
Agreement at section 6.3.
3. Northwest Airlines Corporation (NWA Corp.) will guarantee
Northwest's obligations under the Omnibus Agreement, including the Put
Option. See Omnibus Agreement at section 8.8.
4. The right to engage an investment banker on behalf of the Plans
in an IPO, at Northwest's expense. See Omnibus Agreement at section
9.1(d).
5. A provision providing that the exercise price of any options on
Pinnacle Stock granted to its executive employees under its stock
incentive plan at the time of an IPO would be at the greater of the
value of the stock at the time it was contributed to the Plans or the
IPO price. See Omnibus Agreement at section 11.2.
Finally, Fiduciary Counselors requests that in Section III.
Definitions at (a) of the Proposed Exemption in column 1 of 68 FR 2590,
the reference to ``5 percent (5%) of such fiduciary's gross income, for
Federal income tax purposes, in its prior tax year, will be paid by
Northwest'' should read ``5 percent (5%) of such fiduciary's annual
gross revenue in the year of its engagement, will be paid by
Northwest.''
The Department has determined that it would be appropriate to
modify the definition of independent fiduciary as follows:
``(3) the annual gross revenue received by such fiduciary, during
any year of its engagement, from Northwest and its affiliates exceeds 5
percent (5%) of the independent fiduciary's annual gross revenue from
all sources for its prior tax year.''
Fiduciary Counselors and Eclat April 25, 2003 Submissions
On April 25, 2003, Fiduciary Counselors provided to the Department
the Independent Fiduciary Report on Contribution of Pinnacle Airlines
Corp. Stock to the Northwest Airlines Pension Plan For Contract
Employees dated March 16, 2003 (the IF Report), the January 15, 2003
Eclat valuation of Pinnacle (the January 15, 2003 Valuation), and an
explanation of the valuation of the Put Option.
The Independent Fiduciary Report
The Independent Fiduciary represents that after extensive
negotiations during November and December, 2002, and January, 2003,
Fiduciary Counselors and Northwest, along with Pinnacle and NWA Corp.,
Northwest's ultimate parent company, entered into an Omnibus Agreement,
dated January 15, 2003, which sets forth the terms and conditions
pursuant to which Fiduciary Counselors will accept the Pinnacle Stock
(the Contribution).\6\
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\6\ Fiduciary Counselors notes that immediately prior to the
transaction, NWA Inc. (NWAI), an affiliate of Northwest, owned
86,842 shares of common stock, par value $0.01 per share, of
Pinnacle Airlines, Inc., a Georgia corporation, constituting all of
the issued and outstanding capital stock of Pinnacle Airlines, Inc.
Pursuant to the transaction, Pinnacle Airlines, Inc. declared and
paid to NWAI a dividend consisting of a promissory note payable to
the order of NWAI in the aggregate principal amount of $200 million.
NWAI then transferred the shares of Pinnacle Airlines, Inc. to
Pinnacle in exchange for its issuance to NWAI of (i) 15,000,000
shares of Pinnacle's common stock, par value $0.01 per share
(Pinnacle Stock), and one share of Series A Preferred Stock, par
value $0.01 per share, of Pinnacle (the ``Series A Preferred
Share''), which, upon issuance and together with the Pinnacle Stock,
constitutes all of the issued and outstanding capital stock of
Pinnacle. NWAI then transferred the Pinnacle Shares and the Series A
Preferred Share to Northwest as a contribution to the capital of
Northwest.
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[[Page 49796]]
The IF Report states that on January 15, 2003, Fiduciary Counselors
determined that the Master Trust could accept a contribution by
Northwest of 1,938,000 shares of Pinnacle Stock, valued at
$43,821,894.00, on behalf of the Contract Plan on terms and conditions
set forth in the Omnibus Agreement. Pursuant to its engagement letter
with Northwest, the scope of Fiduciary Counselors' engagement includes
determining whether to accept the Contribution on behalf of the Plans,
and if so, to value the Pinnacle Stock for Plan funding purposes.
Fiduciary Counselors' duties also include the discretionary authority
to manage the Pinnacle Stock as investment manager.
The IF Report notes that the Independent Fiduciary drew upon the
resources of its affiliate, Aon Investment Counseling, Inc. (AIC), to
assist it in its financial analysis and valuation of the Pinnacle
Stock. The Independent Fiduciary also engaged the law firm of Jones Day
as legal counsel to advise it in connection with its negotiations with
Northwest regarding its engagement and Eclat, to provide financial
expertise and to value the Pinnacle Stock. Eclat furnished to the
Independent Fiduciary its report and opinion as to the value of the
contributed Pinnacle Stock at the time of the Initial Contribution on
January 15, 2003 (January 15, 2003 Valuation). Eclat will furnish a
similar valuation report with respect to each subsequent contribution.
In negotiating the terms of the Contributions and determining whether
to accept the Initial Contribution, the Independent Fiduciary, with its
financial advisors and legal counsel, reviewed those documents that it
deemed relevant, participated in meetings and telephone conferences
with officers and other representatives of Northwest, and considered
aspects of the Contribution that it deemed pertinent to its engagement,
including without limitation Northwest's current and future ability to
honor the Put Option. Because the value of the Pinnacle Stock is based
on the financial performance of Pinnacle, the Independent Fiduciary
reviewed and considered the business of Pinnacle, and the contractual
relationship between Pinnacle and Northwest. The Independent Fiduciary
and its advisors also met with the senior officers of Pinnacle.
The Independent Fiduciary and its advisors reviewed various
documents relevant to the Contribution, including without limitation,
Northwest's certificate of incorporation; Northwest's corporate bylaws;
the certificate of incorporation of Pinnacle; the Master Trust
agreement pursuant to which the Plan assets are currently held and
managed; audited financial statements of the Plans for 2000 and 2001;
the current Plan documents; the Plans' annual reports on Forms 5500 for
2000 and 2001; other information provided by Northwest regarding the
Plans' assets (including the Plans' investment guidelines and portfolio
composition); a statement prepared by the Plans' actuaries of the
Plans' liquidity needs to pay benefits and administrative expenses in
the near future and the sources of funds (other than the Pinnacle
Stock) available to satisfy such liquidity needs; and certain of
Pinnacle's collective bargaining agreements. In addition, the
Independent Fiduciary reviewed a number of other documents, including
SEC Form S-1 filed with the Securities Exchange Commission on February
25, 2002 registering shares of Pinnacle Stock for an IPO and the
Airline Services Agreement dated March 1, 2002. As a result of its
review, certain changes were incorporated in the new Airline Services
Agreement entered into on January 14, 2003 (ASA).
The IF Report provides that the Independent Fiduciary and its
advisors participated in numerous telephone conferences with
representatives of Northwest and Pinnacle through November, December
and early January concerning the Independent Fiduciary's engagement,
the proposed Contribution, the status of Northwest's minimum funding
waiver applications to the Internal Revenue Service and the Proposed
Exemption. On January 11, 2003, the Independent Fiduciary and its
advisors conducted a telephone interview with Pinnacle's chief
executive officer and chief financial officer as part of its due
diligence.
The Independent Fiduciary and its advisors analyzed the voting,
transfer and put right features of the Pinnacle Stock and engaged in
significant negotiations on those features with Northwest. The
Independent Fiduciary was also advised on the requirements of the U.S.
Department of Transportation regarding restrictions on directors of
airlines. In its determinations, the Independent Fiduciary has also
taken into account Northwest's request for a minimum funding waiver
with respect to Plan contributions in 2003 and 2004, and considered the
likelihood that such waiver will be granted.
The IF Report states that under the ASA, Northwest has committed 95
regional jet aircraft financed by Bombardier to be delivered to
Pinnacle by December 31, 2004. As of December 31, 2002, the carrier had
taken possession of 51 regional jets. The addition of the regional jets
has more than doubled the size of the airline. According to the IF
Report, Eclat estimates that Pinnacle's value to the Northwest domestic
system is between $520 million and $540 million annually as the carrier
exists today. Pinnacle itself had revenues of approximately $345.2
million for 2002.
The IF Report explains that, because Pinnacle's operations are so
entwined with Northwest's, Eclat evaluated Northwest as well as
Pinnacle in its November 27, 2002 report to the PBGC (The Eclat
Report). Despite the turmoil in the industry in recent years, Eclat
felt that Northwest has emerged as, perhaps, the most stable airline in
the industry. While all of the ``Big 6'' network airlines are losing
money, Northwest has suffered the smallest loss of any carrier.
Northwest reported a net loss of $46 million, with operating income of
$8 million in the 3rd quarter of 2002. Northwest ended the 3rd quarter
with over $2.5 billion in cash and short-term receivables.
The IF Report notes that Northwest is a global carrier through its
alliance with KLM and its Amsterdam hub, and its own hub in Tokyo.
While the U.S. market has suffered tremendous losses due to the
slowdown in the U.S. economy and the terrorist attacks of 9/11, the
global market has rebounded much quicker. Northwest's presence in
international markets has helped offset the losses in the U.S. domestic
market. As with all domestic U.S. carriers, Northwest has been hit by
the drop in revenue due to lower overall yields and depressed passenger
levels. The drop-off in premium passenger traffic, the weak U.S.
economy, and the increased presence of low-cost carriers has impacted
the ability of the network carriers to generate high yield revenue.
Through reduced employment levels and other cost-cutting measures,
Northwest has been able to minimize the ongoing impact of reduced
revenue levels, which the Independent Fiduciary believes are likely a
permanent change in the industry. The labor situation is
[[Page 49797]]
stable. One of the strengths of the Northwest network is that the
airline has the least exposure of any major carrier to low-cost
carriers in the industry. This is primarily due to the fact that
Southwest Airlines does not serve 2 of the 3 Northwest hubs--Memphis
(Pinnacle's largest market) and Minneapolis. Southwest has a small
operation in Detroit with only 2 gates. The IF Report states that Eclat
expects that low-cost carriers will expand and gain share in the future
but feels that Northwest is in the best shape of any network carrier to
compete.
The Eclat Report and the January 15, 2003 Valuation
Fiduciary Counselors and Eclat represent that Eclat was originally
retained by PBGC to value Pinnacle and to evaluate the financial
viability of Northwest. Eclat is an aviation-consulting firm that
specializes in detailed analysis of the economic and financial issues
that surround the industry. The IF Report states that Eclat's clients
come from almost every sector of the aviation industry--airports,
airlines, labor organizations and aerospace/aeronautics corporations.
With PBGC's consent, Eclat was subsequently retained by the Independent
Fiduciary to value the Pinnacle Common Stock.
Eclat states in the January 15, 2003 Valuation that the valuation
includes competitive, operational and financial elements essential to
validating Pinnacle's current market viability as a Northwest regional
partner and as a stand-alone airline and that the valuation describes
the state of the regional airline industry, delves into some of the
more important issues surrounding Pinnacle specifically, provides a
brief financial review of the carrier, explains the valuation
methodology, compares Pinnacle to Continental Express, and comments on
the stability of Northwest. Appendices were attached that illustrate
the valuation model used and highlight some of the additional
information used to conduct the analysis.
The IF Report summarizes that, in order to determine the value of
Pinnacle, Eclat created a model based on the Three-Stage Free Cash Flow
to Equity valuation technique. This model is designed to value firms,
like Pinnacle, that are expected to go through three phases of growth--
an initial phase of high growth, a transitional period where the growth
rate declines, and a steady-state period where growth is stable. Once
these growth assumptions are made, the present value of expected free
cash flow is calculated.
The IF Report notes that in the Eclat Report, Eclat's valuation of
the Pinnacle Common Stock was considerably lower than the value it
ultimately determined for the Independent Fiduciary in the January 15,
2003 Valuation. Eclat's original valuation for PBGC was based on
publicly available information, primarily a draft S-1 Registration
Statement which contained financial information only for the first nine
months of 2002. As a result of its engagement by the Independent
Fiduciary, Eclat was given access to non-public information including
the ASA, Pinnacle's full 2002 revenue figures and information
concerning the delivery schedule for delivery of regional jets to
Pinnacle. The IF Report represents that, in the January 15, 2003
Valuation, Eclat determined that the net equity value (before
discounts) of Pinnacle was $412,923,928.00. Based on input from AIC,
Eclat then applied a 15 percent liquidity discount and a 5 percent
minority discount. AIC valued the Put Option at $20,680,684 using a
Black-Scholes American option-pricing model. The value of the
transaction was also adjusted for the period between the exercise of
the put and the Plan's receipt of the funds. This period could range
between 30 and 180 days depending on Northwest's liquidity position.
The result was a net value of $339,178,820.00 for the purposes of
determining the value of the stock contributed on January 15, 2003.
Negotiation of the Term Sheet and Omnibus Agreement
The Independent Fiduciary recognizes that all aspects of its
engagement involved fiduciary actions, and, for that reason,
representatives of the Independent Fiduciary and its financial and
legal advisors actively participated in the negotiations relating to
the Omnibus Agreement and in the evaluation of the decision of whether
to accept the Contribution. From a fiduciary standpoint, Independent
Fiduciary was required to determine whether the terms it negotiated in
the Omnibus Agreement and its decision whether to accept the
Contribution were prudent, for the benefit of, and in the interest of,
Plan participants and their beneficiaries. In this regard, the
Independent Fiduciary represented that it negotiated terms that it
determined were no less favorable to the Plans than terms negotiated at
arm's length with an unrelated third party under similar circumstances.
The terms of the transaction negotiated between the Independent
Fiduciary and Northwest were embodied in a Term Sheet, which was
provided to the Department on January 10, 2003. The Term Sheet formed
the basis for the Omnibus Agreement, which was executed on January 15,
2003, after the Independent Fiduciary received confirmation from the
Department that the Proposed Exemption had been issued.
Fiduciary Counselors states that the Omnibus Agreement provides:
[sbull] For purposes of the funding standard account of each Plan,
the value of the shares of Pinnacle Stock contributed to each Plan will
be determined by the Independent Fiduciary. In addition to determining
the value of Pinnacle Stock at the time of a proposed contribution, the
Independent Fiduciary will provide an annual written valuation of the
per share value of all Pinnacle Stock held by the Plans as of each
December 31 and at any time the Independent Fiduciary exercises the Put
Option described below.
[sbull] Subject to the further conditions and restrictions set
forth in the Omnibus Agreement, the Plans may transfer the Pinnacle
Stock prior to July 1, 2006, (1) only in the event of an IPO or sale to
a third party initiated by Northwest, (2) by exercise of the Put Option
(as described below), or (3) because of an Early Termination Event
(including a breach of the Omnibus Agreement by Northwest or Pinnacle
which is not cured timely or Northwest's failure to honor the Put
Option).
[sbull] The Plans will be granted a Put Option with respect to each
share of Pinnacle Stock contributed to the Plans, which may be
exercised by the Independent Fiduciary at any time. To exercise the Put
Option, the Independent Fiduciary must provide written notice to
Northwest of its election to put to Northwest any or all of the shares
of Pinnacle Stock then held by the Plans. The closing date of the
purchase and sale of shares with respect to which the Put Option has
been exercised will be the 30th calendar day after such notice is
given. However, if Pinnacle has not yet consummated the IPO by the date
that would otherwise be the closing date, Northwest will have the right
to defer such closing date for up to 150 days, depending on Northwest's
liquidity. The closing date may be further deferred and deferred
payments may be made by Northwest as agreed to by the Independent
Fiduciary if Northwest posts collateral in an amount and on terms
satisfactory to the Independent Fiduciary. Alternatively, Northwest may
arrange for the stock to be purchased by a third party.
[sbull] If the Pinnacle Stock is not publicly traded, the Plans
will receive the
[[Page 49798]]
greatest of (i) the initial contribution value (the ``Floor Price''),
(ii) the fair market value as determined by the Independent Fiduciary
at the time of the exercise of the Put Option, or, if greater, at the
closing date of the Put Option, and, (iii) if a third party sale is
elected for the Plans (under the limited circumstances described above)
and Northwest does not exercise its right of first refusal, the
proceeds from the sale of Pinnacle Stock held by the Plans to such
third party. If the Pinnacle Stock is publicly traded, the Plans will
receive the greater of (i) the Floor Price, or (ii) the average closing
price for the stock on the public market for the 10 trading days
preceding the exercise date or, if greater, the closing price on the
day before the Put Option closing date.
[sbull] Once Pinnacle Stock is publicly traded, the Put Option will
be suspended if all of the remaining shares of Pinnacle Stock held by
the Plans have a market value not less than 110% of the Floor Price and
such shares are freely tradable. Fiduciary Counselors and its advisors
negotiated with Northwest and Pinnacle concerning the ability of the
Plans to transfer the Pinnacle Stock and the rights of the Plans to
cause Northwest to register the shares of Pinnacle Stock under Federal
and State securities laws for resale to third parties. In negotiating
the rights and restrictions set forth in the transfer and registration
rights provisions of the Omnibus Agreement, Fiduciary Counselors
balanced the need of the Plans to achieve greater diversification in
light of the anticipated holdings of shares of Pinnacle Stock with the
need to maximize the value of the investment in such stock.
[sbull] In addition, the Independent Fiduciary negotiated that
Northwest Airlines Corporation (NWA Corp), Northwest's ultimate parent
company, will guarantee Northwest's obligations under the Omnibus
Agreement, including the consummation of the Put Option.
[sbull] As a condition to any such contribution by Northwest, the
Independent Fiduciary must determine on behalf of the Plans that the
acceptance of the contributed shares is prudent and in the interests of
the Plans' participants and beneficiaries and otherwise consistent with
the fiduciary standards of ERISA. In addition, the Independent
Fiduciary will monitor on an ongoing basis the prudence of the Plans'
continued holding of Pinnacle Stock consistent with the fiduciary
standards of ERISA. The appropriate fiduciary of the Plans (other than
the Independent Fiduciary) will determine that such investment will not
impair the liquidity of the Plans such that the Plans would not be able
to pay benefits and expenses when due. If such appropriate Plan
fiduciary determines the liquidity of the Plans is impaired, such
fiduciary shall direct the Independent Fiduciary to dispose of all or a
portion of the Pinnacle Stock consistent with the terms of the Omnibus
Agreement to the extent commercially reasonable.
[sbull] All transactions involving the Plans in connection with the
contribution of Pinnacle shares will be no less favorable to the Plans
than arm's length transactions involving unrelated parties.
[sbull] No commissions, fees, costs, charges or other expenses will
be borne by the Independent Fiduciary or the Plans in connection with
any acquisition, holding or disposition of Pinnacle shares to or from
the Plans, other than the underwriters' discount or other broker-dealer
fees or commissions charged in any sale of such shares. In addition,
the Independent Fiduciary negotiated the right to engage an investment
banker on behalf of the Plans in an IPO, at Northwest's expense.
[sbull] Northwest will provide at least quarterly notice to the
Independent Fiduciary of its cash liquidity. More frequent notice will
be required based on Northwest's liquidity and the value of the
Pinnacle Stock contributed to the Plans. In addition, Northwest will
provide the Independent Fiduciary with the information required to be
provided to its lenders under its credit agreement. In addition,
Northwest shall provide it with copies of any amendments to the credit
agreement.
[sbull] The Independent Fiduciary negotiated a comprehensive set of
governance rights accorded to the Plans as a condition of acceptance of
Pinnacle Stock. In this regard, as long as the Plans hold at least 5
percent of the Pinnacle Stock, the Plans will have the right to
designate one nominee to Pinnacle's board of directors, and Northwest
will vote the Series A Preferred Share held by it in favor of such
designee. The director designated by the Plans will have the right to
serve on Pinnacle's audit committee to the extent permitted under
applicable SEC and stock exchange rules. Once the Plans hold more than
50 percent of the Pinnacle Stock, the affirmative vote of the director
designated by the Plans shall be required to approve the appointment of
any new CEO of Pinnacle and compensation of any CEO, any amendments to
the $200 million Note of Pinnacle Airlines, Inc. held by Northwest, the
amendment of Pinnacle's charter or by-laws in certain respects, or the
implementation of certain changes in Pinnacle's capital structure or
the issuance of capital stock prior to an IPO. The Independent
Fiduciary negotiated further powers with respect to the Plan director,
including the right to object to Business Combinations involving
Northwest's affiliates.
[sbull] Any change to the ASA, including any early termination of
the ASA by Pinnacle, must be approved by a majority of Pinnacle's
independent directors, which majority must include the director
designated by the Plans. Any transaction involving Northwest outside
the ordinary course of business that involves more than $2 million and
any ordinary course transaction that involves more than $5 million must
be approved by a majority of the independent directors. In this event,
a majority of the independent directors may require a fairness opinion
from a nationally recognized investment banking firm.
[sbull] The Independent Fiduciary negotiated a comprehensive set of
representations and warranties relating to both Pinnacle Corp. and
Northwest and its affiliates relating to Northwest's ability to honor
the Put Option and to the value of Pinnacle Corp. The representations
and warranties must be true at the time of any Contribution. The
Independent Fiduciary negotiated the survival of the representations
and warranties in general for 24 months after the Closing Date and
indefinitely with respect to those relating to Northwest's ownership of
the Pinnacle Stock and Pinnacle's ownership of the outstanding shares
of Pinnacle Airlines, Inc. prior to the Initial Contribution;
Northwest's ownership of the Pinnacle Stock prior to any subsequent
Contribution; and Northwest's and NWA's representation that the
contemplated transactions do not violate or result in a default under
any of their material contracts, including without limitation, the
Credit Agreement.
Valuation of the Put Option
Fiduciary Counselors stated that, in conjunction with Northwest's
contribution of Pinnacle stock to the Plans, Northwest has provided the
Plans with a Put Option to protect them from a possible decline in
Pinnacle's shares' value. The value of the transaction is enhanced due
to the downside protection that this Put Option provides. In valuing
the Pinnacle shares, it was necessary to assign a value, not only to
Pinnacle, but also to the Put Option.
Prior to valuing the put option, Eclat's estimate of the value of
Pinnacle was $333,436,072, after application of an illiquidity discount
of 15% and a minority discount of 5%. This value was further discounted
by 4.48%, to
[[Page 49799]]
$318,498,136, to reflect Northwest's ability to delay payment on the
put for up to 6 months. Although the Plan's option is exercisable at
anytime, unlike a normal option, Northwest does not have to immediately
settle. Northwest has from 30 to 180 days to settle the option. The
4.48% discount represents what Eclat used for Pinnacle's pre-tax cost
of debt (9.6%) adjusted for a six-month period. Fiduciary Counselors
assumed that since Northwest could take up to 180 days to settle the
option that it would. Although Eclat cannot know what market conditions
might be like during this settlement period, this rate also exceeds the
Plan's assumed asset earnings rate.
The value was then increased to reflect the value of the put. The
Put Option is exercisable at any time by the Plan. Eclat used the
Black-Scholes option-pricing model to determine the value of the Put
Option. Using the Black-Scholes American option pricing model, Eclat
determined the value of the Put Option to be $20,680,684.
The Independent Fiduciary's Determinations
Fiduciary Counselors notes that under section 404(a)(1) of ERISA, a
fiduciary must discharge its duties with respect to a plan solely in
the interest of plan participants and beneficiaries. In addition, a
fiduciary must act for the exclusive purpose of providing benefits to
participants and beneficiaries; must act prudently; and must diversify
the investment of plan assets to minimize the risk of large losses,
unless under the circumstances it is clearly prudent not to do so. For
the reasons set forth below, the Independent Fiduciary has concluded
that it is prudent for the Plans to accept the Contribution and that
the Contribution is in the interest of the Plans and their participants
and beneficiaries:
[sbull] Participants and beneficiaries of the Plans stand to
benefit from an IPO of the Pinnacle Stock. The ASA provides a range of
revenues to be paid by Northwest to Pinnacle, and Eclat valued the
Company based on the minimum revenues, which would result from the ASA.
If Pinnacle in fact achieves the maximum operating margin provided
under the ASA, Eclat estimated that the value of Pinnacle would be
approximately 20 percent greater than the value used for purposes of
the contribution.
[sbull] In valuing Pinnacle Stock, the Independent Fiduciary
specifically applied a 15% liquidity discount and a 5% discount to take
into account that, for some period, the Plans would be a minority
shareholder.
[sbull] The Independent Fiduciary negotiated the terms of the Put
Option which provide downside protection by permitting the Plans to
sell the Pinnacle Stock back to Northwest for the greater of the
original value at which it was credited to the funding standard account
or its fair market value at the time it is sold back to Northwest.
Transfer restrictions on Pinnacle Stock held by the Plans are
reasonable in light of the Put Option. Specifically, the Independent
Fiduciary negotiated a limited period for the transfer restrictions
(until July 1, 2006) and the elimination of such restrictions upon the
occurrence of an Early Termination Event.
[sbull] The Independent Fiduciary negotiated voting and governance
rights to be accorded to the Plans that protect the interests of the
Plans (e.g. protect the plans from adverse changes in the ASA, in
Pinnacle's capital structure, etc.).
[sbull] Registration rights and Plan director's rights preserve the
value of the Pinnacle Stock while held by the Plans.
[sbull] The Independent Fiduciary retained an independent, expert
airlines valuation firm, Eclat, to provide valuation services. Eclat
determined that Pinnacle and Northwest are healthy companies, even in
light of current economic conditions in the airline industry.
[sbull] The terms of the ASA and related agreements are more
favorable to Pinnacle than an arm's length transaction between
unrelated parties, and substantially determine and enhance the value of
Pinnacle. The requirement that the director nominated by the Plans
approve any changes in the ASA will ensure that any modification of
those terms is done only if the changes, taken as a whole, are
favorable to Pinnacle and its shareholders, including the Plans.
[sbull] Participants and beneficiaries of the Plans benefit from
Northwest's improved liquidity and continued viability and
competitiveness in the current economic environment.
[sbull] The Independent Fiduciary considered, and determined, that
the Plans' holding of Pinnacle Stock was consistent with the Plans'
investment guidelines and would not impair the Plans' diversification.
The Pension Investment Committee informed the Independent Fiduciary
that the holding of Pinnacle Stock constituting the Initial
Contribution to the Plans would not and was not expected in the
foreseeable future to impair the liquidity of the Plans and that the
Plans would be able to pay benefits and expenses when due.
[sbull] Based on the Eclat and AIC valuations, the Independent
Fiduciary determined that the contribution of 1,938,000 shares of
Pinnacle Stock should be valued at $43,821,894 as of January 15, 2003,
the date the contribution occurred.
Duties of the Independent Fiduciary
The Department notes that the appointment of an independent
fiduciary to represent the interests of the Plans with respect to the
transactions that are the subject of the exemption request was a
material factor in its determination to propose exemptive relief. In
response to the commenters' concerns about the role of the independent
fiduciary, the Department believes that it would be helpful to provide
its views on the responsibilities of an independent fiduciary in
connection with the in-kind contribution of property to an employee
benefit plan.
As noted in the Department's Interpretive Bulletin, 29 CFR 2509.94-
3(d) (59 FR 66736, December 28 1994), apart from consideration of the
prohibited transaction provisions, plan fiduciaries must determine that
acceptance of an in-kind contribution is consistent with ERISA's
general standards of fiduciary conduct. It is the view of the
Department that acceptance of an in-kind contribution is a fiduciary
act subject to section 404 of ERISA. In this regard, section
404(a)(1)(A) and (B) of ERISA requires that fiduciaries discharge their
duties to a plan solely in the interests of the participants and
beneficiaries, for the exclusive purpose of providing benefits to
participants and beneficiaries and defraying reasonable administrative
expenses, and with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims. In addition, section
404(a)(1)(C) requires that fiduciaries diversify plan investments so as
to minimize the risk of large losses, unless under the circumstances it
is clearly prudent not to do so. Accordingly, the fiduciaries of a plan
must act ``prudently,'' ``solely in the interest'' of the plan's
participants and beneficiaries, and with a view to the need to
diversify plan assets when deciding whether to accept an in-kind
contribution. If accepting an in-kind contribution is not ``prudent,''
not ``solely in the interest'' of the participants and beneficiaries of
the plan, or would result in an improper lack of diversification of
plan assets, the responsible fiduciaries of the plan
[[Page 49800]]
would be liable for any losses resulting from such a breach of
fiduciary responsibility, even if a contribution in kind does not
constitute a prohibited transaction under section 406 of ERISA.
The selection of an independent qualified appraiser to determine
the value of an in-kind contribution and the acceptance of the
resulting valuation are fiduciary decisions governed by the provisions
of Part 4 of Title I ERISA. In discharging its obligations under
section 404(a)(1), the independent fiduciary must take steps calculated
to obtain the most accurate valuation available. In addition, the
fiduciary obligation to act prudently requires, at a minimum, that the
independent fiduciary conduct an objective, thorough, and analytical
critique of the valuation. In conducting such verification, the
independent fiduciary must evaluate a number of factors relating to the
accuracy and methodology of the valuation and the expertise of the
independent qualified appraiser. Reliance solely on the valuation
provided by the appraiser would not be sufficient to meet this prudence
requirement.
In considering whether to accept an in-kind contribution, the
Independent Fiduciary's responsibilities include the following:
1. The Independent Fiduciary must prudently determine the fair
market value of the Pinnacle Stock as of the date it is contributed to
the Plans. In determining the fair market value of the stock, the
Independent Fiduciary must obtain an appraisal by a qualified
independent appraiser, and must ensure that the appraisal is consistent
with sound principles of valuation.
2. The Independent Fiduciary must ensure that each appraisal, at a
minimum, includes the following elements:
(a) A summary of the appraiser's qualifications to evaluate
Pinnacle Stock,
(b) A statement that the appraiser is independent of Pinnacle and
Northwest, and that the appraiser has no interest in the securities
issued by Pinnacle or Northwest,
(c) A statement that the appraisal is being conducted to determine
the fair market value of Pinnacle Stock, which is defined as the price
at which the stock would change hands between a willing buyer and a
willing seller when the former is not under any compulsion to buy and
the latter is not under any compulsion to sell, and both parties are
able, as well as willing, to trade and are well informed about the
stock and the market for the stock,
(d) A statement of the stock's value, the methodologies used in
determining the value, the reasons for the valuation in light of the
methodologies, and the reasons that the appraiser chose to apply
particular valuation methods rather than others,
(e) A statement of the relevance or significance accorded to the
valuation methodologies taken into account,
(f) The effective date of the valuation,
(g) a description of the nature of Pinnacle's business and history,
(h) A description of the economic outlook in general, and of the
condition and outlook of Pinnacle's industry in particular,
(i) An analysis of Pinnacle's financial condition and earning
capacity,
(j) A description of all of the factors taken into account in
making the valuation, including any restrictions, understandings,
agreements or obligations limiting the Plans' ability to dispose of the
stock,
(k) A statement of past transactions involving Pinnacle Stock,
including dates, amounts, price, and whether the transactions were at
arms-length, as well as a description of any attempts to buy or sell
Pinnacle Stock over the last five years, including a description of any
previous plans for initial public offerings,
(l) An analysis of the market price of securities of corporations
engaged in the same or similar lines of business as Pinnacle, which are
actively traded on a recognized exchange or automated broker-dealer
quotation system,
(m) An analysis of the marketability, or lack thereof of the
Pinnacle Stock, with specific reference to any restrictions,
understandings, agreements, or obligations limiting the Plans' ability
to dispose of the Pinnacle Stock,
(n) An analysis of the degree to which actual control (both in form
and in substance) will pass to any of the Plans as a result of any of
the contemplated transactions,
(o) To the extent that Pinnacle's current or projected revenues and
expenses are related to, or dependent upon, contracts, agreements, or
understandings between Northwest and Pinnacle, an analysis of
Northwest's financial condition, the likelihood of a Northwest
bankruptcy, and the potential impact of a Northwest bankruptcy on those
contracts, agreements, or understandings, and on the market value of
Pinnacle Stock, and
(p) Any other factors necessary for a prudent determination of the
market value of Pinnacle Stock.
3. The Independent Fiduciary must investigate the facts and
assumptions underlying the appraisals to ensure that stock
contributions are not valued at more than fair market value. The
Independent Fiduciary must not simply defer to the conclusions reached
by the appraiser, but rather will take appropriate action to ensure:
(a) That the appraisal is based upon complete, accurate, and
current data;
(b) That the appraiser is appropriately qualified to conduct the
valuation;
(c) That the valuation methodologies are appropriate and adequately
explained and that the appraiser has adequately justified its decision
not to use alternative methodologies;
(d) That any variables used in the valuation analysis such as
projected revenues, expenses, operating margins, depreciation, discount
rates, capitalization rates, and multipliers are adequately supported
by market data;
(e) That the stock's value is calculated with appropriate discounts
for lack of marketability and control after a reasoned evaluation of
the relevant market data concerning such discounts, as well as of each
Plan's actual ability to effectively dispose of its stock or to control
Pinnacle;
(f) That the appraisal's reasoning and assumptions are consistent,
logical, and supported by appropriate financial and economic data and
that any calculations are accurate;
(g) That the valuation is based on complete, accurate, and audited
financial statements, which have been properly analyzed;
(h) That the assumptions underpinning the valuation are properly
identified, and a careful analysis is performed of the impact of
changes in those assumptions on the value of Pinnacle Stock;
(i) That the valuation has appropriately considered Northwest's
financial condition in valuing Pinnacle Stock, as well as the impact of
a Northwest bankruptcy on the value of Pinnacle Stock; and
(j) That the fair market value of the stock has been determined by
way of a prudent investigation.
4. The Independent Fiduciary must ensure that all of the conditions
above are satisfied with respect to any past contributions of Pinnacle
Stock, as well as any future contributions. If previous valuations or
analyses do not comport with these conditions, the Independent
Fiduciary must perform any additional work necessary to make the
valuations and analyses consistent with the conditions of this
exemption. In no circumstance, however, may the parties treat Pinnacle
Stock previously contributed to the Plans as if it had a higher value
than was attributed to it at the time of the original contribution.
[[Page 49801]]
Northwest represents that, if the Independent Fiduciary determines
that the Pinnacle Stock previously contributed to the Plans was worth
less at the time of the contribution than the amount attributed to it
at the time of the contribution, Northwest shall contribute additional
Pinnacle Stock or cash in amounts sufficient to make up the shortfall.
Lastly, the Department notes that the above described
responsibilities to be undertaken by the Independent Fiduciary are
material factors in the Department's determination to grant a final
exemption.
Additional Comments and Submissions
Northwest April 10, 2003 Submission
On April 10, 2003, Northwest submitted additional documentation to
the Department in connection with the January 15, 2003 contribution of
Pinnacle Stock to the Contract Plan (April 10 Submission Documents).
Northwest noted that the Pinnacle Stock is being held in an Investment
Fund established in connection with the Master Trust, and the amounts
were allocated to the Contract Plan and Salaried Plan consistent with
the provisions of the Master Trust, as described in the Proposed
Exemption. Northwest appointed Fiduciary Counselors investment manager
of the Investment Fund and Fiduciary Counselors has accepted this
appointment.
Northwest April 26, 2003 Comment
By letter dated April 26, 2003, Northwest responded to many of the
comments the Department had received concerning the Proposed Exemption
(April 26 Comment). Northwest observed that the comments submitted to
the Department raised several concerns regarding the contribution of
Pinnacle Stock to the Plans, as contemplated by the Proposed Exemption.
Because many of the comments raise common concerns, Northwest organized
its responses to address these common concerns.
Airline Industry and Northwest Financial Condition
Comment: A number of comments noted that the airline industry is
experiencing significant financial troubles and that some other
airlines are in bankruptcy. The comments expressed concern that
Northwest is exposed to bankruptcy risk and that the Pinnacle Stock
would have greatly reduced value if Northwest were to file for
bankruptcy, because Pinnacle serves Northwest.
Northwest Response: Northwest responded that Northwest recognizes
that it and the airline industry face significant financial challenges.
Northwest sought the exemption to permit the Pinnacle Stock
contribution as part of its overall strategy of managing the current
economic uncertainty. By permitting the contribution of Pinnacle Stock,
Northwest is able to preserve needed cash so that it can withstand
several years of losses. Maintaining liquidity is key to Northwest's
strategy for avoiding bankruptcy.
Northwest strongly believes that Pinnacle Stock has significant
value and that the value of Pinnacle Stock will increase when the IPO
market improves for regional airlines. Regional airlines play an
indispensable role in providing major airlines with important access to
passengers, largely from markets too small to be serviced by a major
airline. Pinnacle contributed over $500 million in revenue to Northwest
in 2002 and is expected to grow its regional jet flying approximately
30 percent per year through 2005. As Pinnacle grows to 95 aircraft, the
number of passengers and revenue will more than double.
Northwest has entered into a 10-year ASA with Pinnacle through 2012
that provides substantial value. Pinnacle's compensation formula within
the ASA contractually provides for a target operating margin of 14
percent from 2003 through 2007, with a guaranteed floor of 12 to 13
percent during this period. In 2008, the target operating margin will
be reset to a market-based percentage, but it will be no less than 10
percent and no higher than 14 percent. Northwest will no longer
guarantee a minimum operating margin in 2008. The target margin will be
reset after 2008 based on historical and expected operating costs.
Northwest asserts that its beliefs in this regard have been
independently verified. In connection with the Exemption Transactions,
Northwest does not determine the value of Pinnacle Stock. The value of
Pinnacle Stock is determined by an independent fiduciary, Fiduciary
Counselors, based on the valuation provided by their independent
valuation firm, Eclat. The valuation prepared by Eclat took into
consideration current industry conditions. If the markets return,
substantial upside will benefit the Plans. Future contributions of
Pinnacle Stock will continue to be subject to independent review and
valuation.
Northwest adds that under ERISA sections 406 and 407, Northwest
could have contributed the stock of its parent company (traded under
the symbol NWAC) to satisfy its funding obligations without seeking an
exemption. However, Northwest has proposed to contribute Pinnacle Stock
because it believes that it is a superior investment for the Plans. The
stock has long term upside potential because of the planned IPO.
Indeed, the January 15, 2003 Valuation indicates that the Plans could
receive a 20 percent IPO premium in connection with the Pinnacle Stock
investment.
Finally, Northwest notes that regional airline stocks have
generally been less volatile and better performing than the stocks of
major airlines. Since September 10, 2001, regional airlines have lost
48% of their value while the major airlines have lost 78% (excluding
U.S. Airways and United that have filed for Chapter 11 bankruptcy
protection). Northwest also believes that the value of Pinnacle Stock
is less exposed to bankruptcy risk than Northwest stock. This is
because a regional airline derives its value from the value of its ASA
with the major carrier and the major carrier is unlikely to terminate
the ASA in bankruptcy because it would severely disrupt the flow of
high yield passengers. In the case of United Airlines, for example, the
airline has not rejected the ASAs it has entered into with its regional
airline partners Atlantic Coast Airlines, SkyWest and Air Wisconsin.
Similarly, U.S. Airways did not reject its ASA with its regional
airline partners Mesa and Chautauqua. In addition, U.S. Airways has
recently signed an agreement with Mesa for more regional aircraft. Wall
Street analysts also look favorably on ExpressJet, the Continental
Airlines regional airline partner. However, Northwest understands that
some of United's airline services agreements have been renegotiated and
that it has been reported that the airline services agreement between
United and Atlantic Coast Airlines is the subject of current
negotiations. Moreover, in connection with the Omnibus Agreement
entered into between Fiduciary Counselors and Northwest, Fiduciary
Counselors negotiated for limitations on Northwest's ability to
unilaterally amend or terminate the ASA.
Valuation of Pinnacle Stock
Comment: A number of comments expressed concerns that Pinnacle
Stock is a risky and illiquid investment and hard to value because
there is no established market for the security.
Northwest Response: Northwest represents that it did not value
Pinnacle Airlines for purposes of the Exemption Transactions. As a
condition of the Proposed Exemption, Fiduciary Counselors, using the
services of its independent appraisal firm Eclat,
[[Page 49802]]
determined the value of Pinnacle Stock. In doing so, Fiduciary
Counselors' legal obligations run exclusively to the Plans, not to
Northwest. As the Plans' independent fiduciary, Fiduciary Counselors
must act prudently and in the interests of the Plans and their
participants.
Northwest asserts that in valuing Pinnacle Stock, there are well-
established valuation methodologies available to the valuation experts
to assess the value of non-public securities like Pinnacle Stock. Such
techniques were employed by Fiduciary Counselors and Eclat in this
circumstance. In particular, the risk and the liquidity of the Pinnacle
Stock were taken into account and are explained in the reports issued
by Fiduciary Counselors and Eclat. Equally important, Fiduciary
Counselors negotiated for special rights associated with the Plans'
acquisition of Pinnacle Stock that limit the risks associated with
Pinnacle Stock. For example, the Plans obtained a Put Option, corporate
governance rights, voting rights in Pinnacle and the right to initiate
an IPO or sale of Pinnacle Stock.
Collateral for Pinnacle Stock Contribution
Comment: Some comments suggested that Northwest be required to post
collateral in order to contribute Pinnacle Stock to the Plans.
Northwest Response: Northwest explains that, while the Proposed
Exemption and the Omnibus Agreement negotiated with Fiduciary
Counselors do not require collateral, the Proposed Exemption and the
Omnibus Agreement include provisions designed to limit the need for
collateral. The purpose of collateral would be to protect the Plans
from declines in the value of Pinnacle Stock and secure the Put Option
accorded to the Plans. In this case, the Omnibus Agreement provides the
Plans with a Put Option that allows Fiduciary Counselors at any time to
``put'' Pinnacle Stock back to Northwest at the greater of the price at
the time the stock was contributed or the price at the time of the
put.\7\ The Omnibus Agreement further requires that Northwest provide
regular notice of its liquidity to Fiduciary Counselors. Thus, the Put
Option serves to protect the Plans from declines in the value of
Pinnacle Stock and the liquidity notice feature ensures that the
Independent Fiduciary has sufficient notice so that it may exercise the
Put Option at a time when Northwest has sufficient financial resources
to meet its obligation under the Put Option.
---------------------------------------------------------------------------
\7\ Northwest notes that specifically, if the Pinnacle Stock is
not publicly traded, the Plans will receive the greatest of (i) the
initial contribution value (the Floor Price), (ii) the fair market
value as determined by the Independent Fiduciary at the time of the
exercise of the Put Option, or, if greater, at the closing date of
the Put Option, and, (iii) if a third party sale is elected by the
Plans and Northwest does not exercise its right of first refusal,
the proceeds from the sale of Pinnacle Stock held by the Plans to
such third party. If the Pinnacle Stock is publicly traded, the
Plans will receive the greater of (i) the Floor Price, or (ii) the
average closing price for the stock on the public market for the 10
trading days preceding the exercise date or, if greater, the closing
price on the day before the Put Option closing date.
---------------------------------------------------------------------------
Northwest asserts that, while the Department has required
collateral for some similar exemptions in the past, it has not required
collateral in all cases. Here, they assert, the purpose of the
exemption, to provide the Plans with a valuable security while
maintaining Northwest's liquidity, would be undermined if assets were
required to be used as collateral in connection with contributions of
Pinnacle Stock. Moreover, to the extent that Northwest has assets to
secure the contributions, such assets will be used to maintain the
liquidity necessary for Northwest to weather the ongoing economic
challenges.
Conflicts of Interest
Comments: Commenters expressed a concern that the contribution of
Pinnacle Stock involves a conflict of interest on the part of
Northwest.
Northwest Response: Northwest states that, because there is a
potential for a conflict of interest, the Proposed Exemption required
that Northwest appoint an independent fiduciary who is vested with the
discretion to determine whether the Plans should acquire, hold or
dispose of Pinnacle Stock. The Proposed Exemption included specific
conditions that ensure that the independent fiduciary is free from
conflicts of interest. The Proposed Exemption further required that the
independent fiduciary obtain expert valuation advice from an
independent valuation firm. Thus, to eliminate the potential for a
conflict of interest, two parties completely independent of Northwest--
Fiduciary Counselors and Eclat--represented the interests of the Plans
in connection with the transaction.
Northwest represents that the final terms of the Omnibus Agreement
reflect the fact that Fiduciary Counselors has represented the Plans'
interests. In this regard, the Plans acquired Pinnacle Stock at a
favorable price and the Plans obtained voting and management rights,
anti-dilution rights, limits on Northwest's ability to terminate the
ASA, rights to sell the Pinnacle Stock or dispose of it in an IPO in a
variety of circumstances, and a protective Put Option. In addition,
Pinnacle has an independent Board of Directors with one member
appointed by Fiduciary Counselors, and the Fiduciary Counselors-
appointed Board member is entitled to special voting rights on certain
matters.
Exposure to Future Underfunding
Comment: Several commenters expressed concern that the exemption
would expose the Plans to increased underfunding in the future.
Northwest Response: Northwest notes that it has never before sought
a prohibited transaction exemption and has never missed a pension
funding payment. Indeed, during the 1990's, Northwest contributed to
its pension plans millions of dollars more than the required amount of
contributions. As Northwest's track record demonstrates, Northwest
agrees that the Plans need to be soundly funded. The Proposed Exemption
is part of Northwest's strategy to achieve that goal. Through the
contribution of Pinnacle Stock, Northwest will be able to meet up to
$330 million (based on the current valuation) in near term funding
obligations while maintaining the airline's ability to weather
difficult times, to the benefit of all concerned. Moreover, when the
IPO of Pinnacle Stock occurs, the Plans may benefit from a potentially
significant IPO premium with respect to their holdings of Pinnacle
Stock. In the absence of the contribution of Pinnacle Stock, the Plans
could suffer from increased underfunding. This is because a cash
contribution is not a viable alternative given the company's liquidity
needs.
Preference for Cash Contribution
Comment: A number of commenters expressed a preference that pension
contributions be made with cash rather than Pinnacle Stock.
Northwest Response: Northwest notes that like other major airlines,
Northwest is in a temporary period of extraordinary airline revenue
weakness and volatility. In this environment, it is necessary to
maintain high liquidity reserves to ensure the viability of the airline
and protect the long-term interests of the pension plans and plan
participants.
Northwest asserts that, if its current cash needs were not so
great, Northwest would make its pension contributions in cash as it has
in the past. However, because of its liquidity needs, a cash
contribution is not a viable alternative.
[[Page 49803]]
Northwest stated ``[i]n the absence of an exemption, Northwest would
have to consider the contribution of NWA Corp. stock or an IRS waiver.
Alternatively, Northwest could consider filing for bankruptcy, which
would suspend most pension contributions, and could result in
termination of some or all of the Plans.''
The goal of the Pinnacle Stock contribution is to (1) provide the
Plans with a valuable security, (2) meet near term pension funding
obligations, and (3) allow Northwest to preserve cash to withstand the
current economic environment. Northwest believes this is the best
outcome for all Plan participants and beneficiaries.
Eclat May 16, 2003 Response
On May 16, 2003, Mr. William S. Swelbar, Managing Director of
Eclat, responded to the Department concerning questions on the two
valuations of Pinnacle. Eclat provided additional information in
support of its view that the discount rates, and other factors used in
determining the fair market value of the Pinnacle Stock were reasonable
and theoretically sound.
Northwest May 20 and June 10, 2003 Comment Letters
On May 20 and June 10, 2003, Northwest responded to certain issues
raised during the Hearing that were not responded to in the April 26
Comment.
1. During the Hearing, the Department asked Northwest to provide
information concerning the funded status of the Pilot Plan, Contract
Plan and Salaried Plan at the end of 2002. Northwest provided the
funded status of each Plan as of 1/1/03 as shown in the following
table.
Northwest Airlines, Inc.--Current Liability Funded Status at January 1, 2003
----------------------------------------------------------------------------------------------------------------
Pilots plan Contract plan Salaried plan
----------------------------------------------------------------------------------------------------------------
Current Liability using 6.65% interest rate (IRC Sec. $3,665,896,686 $2,673,540,738 $425,037,585
412(l))...............................................
Market Value of Assets (with PY02 accrued 2,253,513,119 \2\ 1,385,832,156 \3\ 254,670,253
contributions)........................................
Actuarial Value of Assets (with PY02 accrued 2,704,215,743 \2\ 1,662,998,587 \3\ 305,604,304
contributions) \1\....................................
----------------------------------------------------------------------------------------------------------------
\1\ Actuarial value of assets smoothes investment gains and losses over a five-year period.
\2\ Accrued contribution of $202,626,983 for PY02.
\3\ Accrued contribution of $20,083,879 for PY02.
2. During the Hearing, employees of Northwest referenced an
employee stock program that was established by the company in 1993.
Northwest explained that, as part of labor agreements reached in 1993,
Northwest's parent company, NWA Corp., issued to trusts for the benefit
of participating employees 9.1 million shares of a new class of Series
C cumulative, voting, convertible, redeemable preferred stock, par
value of $.01 per share (the Series C Preferred Stock), and 17.5
million shares of Common Stock and provided the union groups with three
positions on the Board of Directors. The Series C Preferred Stock ranks
senior to Common Stock with respect to liquidation and certain dividend
rights. As long as the Common Stock is publicly traded, no dividends
accrue on the Series C Preferred Stock.
The Northwest Airlines Corporation Employee Stock Plan (Employee
Stock Plan) was established in 1993. The Employee Stock Plan is a
profit sharing plan that is tax qualified under section 401(a) of the
Code and subject to ERISA.\8\ The Employee Stock Plan was established
through labor negotiations between Northwest and its unions in 1993 to
hold contributions of Northwest Airlines Corporation Series C Preferred
Stock. These negotiations resulted in agreements (Agreements) between
Northwest and each of its unions under which Northwest would contribute
to the Employee Stock Plan a newly created, special class of stock (the
Series C Preferred Stock) in an amount that would equal the monetary
value of certain wage and other concessions agreed to by the unions.
Each of Northwest's three main unions at the time of the Agreements
also was granted the right to appoint one director to the Northwest
board of directors.
---------------------------------------------------------------------------
\8\ The original Employee Stock Plan was established in 1993. On
December 2, 2002, the Employee Stock Plan was divided into three
components, which were then merged into the existing Northwest
Airlines Retirement Savings Plan for Pilot Employees, Northwest
Airlines Retirement Savings Plan for Contract Employees and
Northwest Airlines Retirement Savings Plan for Salaried Employees.
Each of these plans is a Code section 401(k) plan that is tax
qualified under section 401(a) of the Code and subject to ERISA. For
ease of reference, Northwest refers to the Employee Stock Plan, but
the factual discussion of the Series C Preferred Stock remains
accurate after the merger with the Northwest 401(k) plans.
---------------------------------------------------------------------------
The Employee Stock Plan covers in general terms Northwest's
employees employed from August 1, 1993 through 1996, including
employees represented by Air Line Pilots Association (ALPA),
International Association of Machinists and Aerospace Workers (IAM),
International Brotherhood of Teamsters (IBT), Airline Technical Support
Association (ATSA), Northwest Airlines Meteorologists Association
(NAMA), Transport Workers Union of America (TWUA) and management
employees. In 1994 through 1997, Northwest made annual contributions of
Series C Preferred Stock to the Employee Stock Plan for the benefit of
employees represented by the IAM and IBT (the other labor groups had
converted their right to receive Series C Preferred Stock into Common
Stock under the Special Conversion Option described below). The shares
were then allocated to individual accounts established on behalf of
each eligible employee. A total of 9.1 million shares of Series C
Preferred Stock were contributed to the Employee Stock Plan.
Each share of the Series C Preferred Stock is convertible at any
time into 1.364 shares of NWA Corp. Common Stock (Common Stock). At the
time a participant exercises conversion rights, the Series C Preferred
Stock is converted to Common Stock, the Common Stock is sold and cash
is allocated to participant accounts. In addition, under the
Agreements, the trustee of each plan was given a one time Special
Conversion Option that, if elected, resulted in the relevant trusts
receiving Common Stock at the rate of 1.9096 shares of Common Stock for
each share of the Series C Preferred Stock that they would have
otherwise received. The Special Conversion Option expired on February
9, 1994. On that day, ALPA, TWUA, NAMA, ATSA and the Company on behalf
of its management and non-contract employees exercised the Special
Conversion Option, with the IAM and IBT electing not to exercise the
Special Conversion Option (63 shares are still owned by the ALPA
trust). Thus, almost all of the Series C Preferred Stock that remains
in the Employee Stock Plan is allocated to the accounts of employees
represented by the IAM and IBT. As of December 31, 2002, 4.3 million
shares of Series C Preferred Stock have been converted into Common
Stock and the remaining
[[Page 49804]]
4.8 million shares outstanding are convertible into 6.6 million shares
of Common Stock.
The holders of outstanding Series C Preferred Stock have a ``put
right'' in 2003 to require NWA Corp. to repurchase such shares for an
amount equal to the actual wage savings achieved under the 1993 labor
agreement (projected to be $226 million at the August 1, 2003 put
date). NWA Corp. has the option to repurchase such shares in cash, by
the issuance of additional Common Stock, or by the use of cash and
stock. A decision to issue only additional Common Stock must be
approved by a majority of the three directors elected by the holders of
the Series C Preferred Stock. If NWA Corp. decides not to repurchase
the Series C Preferred Stock, quarterly dividends will accrue beginning
August 1, 2003, at 12% per annum and the employee unions will receive
three additional Board of Directors positions. If, on August 1, 2003,
NWA Corp. decides not to repurchase the Series C Preferred Stock,
beginning on August 1, 2003 and on each succeeding quarter end date,
NWA Corp. must use all ``Available Cash'' (a defined term in the
Agreements) to effect partial repurchases of the Series C Preferred
Stock, but only if and to the extent NWA Corp. is not prohibited from
making such repurchases under applicable Delaware corporate law or any
loan agreement to which NWA Corp. is a party. Any decision not to use
all Available Cash to effect such partial purchases must be approved by
a majority of the directors elected by the holders of the Series C
Preferred Stock.
On August 1, 2003, Northwest issued a press release that announced
its decision on the Series C Preferred Stock. The Northwest board of
directors determined that at this time the company could not legally
redeem the 4.8 million shares of its Series C Preferred Stock still
outstanding and made the following statement:
After a thorough review of the legal restrictions applicable to
the company, the board concluded that Northwest was not able to buy
back the Series C Preferred Stock, at this time. As a board, we
recognize the valuable contributions our employees made to the
company during the 1993-1996 wage reduction period and acknowledge
the company's obligation to buy back the Series C Preferred Stock.
We want to do so as soon as possible. We devoted substantial time
and effort to this issue. We discussed the Series C Preferred Stock
buy back at length in our regularly scheduled April and June board
meetings, and held two special meetings in July devoted exclusively
to the Series C issue * * *. At the conclusion of these
deliberations, it was clear that the legal restrictions applicable
to stock buy backs under Delaware Law did not permit Northwest to
proceed at this time with the buy back of the Series C Preferred
Stock.
The board noted that the company's obligation to the holders of the
Series C Preferred Stock continues until Northwest has the ability to
repurchase the Series C Preferred Stock. Until the Series C stock is
repurchased, each share will accrue a 12% per year dividend on the
$46.96 per share buy back price.
On August 1, 2003, in response to the Department's questions
concerning the ``legal restrictions'' that prevented Northwest from
repurchasing the Series C Preferred Stock and whether these legal
restrictions were tied to Northwest's financial condition, Northwest
explained that in making the Series C stock repurchase decision, the
board of NWA Corp. was subject to a Delaware law that applies only to
NWA Corp.'s repurchase of its own stock. The Delaware law does not
apply to the repurchase of Pinnacle Stock, which is not treated as NWA
Corp.'s own stock. The Delaware law applicable to the repurchase of the
Series C stock requires the Board to make a finding that NWA Corp. has
adequate surplus, defined as the net asset value of the corporation in
excess of its capital. At the present time, the Board was unable to
make this finding.
The Department also questioned whether such restrictions would
similarly preclude Northwest from honoring the Put Option. Northwest
responded that no similar legal restriction would apply to the
repurchase of Pinnacle Stock pursuant to the exercise of the Put
Option. Minnesota law would not restrict the repurchase of Pinnacle
stock by Northwest, a Minnesota corporation, which issued the Put
Option. In addition, Delaware law would not restrict NWA Corp., a
Delaware corporation, from repurchasing the Pinnacle Stock as the
guarantor of the Put Option. Both the Minnesota law and the Delaware
law relate to the repurchase of the stock issued by Northwest Airlines,
Inc. and NWA Corp., respectively, and would not apply to the repurchase
of stock of Pinnacle (the Pinnacle Stock). Northwest notes that the
board previously approved the Omnibus Agreement, which includes the Put
Option, and no further action would be required of the board in the
event that the Put Option is exercised by the Independent Fiduciary.
Northwest stated that the language at section 5.1(b) of the Omnibus
Agreement contains a representation that Northwest has the corporate
and legal authority to meet its obligations under the agreement,
including the Put Option. Northwest asserts that it couldn't make this
representation if there were restrictions that limited its ability to
honor the Put Option or other aspects of the Omnibus Agreement and this
representation was the product of the negotiations between the
Independent Fiduciary and Northwest (as noted above).
Fiduciary Counselors' July 11, 2003 Submission
Additional Information
Fiduciary Counselors sent additional information to the Department
on July 11, 2003. The information addressed, among other issues, how
the possibility of a Northwest bankruptcy was factored into the
valuation, how the valuation was ``stress'' tested for other
assumptions contained in the valuation, and the reasons for the
selection of a 15% liquidity discount.
Fiduciary Counselors, AIC and Eclat represent that the ASA between
Northwest and Pinnacle provided the framework for the final valuation.
There were significant changes made to the original valuation performed
for the PBGC (the Eclat Report) based on this agreement that proved to
be more conservative with respect to the ultimate valuation. Fiduciary
Counselors, AIC and Eclat also noted that some of the information used
by Eclat for the January 15, 2003 Valuation was not available during
the initial valuation in the Eclat Report.
Additionally, by letter dated July 15, 2003, Fiduciary Counselors
represents that in preparing the valuation for subsequent
contributions, Eclat will reexamine the assumptions used in preparing
the initial valuation and will continue to stress test the assumptions
in its valuation model to reflect the credit-worthiness of Northwest
and changing conditions in the regional jet market.
Change of Affiliation of Fiduciary Counselors
On July 11, 2003, Fiduciary Counselors informed the Department that
Fiduciary Counselors Inc. (formerly Aon Fiduciary Counselors, Inc.)
(Fiduciary Counselors) is no longer a subsidiary of Aon Corporation. As
of June 30, 2003, Fiduciary Counselors was acquired by Fiduciary Group,
Inc., in a management-led buyout.
Fiduciary Counselors notes that there will be no change in its
providing objective and independent investment management. Ellen A.
Hennessy will
[[Page 49805]]
continue as President of Fiduciary Counselors and, as majority
shareholder of Fiduciary Group, will continue to control management
decisions with respect to Fiduciary Counselors. Ellen A. Hennessy will
continue to be the primary person at Fiduciary Counselors handling its
responsibilities as independent fiduciary to the Northwest Airlines
defined benefit plans.
Fiduciary Counselors adds that AIC, which remains a subsidiary of
Aon, will continue to act as advisor in connection with this
engagement. There will be no change in their personnel assigned to this
engagement or in the manner in which the fees are split between the two
organizations.
As described in the Fiduciary Counselors letter to the Department
on January 6, 2003, Northwest has agreed to pay Fiduciary Counselors an
annual fee that covers both the independent fiduciary and investment
management services provided by Fiduciary Counselors and the investment
advisory services provided by AIC. The initial fee was remitted
directly to Aon Consulting, Inc., then a parent company of both
Fiduciary Counselors and AIC. Aon Consulting internally allocated 25%
of the fee to Fiduciary Counselors, which comprised less than 5% of its
annual gross revenue in 2002. In connection with the change in
ownership of Fiduciary Counselors, Fiduciary Counselors and AIC have
agreed that future payments will be allocated in the same proportions.
Payment will be made to Fiduciary Counselors, which will remit 75% to
AIC. Based on current client engagements, Fiduciary Counselors
anticipates that the portion retained by it will comprise less than 5%
of Fiduciary Counselors' gross revenue for 2003.
Fiduciary Counselors asserts that the sale of Fiduciary Counselors
will, if anything, increases their independence. As reflected in the
Proposed Exemption, another Aon affiliate does provide non-plan
services to Northwest, albeit services representing less than 1% of
Aon's total annual revenue. In contrast, under its new ownership,
neither Fiduciary Counselors nor any affiliate will accept any other
engagement from Northwest while it is independent fiduciary for the
Plans.
Termination of the Independent Fiduciary Agreement
The Department notes that the Preamble to the Proposed Exemption
stated that either party may terminate the Independent Fiduciary
Agreement for any reason upon 60 days notice and that the Agreement may
be terminated immediately for cause. As further noted in the Preamble,
the parties to the Agreement shall notify the Department within 30 days
of any decision regarding the resignation, termination or change in
control of the Independent Fiduciary. The Department wishes to clarify
that any replacement Independent Fiduciary must be acceptable to the
Department and must assume its responsibility prior to the effective
date of the removal of the predecessor Independent Fiduciary.
Northwest and ALPA Agreement Regarding Pinnacle Stock
On June 27, 2003, ALPA and Northwest provided the Department with a
Letter of Agreement between Northwest and the Northwest airline pilots
represented by ALPA (the Letter Agreement) regarding the acquisition
and holding of Pinnacle stock by the Northwest Pension Plan for Pilot
Employees (the Pilot Plan). ALPA and Northwest informed the Department
that the Letter Agreement will be executed by the parties in connection
with a proposed voluntary contribution of Pinnacle Stock (described
below).
The Letter Agreement provides that:
1. Northwest will make a voluntary contribution to the Pilot Plan
on or before September 15, 2003 so that the funded current liability
percentage for the Plan is at least 80% for the 2003 Plan Year. This
voluntary contribution will eliminate the funding requirements under
the Code and ERISA for the 2003 Plan Year that would otherwise be
payable with respect to the Pilot Plan.
2. The voluntary contribution to the Pilot Plan will consist
entirely of Pinnacle Stock. At the time the voluntary contribution is
made to the Pilot Plan, Northwest also will contribute Pinnacle Stock
to the Salaried Plan in an amount such that the amount of the Pinnacle
Stock held by the Salaried Plan equals the required minimum funding
contribution due under ERISA and the Code on September 15, 2003. Any
remaining Pinnacle stock will then be contributed to the Contract Plan.
3. The Pinnacle Stock contributed to the Pilot Plan will be held in
a separate, segregated subaccount of the Master Trust and held for the
exclusive benefit of the Pilot Plan. Contributions of Pinnacle Stock to
the Salaried Plan and the Contract Plan will likewise be held in a
separate segregated subaccount of the Master Trust and held for the
exclusive benefit of each respective plan.
4. Northwest will obtain an amendment of the Omnibus Agreement so
that the Independent Fiduciary will have first priority to sell
Pinnacle Stock in an initial public offering, if certain conditions
exist.
5. The Contract Plan, the Salaried Plan and the Pilot Plan will
have the same registration rights provided in the Omnibus Agreement
dated January 15, 2003 between Pinnacle Airlines Corp., Northwest and
Fiduciary Counselors.
6. Northwest may not terminate Fiduciary Counselors as the
Independent Fiduciary without the consent of ALPA and may not appoint a
new Independent Fiduciary without the consent of ALPA. The Independent
Fiduciary will have the sole responsibility to determine whether to
acquire, hold or dispose of Pinnacle Stock on behalf of the Plans and
whether to exercise the Put Option with respect to Pinnacle Stock.
7. The monthly contributions required to be made to the Pilot Plan
pursuant to the pilot collective bargaining agreement are waived for
the 2004 and 2005 Plan Year.
As described in the Proposed Exemption, the current provisions of
the Pilot Plan and the pilot collective bargaining agreement prohibit
the Pilot Plan from acquiring or holding employer securities. Without
modifications to the pilot collective bargaining agreement, the
Proposed Exemption contemplated that the other two Plans would receive
a contribution of Pinnacle Stock in an amount equal to the maximum
amount permitted under section 407(a)(2) of ERISA, while the Pilot Plan
would receive no contributions of Pinnacle Stock.
ALPA represents that it recognizes the need for Northwest to
preserve liquidity so ALPA has agreed to modify the collective
bargaining agreement and the Pilot Plan to permit the Pilot Plan to
acquire and hold employer securities through a voluntary contribution
to the Pilot Plan. The Proposed Exemption contemplates both voluntary
and required contributions to the Northwest Plans, as did the
Application filed by Northwest on November 6, 2002 and the Omnibus
Agreement.
Northwest and ALPA assert that the voluntary contribution gives
Northwest the liquidity it needs, and thereby the ability to maintain
all of its Plans, by eliminating the funding requirement for the Pilot
Plan for the 2003 Plan Year, possibly reducing the funding requirements
for future plan years, and by waiving the monthly contribution
requirement under the pilot collective bargaining agreement for the
2004 and 2005 Plan Years. The Pilot Plan and its participants benefit
from the voluntary contribution by providing an early contribution of
an asset with significant
[[Page 49806]]
value to more adequately fund the benefits promised under the Pilot
Plan.
The allocation method made pursuant to the Letter Agreement will
result in a modest change in the percentage of the Contract and
Salaried Plans' assets invested in Pinnacle Stock compared to the
ratable allocation contemplated by the Proposed Exemption. Without
modification to the pilot collective bargaining agreement, the Proposed
Exemption contemplated that the Salaried and Contract Plans could hold
Pinnacle Stock equal up to 10% of each Plan's assets. Under the Letter
Agreement, the Salaried and Contract Plans will instead hold Pinnacle
Stock with a value equal to approximately 8% of their respective
assets.
Northwest and ALPA believe that the Letter Agreement also enhances
protections for participants in all three Plans by giving the
Independent Fiduciary first priority to sell Pinnacle Stock in an IPO
where the number of shares sought to be sold exceeds the number that
can be sold.
The Department asked whether Northwest intends to contribute cash
or some other asset to satisfy the balance of the calendar year 2003
funding requirements of the Salaried and Contract Plans that will not
be met by the Pinnacle Stock contribution as a result of the Letter
Agreement. Northwest represents that it will make any such
contributions in cash. Additionally, Northwest will maintain a
subaccount for each Plan within the Master Trust for so long as that
Plan holds Pinnacle Stock. Once all of the Pinnacle Stock in such an
account has been liquidated, that subaccount may be dissolved.
As noted in the June 27, 2003 letter from Northwest and ALPA to the
Department, Northwest states that the Letter Agreement will be executed
in connection with the voluntary contribution. Thus, the ALPA agreement
will be formally entered into and effective on the date of the
voluntary contribution.
August 6, 2003 Northwest and Independent Fiduciary Response
Audited Financial Statements
The Department asked the Independent Fiduciary if the January 15,
2003 Valuation was based on audited financial statements.
Fiduciary Counselors stated that Eclat's valuation took into
account a variety of financial data. Eclat was provided with Pinnacle's
audited financial statements for the years 2000 and 2001. Eclat was
also provided with unaudited interim and full year financial
information for 2002. However, audited 2002 financial statements were
not available at the time of Eclat's valuation for the January 15, 2003
contribution.
Enhanced Communication with Plan Participants
Several commenters requested that Northwest provide for enhanced
communication with the Plan participants concerning the Exemption
Transactions. Additionally, ALPA requested that it be involved in the
monitoring of the Independent Fiduciary.
In this regard, Fiduciary Counselors plans to hold periodic
conference calls to report to the representatives of the participants
covered by collective bargaining agreements on developments with
respect to the Pinnacle Stock held by the plans. Additionally,
Northwest notes that the Letter Agreement between Northwest and ALPA
relating to a voluntary contribution of Pinnacle Stock would provide
ALPA with a role in reviewing and approving the termination, and any
replacement, of the independent fiduciary. This, together with the
reporting planned by Fiduciary Counselors, will permit ALPA to monitor
the Independent Fiduciary.
Plan Asset Investment Guidelines
A number of commenters asked, if Pinnacle Stock is contributed to
the Plans, how would this affect the manner in which other Plan assets
are invested?
Northwest noted that, as is the case for sponsors of defined
benefit plans, Northwest has adopted investment guidelines and asset
allocation strategies that guide the investment of the Plans' assets.
These guidelines contemplate that a certain amount of assets will be
allocated to securities with risk and return characteristics similar to
Pinnacle Stock. Thus, Northwest notes that the holding of Pinnacle
Stock by the Plans can fit within the overall investment strategy
adopted for the Plans.
Fiduciary Counselors notes, as described in its report, in
accepting the Pinnacle Stock contribution, Fiduciary Counselors
determined that Pinnacle Stock fit within the Plans' investment
guidelines and diversification needs. Fiduciary Counselors also
obtained a determination from Northwest's Pension Investment Committee
that the holding of Pinnacle Stock would not impair the liquidity of
the Plans and that the Plans would be able to pay benefits and expenses
when due. Similar considerations will be taken into account by
Fiduciary Counselors in determining whether to accept any future
contribution of Pinnacle Stock.
Minimum Rate of Return
Some commenters asked if Northwest would be willing to guarantee
the Plans a minimum rate of return on the Pinnacle Stock such as a rate
equal to the inflation rate.
Northwest stated that it would not. Northwest provided that the
Omnibus Agreement guarantees that the Plans always receive the greater
of the initial contribution value of Pinnacle Stock or the value of the
stock at the time of an IPO or the exercise of the Put Option.
Northwest guarantees the ``principal'' attributable to the investment
in Pinnacle Stock. According to Northwest, the Omnibus Agreement
provides the Plans substantial investment risk protection, protection
that would not be available to the Plans when investing in securities
with similar risk and return characteristics. Moreover, the Plans will
receive all of any investment gains attributable to their shares of
Pinnacle Stock at the time of an IPO. Northwest also noted that it
assumes the investment risk associated with any investment by the
Plans, including the investment in Pinnacle Stock, and must make up any
investment losses through future contributions to the Plans.
The IPO
Several commenters asked whether the Plan trustees should decide
when to initiate a public offering since the Plans will own a majority
of Pinnacle Stock.
Northwest noted that under the terms of the Omnibus Agreement,
Northwest is responsible for making up the difference, if any, between
the IPO price and the original contribution value. As a result,
Northwest has a strong interest in ensuring that maximum value is
obtained in connection with an IPO and Northwest believes that it is
appropriate for it to determine the timing of an IPO. Additionally,
Fiduciary Counselors agreed only to a limited period during which
Northwest has the exclusive right to cause an IPO. Under the Omnibus
Agreement, Northwest controls the timing of the IPO until the earlier
of July 1, 2006 or the occurrence of an early termination event. After
that date, the Omnibus Agreement provides Fiduciary Counselors with the
right to cause an IPO of Pinnacle Stock.
Pinnacle Management
Several commenters asked if Northwest would manage Pinnacle in a
manner that maximizes its value.
Northwest replied that Northwest does not manage Pinnacle. Except
for one director appointed by Northwest, Pinnacle's board is
independent of Northwest. Northwest expects that the
[[Page 49807]]
board, like any board fulfilling its fiduciary duties, will seek to
maximize the value of the enterprise. In addition, Fiduciary Counselors
negotiated comprehensive voting and governance rights specifically for
the Plans under the Omnibus Agreement. For example, Fiduciary
Counselors appointed a director to Pinnacle's board who sits on the
board's audit committee. Once the Plans own 50% of the Pinnacle Stock,
the Plans' director will exercise additional approval rights relating
to the company's bylaws and capital structure. In addition, changes to
the ASA and other significant transactions must be approved by a
majority of Pinnacle's directors, which majority must include the
Plans' director.
Modifications to the ASA
On July 23, 2003, Northwest confirmed to the Department that the
modifications to the ASA referred to in the Proposed Exemption have
been made. The ASA was revised to provide that the acquisition or
disposition of shares of Pinnacle Stock pursuant to the terms of the
Omnibus Agreement does not constitute a Change of Control (as defined
in the ASA). The ASA also was revised to eliminate the unilateral right
of Northwest to terminate the ASA in the event of the bankruptcy of
Northwest.
10% Limitation
In the March 5 Comment, Fiduciary Counselors corrected previous
information provided to the Department in the Proposed Exemption with
reference to ``employer securities or employer real property'' in the
last sentence of paragraph 14 in column 1 of 68 FR 2584 (emphasis
added) and each other place it occurs. This phrase should be changed to
``employer securities and employer real property''.
In this regard, the Department wishes to note that Northwest has
not requested, and the Department is not providing, any relief for any
contribution of Pinnacle Stock that, when aggregated with any employer
securities and employer real property currently held by any of the
Plans, represents more than 10 percent of the value of that Plan's
assets.
Best Interest Standard
In the March 5 Comment, Fiduciary Counselors noted that, consistent
with the statutory requirements of section 404(a) of ERISA, the
reference in the Proposed Exemption to ``the best interests of the
Plans' participants and beneficiaries'' (emphasis added) should be
changed to ``the interests of the Plans' participants and
beneficiaries''.
Entity References
In the March 3 Comment, Northwest observed that there are three
references to NWA Inc. in the second column at 68 FR 2584 that should
reference Northwest (Northwest Airlines, Inc.), the wholly-owned
subsidiary corporation of NWA Inc. The references appear almost halfway
down the column beginning in the fourth full paragraph, and in the last
paragraph in the column.
Jones Day
The March 5 Comment noted that due to the firm's recent name
change, the reference to ``Jones, Day, Reavis & Pogue'' in the first
column of the Proposed Exemption at 68 FR 2584 should be changed to
``Jones Day''.
Determination of the Department
Accordingly, based upon the representations made by the Applicant,
the written comments received in response to the Proposed Exemption,
the record of the public hearing, and the analysis conducted by the
Independent Fiduciary, the Department has determined to grant the
exemption. The Department has, in transactions of this nature, placed
emphasis on the need for an Independent Fiduciary and on such
Independent Fiduciary's considered and objective evaluation of the
transactions. In its deliberations, which included its analysis of all
aspects of the transactions, the Independent Fiduciary has consistently
represented for the record that no contribution of Pinnacle Stock will
be accepted on behalf of the Plans unless such transactions are found
by the Independent Fiduciary to be in the interests of the Plans.
Finally, the Department notes that the Independent Fiduciary's
satisfaction of its obligations in connection with the determination of
the fair market value of the Pinnacle Stock as previously described by
the Department in the Preamble to the final exemption is a critical
factor in the Department's decision to grant a final exemption.
The Application pertaining to the exemption, the Proposed
Exemption, the comments submitted to the Department and the responses
to the comments, the transcript of the Hearing, and all other documents
submitted to the Department concerning this exemption have been
included as part of the public record of the Application. The complete
Application file, including all supplemental submissions received by
the Department, is available for public inspection in the Public
Disclosure Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
For a complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the January 17, 2003 Notice of Proposed Exemption at 68 FR 2578.
General Information
The attention of interested person is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which require, among other things, a fiduciary to
discharge his or her duties respecting the plan solely in the interest
of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirements of section 401(a) of the Code that the plan
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) The exemption will not extend to transactions prohibited under
section 406(b)(3) of the Act and section 4975(c)(1)(F) of the Code;
(3) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department finds that the exemption is
administratively feasible, in the interests of the plans and their
participants and beneficiaries and protective of the rights of the
participants and beneficiaries of the plans;
(4) This exemption is supplemental to, and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transitional rules. Furthermore, the fact
that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction; and
(5) The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application are true and complete and accurately describe all material
terms of the transactions, which are the subjects of the exemption.
[[Page 49808]]
Exemption
In accordance with section 408(a) of the Act and section 4975(c)(2)
of the Code and the procedures set forth in 29 CFR Part 2570, Subpart B
(55 FR 32836, 32847, August 10, 1990) and based upon the entire record,
the Department finds that the exemption is:
(a) Administratively feasible;
(b) In the interests of the plans and their participants and
beneficiaries; and
(c) Protective of the rights of the participants and beneficiaries
of the plans.
Section I. Covered Transactions
The restrictions of sections 406(a), 406(b)(1) and (b)(2), and
407(a) of the Act and the sanctions resulting from the application of
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A)
through (E) of the Code, shall not apply to:
(1) The transfer of the common shares of Pinnacle Airlines Corp.
(Pinnacle Stock) to the Northwest Airlines Pension Plan for Salaried
Employees, the Northwest Airlines Pension Plan for Pilot Employees, and
the Northwest Airlines Pension Plan for Contract Employees (the Plans)
through the in-kind contribution(s) of such shares by Northwest
Airlines, Inc. (Northwest), a party in interest with respect to such
Plans;
(2) The holding of the Pinnacle Stock by the Plans;
(3) The sale of the Pinnacle Stock by the Plans to Northwest;
(4) The acquisition, holding, and exercise by the Plans of a put
option (the Put Option) granted by Northwest which permits the Plans to
sell the Pinnacle Stock to Northwest; and
(5) The guaranty to the Plans by Northwest Airlines Corporation of
Northwest's obligation to honor the Put Option.
Section II. Conditions
This exemption is conditioned upon adherence to the material facts
and representations described herein and upon satisfaction of the
following requirements:
(a) The Plans acquire the Pinnacle Stock through one or more
contributions by Northwest during the calendar years 2003 and 2004;
(b) An independent qualified fiduciary (the Independent Fiduciary),
acting on behalf of the Plans, represents the Plans' interests for all
purposes with respect to the Pinnacle Stock, and determines, prior to
entering into any of the transactions described herein, that each such
transaction, including the contribution of the Pinnacle Stock, is in
the interests of the Plans;
(c) The Independent Fiduciary negotiates and approves the terms of
any of the transactions between the Plans and Northwest that relate to
the Pinnacle Stock;
(d) The Independent Fiduciary manages the holding and disposition
of the Pinnacle Stock and takes whatever actions it deems necessary to
protect the rights of the Plans with respect to the Pinnacle Stock;
(e) The terms of any transactions between the Plans and Northwest
are no less favorable to the Plans than terms negotiated at arm's-
length under similar circumstances between unrelated third parties;
(f) The Independent Fiduciary determines the fair market value of
the Pinnacle Stock contributed to each plan as of the date of each such
contribution. In determining the fair market value of the Pinnacle
Stock, the Independent Fiduciary obtains an appraisal from an
independent qualified appraiser selected by the Independent Fiduciary,
and ensures that the appraisal and the Independent Fiduciary's analysis
of the appraisal are consistent with sound principles of valuation and
with the elements described by the Department in the Preamble to this
final exemption in the section entitled Duties of the Independent
Fiduciary;
(g) The terms of (1) the Put Option granted by Northwest; (2) any
exercise of the Put Option by the Plans; and (3) any sale of the
Pinnacle Stock by the Plans to Northwest other than through the
exercise of the Put Option will be in accordance with the terms set
forth in the Term Sheet and the Omnibus Agreement;
(h) Immediately after each contribution, employer securities and
employer real property, including the Pinnacle Stock, will represent no
more than 10 percent (10%) of the value of each Plan's assets. For
purposes of this requirement, the term ``employer real property'' means
real property leased to, and the term ``employer securities'' means
securities issued by, an employer any of whose employees are covered by
the Plans or by an affiliate of such employer; and
(i) The Plans incur no fees, costs or other charges as a result of
their participation in any of the transactions described herein.
Section III. Definitions
(a) The term ``independent fiduciary'' means a fiduciary who is:
(1) independent of and unrelated to Northwest and its affiliates, and
(2) appointed to act on behalf of the Plans for all purposes related
to, but not limited to, (A) the in-kind contribution of the Pinnacle
Stock by Northwest to the Plans, (B) the holding of the Pinnacle Stock
by the Plans; (C) the acquisition, holding, and exercise by the Plans
of the Put Option, and (D) any sale of the Pinnacle Stock by the Plans.
For purposes of this exemption, a fiduciary will not be deemed to be
independent of and unrelated to Northwest if: (1) Such fiduciary
directly or indirectly controls, is controlled by or is under common
control with Northwest, (2) such fiduciary directly or indirectly
receives any compensation or other consideration in connection with any
transaction described in this exemption; except that an independent
fiduciary may receive compensation for acting as an independent
fiduciary from Northwest in connection with the transactions
contemplated herein if the amount or payment of such compensation is
not contingent upon or in any way affected by the independent
fiduciary's ultimate decision, and (3) the annual gross revenue
received by such fiduciary, during any year of its engagement, from
Northwest and its affiliates exceeds 5 percent (5%) of the independent
fiduciary's annual gross revenue from all sources for its prior tax
year.
(b) The term ``affiliate'' means:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) any officer, director, employee, relative, or partner in any
such person; and
(3) any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Date: This exemption is effective as of January 15, 2003.
Signed at Washington, DC this 14th day of August 2003.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, Department of Labor.
[FR Doc. 03-21162 Filed 8-18-03; 8:45 am]
BILLING CODE 4510-29-P
