Unions Win Preferred Stock Breach of Contract Suit Against Northwest

March 28, 2005 (PLANSPONSOR.com) - The highest court in New York state has ruled that Northwest Airlines breached its agreements with two unions by failing to buy back preferred shares it gave them over a decade ago.

In August, 2003, Northwest – which has been plagued by troubles due to high oil prices and competition – told mechanics, ground workers and flight attendants that it could not redeem stock issues in 1993 that the company had promised to buy back at $49.96 a share (See Northwest Machinists Head for Court Over Stalled Stock Buyback ). At the time, the airline claimed that Delaware law (where the company is incorporated) prohibited it from doing so unless it would have adequate cash on hand to meet other obligations, which it claimed it didn’t.

When the company refused to buy the shares, the International Association of Machinists and the International Brotherhood of Teamsters sued, alleging a breach of contract and seeking redemption of the shares, damages and other relief, according to the Wall Street Journal. In the ruling, New York Supreme Court Justice Helen Freedman said that the contract had been breached, and she ordered a new trial to assess damages.

Northwest has not denied that it had an obligation to buy back the stock, and has been required to pay a 12% annual dividend on the shares because of the failure to buy them outright. On top of this, each union now has a right to nominate an additional member to the company’s board.

Contracts for the flight attendants and mechanics are up for renewal in May, amid calls by the company that it needs to cut almost $1billion in costs to be competitive. Pilots and salaried managers already agreed to take a $300 million hit on the year, with the pilots expected to take more cuts in two years time.