Northwest Must Redeem Shares Issued to Workers

A judge has ruled that Northwest Airlines Corp. must redeem about $226 million in preferred stock that the airline issued to employees more than 10 years ago as part of wage-cut negotiations.

The airline had agreed to redeem the preferred stock in 2003. But when redemption time came, the airline faced renewed financial troubles and decided it would be impossible to do so. The unions representing flight attendants and ground workers sued.

“This is an important decision ... that vindicates the rights of employees who devoted many years to this airline, in good times and in bad,” said Howard Graff, a lawyer for the unions. He added that there was no substantive distinction “between this obligation and those to its lenders and suppliers.”

The ruling comes as Northwest attempts to persuade employees to agree to another round of salary and benefit cuts to save the airline $950 million annually. So far, only the pilots have agreed. The pilots union wasn’t involved in the lawsuit.

A Northwest spokesman declined to comment on the case, saying airline executives had not yet reviewed Judge Helen Freedman’s decision.

In 1992 and 1993, pilots, flight attendants and ground workers of the Eagan, Minn., airline agreed to contract concessions worth $886 million. In return, Northwest granted employees 4.8 million preferred shares that the airline agreed to redeem in 2003 for cash or stock.

Ten years later, the board decided it preferred to redeem the shares in cash, but doing so at that time, under renewed financial strain, would violate legal restrictions on stock buybacks.

Freedman ruled Wednesday that Northwest was obliged to exchange the preferred shares for common stock if it was impossible to redeem them in cash.

“Northwest could not avoid repurchase by first electing to pay cash and then claiming that cash payments would be illegal,” she wrote in her decision.

Freedman will meet with lawyers from both sides Tuesday to set payment terms. It isn’t clear whether Northwest will try to appeal the decision.