Law Times

Law Times • march 21, 2016 Page 13 www.lawtimesnews.com Nortel restructuring saga drags on BY JIM MIDDLEMISS For Law Times D espite 124 monitor re- ports, litigation filings around the world, and seven years of wrangling, Nortel remains mired in creditor pro- tection with no real end in sight. at's not to say the restruc- turing has been a failure. Rather, "it's been a victim of its own success," observes Mark Zigler, a pensions lawyer at Kos- kie Minsky LLP who represents the Canadian Creditors' Com- mittee and Nortel employees in Canada. Jeffrey Carhart, a partner in the insolvency group at Miller om- son LLP representing a Canadian bank, added the restructuring professionals "were very success- ful in creating a big pot." "I was shocked at how much money there was," he says. However, that has had a downside. ornton Grout Finnigan LLP partner D.J. Miller, who represents the Nortel Unit- ed Kingdom pensioners, said "the higher-than-anticipated sale proceeds from the residual IP seems to have had the effect of creating five times the incentive to fight over how the proceeds would be allocated among the various Nortel entities." What started off as an attempt to restructure the complex tech giant, which at one point had 143 subsidiaries around the world, quickly devolved into a sales process of Nortel's extensive patent portfolio and a windup. e company was simply too in- tegrated and too complicated to restructure as a going concern. However, it was successful- ly sold in parts. e restruc- turing got a big boost from a US$4.5-billion bid from Rock- star Bidco, LP, which bought a key Nortel patent portfolio. Sales involving business lines generat- ed another US$2.8 billion avail- able for distribution. Project Copperhead — as the Nortel restructuring has been dubbed since its infancy — be- came a cash cow. Now, it could more appropriately be described as Project Entrenched Warfare over the US$7.3 billion in "lock- box funds" generated by the sale of the Nortel assets, and how those should be divided among the various corporate entities, impacting how Nortel's carcass is carved up among creditors and bondholders. A decision over how allocation would be made was put off early in the case to prevent any stale- mate that would impact the ability of financial advisors to maximize assets. When there was no money in the lock-box and the threat of bleeding assets, parties had an incentive to arrive at a consensus earlier in the game. Instead, the cross-border restructuring has become a three-headed viper and a bat- tle among debtors in the United States, Canada, and Europe, the Middle East and Africa, each one claiming it was entitled to a great- er share of the funds. Zigler called it a "three-cornered hat. It takes three parties to resolve anything." At its peak, Nortel employed 93,000 people. Many of them are now pen- sioners caught up in the fracas — about 33,000 of them in the U.K. and 20,000 in Canada. Since the filing in 2009, thousands more have died. Pensioners have ef- fectively become hostages to various Nortel bondholders duk- ing it out over how the proceeds should be split. At times the pen- sioners have been on opposite sides of the fight because of geog- raphy and corporate structures. e Nortel U.K. pension plan, for example, was underfund- ed at the time of filing by about US$3.2 billion. ere are parties that would like to foist such lia- bility on to government shoul- ders. Pensioners can take some solace from the historical May 2015 rulings from Ontario Jus- tice Frank Newbould and Judge Kevin Gross of the U.S. Bank- ruptcy Court for the District of Delaware following a gruelling trial spread out over 24 days. e judges ruled that the lock- box proceeds should be split on a pro rata basis, rejecting arguments from various debtor groups, and siding with argu- ments put forward by the U.K. pensioner group, which was also an alternative argument advocat- ed by the Canadian pensioners. At the centre of the trial was the interpretation of a Master Research and Development Agreement, which determined how Nortel would divvy up cash among its various entities. Research and development took place across the globe and drove sales across the spectrum of companies, raising questions around transfer pricing. As well, there were questions over which entity actually owned the IP that was sold, since the bonds attached to certain Nortel companies. In the end, the judges opted for a pro rata distribution, rather than linking funds back to spe- cific entities. Doing so, Newbould wrote, would "unjustly enrich" Nortel Networks Limited, which held the registered patents, at the ex- pense of the other Nortel entities. "is was not one corporation and one set of employees invent- ing IP that led to patents. Nortel was a highly integrated multi-na- tional enterprise," said Newbould. For his part, Judge Gross held that "territorial wrangling signifi- cantly diminishes value for stake- holders in a global insolvency involving a highly integrated mul- tinational enterprise whose assets are entangled, and ought not to be condoned or rewarded." In April, the next round of battle begins in a Delaware court. at's when an appeal of Gross's ruling is slated to be heard. Meanwhile, in Ontario, law- yers await word from the Ontario Court of Appeal on whether or not it will grant leave to New- bould's ruling. LT FOCUS D.J. Miller says higher-than-expected sale proceeds from Nortel's residual IP seem to have created an incentive to fight over how proceeds are allocated. WHEN LIFE GETS LEGAL FindLaw.ca Legal. Life Matters. Visit • LANDLORD DISPUTES • SELLING A HOUSE • RENTING OUT Find Lawyers & Legal Information: @FindLawCanada FindLawCanada Untitled-4 1 2016-03-16 10:36 AM SAVE 10% Register before April 1, 2016 THIS PROGRAM CONTAINS 3 PROFESSIONALISM HOURS INFORMATION TECHNOLOGY LAW SPRING FORUM 2016 CHAIRED BY Lisa R. Lifshitz, Partner, Torkin Manes LLP Cory Freed, Senior Legal Counsel, Microsoft Canada Inc. St. Andrew's Club & Conference Centre 150 King Street West 16th Floor, Toronto ON, M5H 1J9 MAY 16, 2016 | WWW.IT-CONFERENCE.CA Powered by Untitled-10 1 2016-03-16 3:03 PM

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