The most widely read magazine for Canadian lawyers
Issue link: https://digital.canadianlawyermag.com/i/50805
"Nortel is much more complicated because it's an international company with all sorts of assets and obligations all over the world and although the parent company was in Canada, it only meant that a lot of the debt flowed back to Canada and a lot of the assets that are in other countries can't be accessed to benefit the creditors." Mark Zigler, Koskie Minsky LLP group in Toronto are also involved in the case as counsel for the court-appointed monitor, Ernst &Young. In February 2010, Ernst & Young reported that the assets of Nortel's HWT had a shortfall of $37 million in its net assets as of Dec. 31, 2008. The trust supports pension- ers' medical, dental, and life insurance benefits, as well as income support for some groups such as long-term disability recipients. Carfagnini says the case has been "very intense" based on the demands by the court. "It is complex because it is a true multinational company headquar- tered here with a high-tech sophisticated business," he says. "We're in court a lot to assist with our client, which has filed 60 reports to the court so far." He acknowledges there have been some precedent-setting developments in the Nortel insolvency such as the hardship program that compensated employees who lost their job and were in dire need of money. For that pro- gram, no other creditors objected, which Carfagnini deems to be important for future insolvencies where employees are left in the lurch. He also says the U.K. proceedings have added complexities because it has a different insolvency regime with most proceedings not taking place in a court, but overseen by administrators appoint- ed by the court. Through the U.K. pro- cess, four administrators are oversee- ing the restructuring of all of Nortel's interests throughout Europe, the Middle East, and Africa under the guidance of a lawyer. So it is essentially a three-way negotiation in each jurisdiction that is handling the matter, which is much dif- ferent than most lawyers are used to and has required all of the counsel involved to be creative in resolving problems or questions that come up because of the matter's breadth, he says. As well, there is a tremendous amount of communication between all of the lawyers involved in all three jurisdictions to make sure they're on the same page. Nortel has had its problems over the years. In 2000, the company posted an annual revenue of $30 billion and an employee roster of 93,000 worldwide. Its share price on the Toronto Stock Exchange was $120. But its forecast for 2001 was inaccurate and the company experienced a loss of $27 billion and subsequently laid off half its staff. The following year, Nortel's chief financial officer Terry Hungle resigned following accusations he had broken the compa- ny's in-house trading rules with respect to some of his own stock transactions, which created some bad publicity for the company and caused the share price to plummet even further. By the spring of 2002, its share price plunged to 69 cents and its long-term debt was downgraded to junk by Moody's Investors Service Inc. and Standard & Poor's Financial Services LLC. By the end of the year, the company employed just one third of the workforce it had in the year 2000. Then in 2004, Nortel fired for cause its chief executive officer Frank Dunn along with chief financial officer Douglas Beatty and controller Michael Gollogly over an accounting scandal. In 2008, all three were criminally charged by the RCMP with misstating the com- pany's financial status in 2002 and 2003. As a result of the accounting scan- dal, its investors launched a global class action and in 2006, Nortel settled the class action and agreed to pay investors $575 million in cash and $1 billion in stock, as well as pledging to co-oper- ate fully with the Ontario Securities Commission and the U.S. Securities and Exchange Commission regarding ongo- ing investigations by both countries' law enforcement authorities into the com- pany's financial restatements. By 2008, Nortel tallied a net loss of $5.8 billion and began an aggressive downsizing that resulted in reducing its global workforce to fewer than 30,000. That same year, its share price fell to 39 cents. So it was not a huge surprise that the following year it filed its bankruptcy applications in each of the three jurisdic- tions. In the fall of 2009, Canada's Industry Minister Tony Clement approved the purchase of Nortel's two wireless divi- sions in Toronto by Swedish telecom- munications giant Ericsson for US$1.3 billion. Then late last year, Nortel announced that Guangdong Nortel Telecommunication Equipment Co. Ltd. (GDNT), which has a joint venture with Nortel, entered into an asset sale agree- ment with Ericsson for US$50 million. Nortel issued a statement to say it will "work diligently with Ericsson and the other shareholders of GDNT to close the sale in the first quarter of 2011." As well, Nortel and its principal operat- ing subsidiary, Nortel Networks Ltd., and its other Canadian subsidiaries obtained a court order from the Ontario Superior Court that extends a stay of proceedings until June 30. The purpose of which is to provide stability to the Nortel companies www.CANADIAN Lawyermag.com A PRIL 2011 33