KEVIN GROSS, UNITED STATES BANKRUPTCY JUDGE.
FACTS ...502
A. The Business Lines...502
B. Research & Development...504
C. Transfer Pricing...505
D. Advanced Pricing Arrangements...506
E. Cost Sharing Agreements...506
F. New Transfer Pricing Arrangement...507
G. The Master R & D Agreement...509
H. Rights to Intellectual Property Under the MRDA...510
I. The MRDA Was Tax Driven...510
J. The Interim Funding and Settlement Agreement...510
K. The Final Canadian Funding and Settlement Agreement...511
L. The Sale of Nortel's Business Lines...512
M. Patent Identification...513
N. Nortel's Patents Had a Useful Life of Many Years...514
O. A Licensing Business — IPCo...514
P. All Integrated Entities Expected to Benefit From IP Monetization...518
Q. Residual Patent Portfolio...518
R. The Sale of Nortel's Residual Patent Portfolio...519
S. The Rockstar Sale Approval Hearing...520
A. The U.S. Interests...520
B. The Committee...523
C. The Bondholders ...523
D. The EMEA Debtors ...523
E. The Monitor and the Canadian Debtors...525
F. The Canadian Creditors' Committee...528
G. Wilmington Trust Company as Trustee...529
H. The UK Pension Claimants ...530
THE MRDA...534
A. Governing Law and Applicable Principles of Contract Interpretation...534
B. The Valuable "Bundle of Rights" that a Patent Affords...538
THE FLAWED POSITIONS...547
A. Canadian-Ownership...547
B. The EMEA Debtors — Contribution...548
C. U.S. Revenue...548
PRO RATA ALLOCATION...549
A. Global General and Administrative Support Functions...551
B. R & D Functions Were Collaborative Across Borders...552
C. Authority for Pro Rata Allocation...553
D. Pro Rata Allocation is Not Substantive Consolidation...555
E. Pro Rata Criticism is Misplaced...557
F. Implementation of the Pro Rata Allocation...560
APPENDIX A: Glossary of Terms
APPENDIX B: Business Line Sales
APPENDIX C: Nortel Bonds Spreads to U.S. Government Yield Curve (Basis Point Chart)
The gargantuan bankruptcy cases giving rise to the opinions of two courts on either side of the Canadian border emanate from the tragic, almost unimaginable collapse of the Nortel Enterprise. The how and why for the downfall are the subject of numerous books and articles and the Court will not gratuitously add its views which are not necessary to the work at hand. It is sufficient to note that even a writer of fiction would not dare to compose the story of the death of this multi-national enterprise and the harm it inflicted on tens of thousands of employees and creditors. The Nortel Enterprise in 2000 had stock with a value of $124.50 per share and a market capitalization of approximately $260 billion. It employed nearly 100,000 people worldwide and had annual sales of $30 billion. Two years later, the Nortel Enterprise had laid off 60,000 employees and its market capitalization had fallen to $2 billion. Nortel had shifted its focus from research and development to acquisition and expansion and thereby found itself overextended. Scandal among management added to Nortel's problems and it was repeatedly restating its earnings. Soon, Nortel was in bankruptcy.
In issuing this opinion, the Court (sometimes referred to as "U.S. Court") is addressing the allocation of Sales Proceeds among numerous debtor entities from numerous countries.
The issue to be decided by the U.S. Court and Canadian Court is:
The parties identified below have submitted widely varying approaches for deciding the issue leaving virtually no middle ground. Their strong criticism of each other's allocation methodology also reveals why the parties were unable to resolve the dispute without the expenditure of time and expense. The Court can only speculate why the parties, all represented by the ablest of lawyers and sparing no expense, were unable to reach a settlement on allocation. For the reasons described and discussed in this opinion, the Court and the Canadian Court have arrived at the same conclusion: a modified pro rata allocation is required.
On January 14, 2009 (the "Petition Date") Nortel Networks Inc. ("NNI") and certain of its affiliates, as debtors and debtors in possession (collectively, the "U.S. Debtors")
As of the Petition Date, Nortel Networks Corporation ("NNC"), a publicly-traded Canadian company, was the indirect parent of more than 130 subsidiaries, located in more than 100 countries (collectively "Nortel or the Nortel Entities").
On the Petition Date, the U.S. Debtors' ultimate corporate parent, NNC, together with NNI's direct corporate parent, NNL, and certain of their Canadian affiliates (collectively, the "Canadian Debtors" or the "Canadian Estate")
On the Petition Date, the U.S. Debtors filed the Motion for Entry of an Order Pursuant to 11 U.S.C. § 105(a) Approving Cross-Border Court-to-Court Protocol (the "Protocol") [D.I. 18], which established procedures for the coordination of cross-border hearings between the Courts. The U.S. Court approved the Protocol on January 15, 2009 [D.I. 54] and the Canadian
On January 22, 2009, the Office of the United States Trustee for the District of Delaware appointed an Official Committee of Unsecured Creditors (the "Committee") [D.I.s 141, 142]. An Ad hoc Group of Bondholders (the "Bondholders" or the "Bondholder Group") was also organized.
On June 19, 2009, Nortel announced that it was in discussions with third parties to sell its businesses and that it would consider alternatives if it was unable to maximize value through sales. As discussed below, Nortel did, in fact, sell all of its business units and associated assets to various purchasers. Most of Nortel's intellectual property ("IP") remained unsold until later.
To facilitate the sales of the businesses and defer the issue of the allocation of the sales proceeds, the Nortel Entities entered into the Interim Funding and Settlement Agreement (the "IFSA"), which the U.S. Court approved by Order, dated June 29, 2009 [D.I. 993], and the Canadian Court approved by Order, dated June 29, 2009.
On April 4, 2011, the U.S. Debtors, together with NNF and NNC, announced an agreement with an affiliate of Google Inc. to sell Nortel's remaining patent portfolio and related assets (the "IP Assets") for $900 million (the "Google Bid"), subject to higher or better offers. The sale of the IP Assets through an auction to Rockstar Bidco L.P. ("Rockstar" and "Rockstar Transaction") resulted in a price of $4.6 billion. Rockstar is a consortium comprised of Apple, Ericsson, Microsoft, Blackberry, EMC and Sony.
The IFSA provided, inter alia, that proceeds from the sales would be and have been held in escrow pending an agreement of the parties on allocation among them or decision by the U.S. and Canadian Courts in a joint trial to be conducted in accordance with the Cross-Border Protocol, and later the Allocation Protocol. Although the parties engaged in extensive negotiations and there were two formal mediations, the parties could not agree on an allocation. The U.S. and Canadian Courts have therefore been called upon to make the allocation determination.
Nortel was organized such that each entity was integrated into regional and product line management structures to share information and perform R & D, sales and other common functions across geographic boundaries and across legal entities. The structure was designed to enable Nortel to function more efficiently, drawing on employees from different functional disciplines worldwide, allowing them to work together to develop products and attract and provide service to customers, fulfilling their demands globally.
As of January 2009, Nortel's lines of business ("Business Lines") were:
As part of the extensive sale processes (see Appendix B), Nortel sold its businesses and assets, including: (i) the sale of certain portions of its Layer 4-7 data portfolio to Radware Ltd. [D.I. 539] (the "Layer 4-7 Sale"); (ii) the sale of substantially all of its CDMA business and LTE Access assets to Telefonaktiebolaget LM Ericsson (publ) ("Ericsson") [D.I. 1205]; (iii) the sale of substantially all of the assets of the Enterprise Solutions business globally, including the shares of Nortel Government Solutions Incorporated and DiamondWare Ltd. to Avaya Inc. [D.I. 1514]; (iv) the sale of the assets of its Wireless Networks business associated with the development of Next Generation Packet Core network components to Hitachi Ltd. [D.I. 1760]; (v) the sale of substantially all the assets of its Optical Networking and Carrier Ethernet businesses associated with its Metro Ethernet Networks business unit to Ciena Corporation [D.I.2070]; (vi) the sale of substantially all of its GSM/GSMR business to Ericsson and Kapsch CarrierCom AG [D.I.2065]; (vii) the sale of certain assets of its Carrier Voice Over IP and Application Solutions business to GENBAND U.S. LLC [D.I. 2632]; (viii) the sale of certain assets of the Debtors' Multi-Service Switch business to Ericsson [D.I. 4054]; and (ix) certain other sale transactions.
At the time the EMEA, U.S. and Canadian Debtors (collectively, the "Debtors") filed for creditor protection in January 2009, only the GSM and CDMA lines of business were profitable.
Nortel spent significant amounts on R & D; in 2004, for example, Nortel spent more on R & D as a percentage of revenue than its competitors.
Subsidiaries commenced their operations and produced "state of the art" products which allowed them to become important participants in their markets.
The following chart summarizes Nortel R & D spending for the years 2000 to 2009.
R&D Spend NNL NNI EMEA 2000 42% 42% 16% 2001 43% 39% 18% 2002 39% 41% 20% 2003 42% 38% 20% 2005-2009 49.8% 38.5% 11.7%
Nortel's billions in R & D expenditures over the decades preceding January 2009 generated the IP, but it is impossible to trace which R & D expenses produced which IP.
Transfer pricing is the process by which a multi-national enterprise ("MNE") sets prices for transactions between related corporate entities across taxing jurisdictions.
In light of these incentives, taxing authorities have implemented regulations that govern transfer pricing generally require that intercompany transactions be priced in a manner consistent with the way that similarly situated, uncontrolled parties would price comparable transactions at arm's length.
If a tax authority disagrees with the transfer pricing methodology reflected in an MNE's tax return for a particular year, the tax authority may initiate an audit, which could potentially lead to an adjustment in taxes owed by the MNE, penalties, tax court litigation and/or double taxation.
From the late 1970s to December 31, 2000, Nortel operated under a series of Cost Sharing Agreements (each a "CSA"), which were bilateral agreements between NNL and each of the other R & D performing Nortel entities, including NNI, NNUK, NN Ireland and NNSA (referred to together with NNL as the "Cost Sharing Participants" or "CSPs").
The last R & D CSA between NNL and NNI was drafted in 1996 and made effective from January 1, 1992 to reflect the terms of a 1996 APA between NNL, NNI, the CRA and the IRS. The 1992 NNL-NNI R & D CSA provided a mechanism for sharing the "costs and risks of research and development services or activities in return for interests in any NT Technology that [was] produced by such services or activities."
At the end of 1999, each of the three CSA APAs in effect between NNL and each of the other then-CSPs (governing R & D, tangible property, and headquarters cost sharing) had expired or was nearing expiration.
Beginning in late 2000, Nortel formed a team of employees (the "APA Team") to determine the appropriate transfer pricing policy to propose to taxing authorities in the upcoming APA process. Nortel's APA Team investigated alternatives to the R & D CSA "[i]n an effort to minimize Nortel's long-term effective tax rate, to make the transfer pricing administrative processes more efficient and to, over time, improve the global allocation of profits among Nortel affiliates." In December 2001, Nortel's R & D CSAs were terminated effective January 1, 2001.
From December 2001 through March 2002, the Nortel tax group worked with external advisors to craft the specific mechanics of a RPSM for Nortel that could be submitted simultaneously to the CRA, IRS and Inland Revenue as the basis for proposed APAs for the 2000 to 2004 period.
To determine the total "pool" of operating profits (or losses) to be allocated among the IEs and LREs, the RPSM started with Nortel's consolidated operating profits or losses and recalculated this figure on an "economic" basis for each entity through a series of adjustments including adding back R & D expenses and then subtracting an amortized portion of those expenses. This calculation resulted in the gross "economic profit or loss."
In the second step of the RPSM, "residual" operating profits or losses remaining after the payout of routine returns were allocated to the IEs only, based on each IEs' relative proportion of capitalized R & D expenses from that year and preceding years, assuming a 30% amortization rate.
One of the objectives of Nortel when implementing the RPSM was to minimize tax payments globally. Nortel personnel and advisors designed the RPSM to shift taxable income from NNI to NNL.
Over the course of eight years (2001-2008) as APA negotiations with the tax authorities continued regarding Nortel's RPSM, the IEs made or received billions of dollars in transfer pricing payments under that system. As summarized in the following table, NNL was the chief recipient of these payments, totaling more than $4.7 billion, while NNI was the largest payor, transferring over $6.7 billion to other Nortel entities:
Table 2: Transfer Pricing Payments, 2001-2008 56 IE 2001 2002 2003 2004 2005 2006 2007 2008 Total NNL 589.0 482.3 391.0 652.4 496.0 511.1 725.9 879.8 4,727.5 NNI -1,931.2 -1,140.2 -857.8 -722.7 -631.8 -371.8 -508.9 -537.3 -6,701.7 NNUK 902.7 198.0 443.8 307.2 205.5 36.5 28.1 20.5 2,142.3 NNSA -92.1 81.1 -27.4 -145.7 -12.7 3.7 -95.3 -46.9 -335.3 NN Ireland -44.2 -70.5 -67.4 -64.9 -50.0 -102.6 -119.5 -147.6 -666.7 NN 38.2 24.2 -17.8 1.5 8.2 -95.6 -0.4 0.0 -41.7 Australia
As shown, in each year covered by the RPSM, NNI paid out hundreds of millions of dollars — more than a billion dollars in some years — to the other IEs. NNL received hundreds of millions of dollars in transfer pricing payments each year. In part, these transfer pricing payments by NNI were used by NNL to fund its R & D.
The amount of transfer pricing payments attributable to R & D and the Total R & D Funded for each entity each year in the Master Research and Development Agreement (discussed below) period are summarized below.
Table 3: R & D Funding Under
the RPSM, 2001-2008
NNL NNI EMEA Total
Direct R&D 7,372 6,467 2,667 16,506
TP-R&D (2,986) 3,006 (205) (185)
Total R&D Funded 4,385 9,473 2,462 16,321
% of Total R&D Funded Directly and Indirectly 27% 58% 15% 100%
Neither the IRS nor the CRA approved Nortel's RPSM. In 2009, following Nortel's insolvency and more than seven years after the 2002 APA applications, the IRS and CRA directed an income adjustment of $2 billion from NNL to NNI as a condition for resolving the APA for those years.
From 2001 until the end of 2004, Nortel operated under the RPSM without any written intercompany agreement memorializing its terms.
The MRDA sets forth a clear exchange of consideration between the signatories. Pursuant to Article 4(a), each Licensed Participant ("Licensed Participant") vested legal title in NNL to the intellectual property it created. Expressly "in consideration therefor," NNL granted an exclusive license ("Exclusive License") back to each Licensed Participant:
The risk that Nortel would be audited by tax authorities without an agreement in place prompted Nortel to draft the MRDA.
Nortel also was aware that the transfer pricing policies it had proposed in its 2002 APA application and which were reflected in the MRDA were subject to approval by the tax authorities, and intended that arrangements in the MRDA would ultimately either be approved by those authorities or be revised to secure approval.
The MRDA enabled Nortel to maintain separate and distinct legal entities in order to avoid NNL having a "permanent establishment" in another jurisdiction by conducting business there, particularly in the United States. Nortel management was aware that under U.S. tax law, if a partnership is engaged in a U.S. trade or business, non-U.S. resident partners that own an interest in that partnership are also deemed to have a U.S. trade or business, and may be subject to tax in the United States if that trade or business is treated as creating a permanent establishment for the non-U.S. partner.
On the Petition Date, with the approval of the U.S. Court, NNI loaned to NNL $75 million under a new revolving loan agreement (the "Intercompany DIP Loan"). The amounts owing to NNI under the Intercompany DIP Loan were repaid with proceeds from the sale of Nortel's Carling facility.
On June 9, 2009, the U.S. Debtors (excluding NN CALA, which had not yet filed for bankruptcy), Canadian Debtors and EMEA Debtors (excluding NNSA, who later acceded to the agreement) entered into the IFSA to address both interim funding of NNL as well as principles under which collaborative sales of Nortel's businesses and assets could take place.
The IFSA provided for a payment by NNI to NNL of $157 million (net of the $30 million previously paid in January) in full settlement of any transfer pricing and other claims NNL might have had against NNI for the period from the Petition Date through September 30, 2009. In April 2009, the Monitor reported that NNL needed this payment in order to have "adequate cash resources to fund operations."
The IFSA also referred to the U.S. Debtors, the Canadian Debtors and the EMEA Debtors as "Selling Debtors." The IFSA required that any agreement or determination by either the U.S. Debtors or Canadian Debtors related to license termination agreements and the allocation of Sales Proceeds required the prior consent of the Bondholder Group, acting in good faith. The U.S. Debtors had to obtain similar consent from the Committee.
At the end of 2009, NNL approached NNI and requested additional financing,
The parties addressed both NNL's cash needs and the tax settlement in a new agreement entitled the Final Canadian Funding and Settlement Agreement (the "FCFSA"). The provisions of the FCFSA included the following:
The EMEA Debtors and NNL separately agreed that they would not exercise any right of termination.
On December 23, 2009, NNI, NNL, the Monitor and other U.S. and Canadian Debtors executed the FCFSA.
Nortel's Business Lines were sold in a consensual, "cooperative and coordinated fashion."
As part of the Business Line Sales process, the U.S. and EMEA Debtors entered into License Termination Agreements (the "LTAs"). Prior to the U.S. Debtors executing an LTA for any Business Line Sale,
Only some of Nortel's patents were sold in the Business Line Sales. If a patent was not "predominantly used" in a Business Line it was not transferred to a purchaser, and the purchaser was generally granted a nonexclusive right to practice the patent in a limited field of use.
Nortel transferred 2,700 patents as part of the Business Line Sales.
As all Debtors, the Committee, Bondholders and the Canadian Creditors Committee ("CCC") agree, and the U.S. Court and the Canadian Court found when they approved them, the Business Line Sales proceeds generated through the auction process represent the fair market value of the Business Lines.
In the Business Line Sales, it was important that Nortel identify which IP rights — principally patent rights — needed to be conveyed; each prospective purchaser wished to obtain as many patents as possible as part of each sale transaction. Conversely, Nortel wanted to ensure that the only patents transferred were those incorporated exclusively or principally in the business line in question so as to retain value within Nortel and not to jeopardize the ability to sell the other Business Lines that might require rights to the same patents.
When the Business Lines were being sold, Nortel's IP Group undertook a patent segmentation process to determine which patents would be transferred with each of the Business Lines. The standard for transfer of a patent in the sales was whether the IP in question was "predominantly used" in a given Business Line. IP that was used in multiple Business Lines ("shared" IP) was not sold with the businesses and rights to use that IP were instead conveyed to Business Line purchasers as necessary, generally via limited, non-exclusive licenses.
U.S. patents are granted for a 20-year period.
After completing the Business Line Sales, Nortel retained a substantial number of intellectual property assets (the "Patent Portfolio" or the "Residual IP"). Over the course of more than a year, the Debtors, other stakeholders and their advisors carefully weighed a possible sale of Nortel's Patent Portfolio against the alternative of an IP licensing service and enforcement business ("IPCo"), a proposed business that Nortel began considering before the insolvency filings as set forth below.
Early in 2008, as discussed below, Nortel began to explore options for more effectively monetizing its intellectual property through developing a more robust licensing and enforcement business than it had to date. John Veschi was hired by NNI in July 2008 as Chief Intellectual Property Officer to "look at options for licensing."
One possibility was for the licensing business to be a separate Business Line with direct reporting to Nortel's CEO.
Post-petition, Veschi's team made presentations in the summer of 2009 addressing the options for monetizing the Patent Portfolio.
Following these presentations, Nortel issued a request for proposals to find a firm to assist in the evaluation of the Patent Portfolio and the further development of IPCo.
On March 20, 2009, the U.S. Court entered an order approving the retention of Lazard Freres & Co. LLC as financial advisor to the U.S. Debtors ("Lazard"). The U.S. Court subsequently entered an order amending the terms of Lazard's compensation to allow for a "IP Transaction Fee" if Nortel consummated "a restructuring and reorganization around all or substantially all of the Company's intellectual
As part of its evaluation, Global IP reviewed more than 11,000 patent claims, categorized patents by technology field, mapped claims to markets for potential enforcement and licensing and screened the patents for encumbrances.
The Debtor Estates weighed several options for monetizing the Patent Portfolio. Stakeholders from the EMEA, Canadian and U.S. Debtors seriously considered IPCo as an alternative to the sale of the Patent Portfolio. A committee of representatives of Nortel and their advisors (the "IP Steering Committee") was formed in January 2010, which led the evaluation process.
In September 2010, the Monitor advised the IP Steering Committee that IPCo should remain an option for consideration.
As the Monitor's representative testified, "[o]ver the course of 2009 and 2010, Mr. Veschi and his team, assisted by Lazard and Global IP, prepared various versions of a model that attempted to forecast the revenues that could be earned by IPCo
The details of the IPCo Model were updated and refined in several revised versions. Later versions of the IPCo Model (including version 4.0) do not dissuade the Court's view that IPCo was a viable option.
The IPCo revenue projections were included in the presentations and models circulated to stakeholders for comment.
Nortel assembled its IP into groups, or "technologies," which represented an idea that was patented (or one for which an application was filed) in one or more territories.
While the stakeholders were considering the alternatives for IP monetization, the expectation was always that the Licensed Participants, and in turn their creditors, would benefit from an eventual sale of the Patent Portfolio or running a business based off of the IPCo Model. As the Monitor's representative noted at trial, the IEs cooperated to maximize the value of the Patent Portfolio, including developing the IPCo Model.
By the time that all of the Business Line Sales were completed in March 2011, Nortel had no remaining operating businesses. What it did retain was a residual patent portfolio, consisting of approximately 7000 patents and patent applications.
If any Debtor or other interested party wished to pursue IPCo, they would need to purchase the residual patents from NNL.
When Google submitted a non-binding indication of interest of $900 million in February 2011, the proposed price was sufficient for the Estates to discuss a sale as a credible alternative to IPCo.
In the IP Stalking Horse Agreement, Google requested a provision pursuant to which Nortel definitively agreed to sell the Residual IP to a third party.
Extensive negotiations culminated with the signing of a stalking horse agreement dated April 4, 2011, between each of the IEs as Sellers and Ranger, Inc., a wholly owned subsidiary of Google for a purchase price of $900 million, (the "IP Stalking Horse Agreement").
A joint hearing was held before the U.S. and Canadian Courts to consider these motions on May 2, 2011.
The final winning bid of $4.5 billion came from Rockstar and resulted in an agreement of sale (the "Rockstar Sale Agreement").
The Rockstar Sale Agreement was presented for approval to the U.S. and Canadian Courts at a joint hearing on July 11, 2011.
The parties who participated in the trial and briefing are described below, together with their positions on allocation. The Court is merely reciting their arguments without comment.
The U.S. Interests include NNI and certain affiliates as debtors and debtors in possession, the Committee and the Bondholders. The Committee and the Bondholders also participated in the trial and submitted their own briefs.
Allocation involves a two-step process. First, the Courts must identify and characterize the property or legal rights transferred or surrendered by each debtor — here grouped by interest. Second, the Courts must value the property or legal rights. The buyers of the Business Lines and Patent Portfolio paid fair market value,
Allocation must be premised on fair market value, the foundational valuation metric widely accepted in the law and economics throughout the world. See United States v. Cartwright, 411 U.S. 546, 550-51, 93 S.Ct. 1713, 36 L.Ed.2d 528 (1973); Pocklington Foods Inc. v. Alberta (Provincial Treasurer) (1998), 218 A.R. 59, para. 197, 354 (Can.Alta.Q.B.), aff'd (2000), 250 A.R. 188 (Can.Alta.C.A.) (explaining that "the most common value standard is fair market value"); Phillips v. Brewin Dolphin Bell Lawrie Ltd, [2001] UKHL 2, [2001] 1 W.L.R. 143 (H.L.), 154 (appeal taken from Eng.).
Basing allocation on the fair market value of the assets each selling debtor transferred or relinquished in the Sales is consistent with the MRDA. The MRDA states that if a Licensed Participant becomes insolvent it may be required to surrender the Exclusive License, but only in exchange for the fair market value of the license. The MRDA, Schedule A, RPSM formula that the parties used to divide operating income for transfer pricing purposes when operating as a functioning MNE does not control. MRDA at Arts. 1, 11. The MRDA explicitly provides that the RPSM transfer pricing formula does not apply to the sale of a line of business.
The RPSM formula was designed to shift income from the U.S. to Canada (within the confines of the arm's length principle) so that NNL and Nortel as a whole could take advantage of the much lower effective tax rate for NNL in Canada rather than the effective tax rate for NNI in the U.S. Indeed, the IRS criticized and never approved the RPSM formula, which ultimately led to a settlement increasing NNI's revenue and decreasing NNL's revenue by $2 billion for 2001-2005. The RPSM formula is therefore inappropriate for use in connection with allocation.
Similarly, the parties' transfer pricing formula is irrelevant because the buyers were in no way bound by and thus would not have been concerned with how Nortel divided operating profits for transfer pricing purposes among affiliated entities. None of the Debtors advocate an approach based solely on the manner in which Nortel divided up operating profits (or, in fact, losses) when it was an operating MNE (i.e., pursuant to the RPSM formula set forth in Schedule A to the MRDA).
In insolvency, a debtor's assets must be made available to satisfy the creditors of that debtor before equity may recover.
The vast majority of patents and patent applications in the Patent Portfolio were filed only in the United States.
The allocation of the Patent Portfolio Sales proceeds by debtor group is as follows:
$ Billions Percent
Canadian Debtors $0.43 9.7%
EMEA Debtors $0.71 16.0%
U.S. Debtors $3.31 74.3%
Total $4.45 100%
Each of the Business Lines was sold as a going concern in a coordinated auction
The U.S. Debtors contributed the majority of the value in the Business Line Sales. The U.S. Debtors relinquished 70% of the total value of the Business Line Sales.
Business Line Sales Valuation Summary
Total Value Relinquished
($ Billions) Percentage
Canadian Debtors $ 0.34 11.9%
EMEA Debtors $ 0.51 18.0%
U.S. Debtors $ 1.99 70.0%
Total $ 2.85 100.0%
A potential buyer naturally would be most interested in acquiring the Business Lines in the territories that are expected to generate the most future cash flows. Here, NNI was the only Nortel entity operating in the most valuable U.S. market. It was the only Nortel entity with the exclusive right to operate in the U.S. market and it had the customer relationships in the U.S. NNI had the exclusive right to convey and did convey those rights, and is entitled to be paid accordingly.
The Committee participated in the trial and supports the U.S. Interests.
The Bondholders consist of entities holding bonds which NNC, NNL, NNI and NNC issued or guaranteed. Pursuant to the Indenture dated as of July 5, 2006, NNL issued multiple series of senior notes guaranteed by NNC and NNI, including two series of fixed rate 10.75% senior notes in the aggregate principal amounts of $450 million and $675 million due 2016, and a series of floating rate senior notes in the aggregate principal amount of $1 billion due 2011. Pursuant to the Indenture dated as of March 28, 2007, NNC issued 2.125% convertible senior notes due 2014 in an aggregate principal amount of $575 million and 11.75% convertible senior notes due 2012 in an aggregate principal amount of $575 million. The 2007 Indenture Notes are each guaranteed by NNI and NNL.
The Bondholder Group represents over half of the Nortel Entities' bonds. It is the single largest creditor group of both the U.S. Debtors and Canadian Debtors. The Bondholder Group fully supports the fair market approach which the U.S. Interests advocate and opposes the other parties' positions in accordance with the arguments of the U.S. Interests.
The EMEA
In determining how to allocate the approximately $7.3 billion in proceeds from the sales of Nortel's global businesses (the "Business Line Sales") and pool of residual patents (the "Residual Patent Sale") among the three estates, i.e., the U.S. Debtors, the Canadian Debtors, and the EMEA Debtors, it is first necessary to identify what classes of assets were conveyed in each of the sales, because the rights of the parties differ in relation to each class of assets. The largest portion of the proceeds from the Business Line Sales and the Residual Patent Sale is attributable to the value of Nortel's IP, which had been the main economic driver of Nortel's business. The biggest issue in the case is therefore how to allocate the asset Sales Proceeds attributable to IP.
The EMEA Debtors want allocation based on the relative contributions to the creation of the IP. The IP that was conveyed in the Business Line Sales and the Residual Patent Sale was the product of collaborative joint R & D efforts by each of the five Nortel residual profit split ("RPS") entities, i.e., NNL, NNI, NNUK, NNSA, and NN Ireland. Each spent billions of dollars on R & D. The product of this R & D was a large portfolio of valuable technology in which the contributions of the individual RPS entities were integrated and indivisible. Prior to insolvency, Nortel allocated the fruits of exploitation of the jointly created IP based on the relative financial contributions of the Nortel entities to the creation of that IP. The EMEA Debtors contend that the benefits of the sale of Nortel's IP should be allocated among the estates using the same approach.
The contribution approach is consistent with the preexisting rights of the parties, as confirmed by how the parties behaved in sharing proceeds, agreements, dealing with third parties including the IRS and CRA, in allocating the proceeds from a prepetition sale and other indicia.
In their prepetition arrangements, the parties have themselves already created an objective formula for how to allocate the value of Nortel's IP based on their respective contributions to the creation of that value: Because of the integrated and additive nature of R & D at Nortel, and the indivisible character of the IP portfolio that was the product of that R & D, the parties agreed that every dollar spent on R & D by any Nortel party had the same value as any other dollar. The parties therefore agreed that the value of IP should be allocated based on their relative R & D spending during the period when a particular commercially exploitable technology was developed, i.e., during the useful (or economic) life of the IP. Accordingly, the task for the Courts in allocating IP value is to determine (i) the value of the IP transferred to the purchaser in each of
The Canadian Interests consist of the Canadian Debtors, NNC and NNL, and Ernst & Young who the Canadian Court appointed to serve as Monitor by Order, dated January 14, 2009.
In addition to the powers and duties set out in the CCAA Initial Order dated January 14, 2009, the Monitor's powers were expanded by order dated August 14, 2009 ("the First Expansion of the Monitor Powers Order").
The central question before the Courts concerns the basis on which approximately $7.3 billion in Sales Proceeds, realized on the sales of Nortel assets following the insolvency filings in 2009, should be allocated among the Estates. The Monitor's position on this question is that the proceeds should be allocated based upon the value of the property rights transferred or surrendered by each Debtor in connection with the Business Line Sales and the Rockstar Transaction. In the context of insolvency, it respects the legal rights of each creditor to recover, from the Debtor indebted to it, out of funds that represent that Debtor's legal entitlement to a portion of the Sales Proceeds. This approach is, in essence, the one that the Courts would follow in a priority dispute over property or over funds derived from property — that is, to determine the priorities and how funds will flow according to the applicable legal rights.
The proper approach to allocation involves a two-step process. First, the specific
The Business Line Sales involved the transfer to purchasers of certain categories of assets, including, most importantly, IP. The Rockstar Transaction involved almost exclusively the transfer of IP. The identification and characterization of the property rights in, or legal rights to, the IP that was transferred or surrendered in the sales are at the center of the dispute between the parties.
The Monitor's position is that the IP transferred in each of the sales was legally owned by NNL, the parent operating company of Nortel. It is also the Monitor's position that the only legal rights related to the IP which were held by NNL subsidiaries who are certain of the U.S. and EMEA Debtors were not ownership of the IP, but were license rights that had been granted to them by the IP's owner, NNL, pursuant to, in accordance with, and limited by, the terms of the MRDA.
This position follows from the clear words of the MRDA, most notably (i) the MRDA's express provision that legal title to the IP is and shall be vested in NNL and (ii) the MRDA's express grant of license rights by NNL (a grant which would be impossible if NNL were not the owner of the IP in question). It is consistent with the controlling Ontario law which governs the MRDA and which provides that a license grants no property interest, but is rather a contractual consent by an owner which gives rights that are limited by the terms of the license. It is also consistent with the history of NNL as the technology-rich parent of the U.S. and EMEA Debtors, the agreements that preceded the MRDA, the thousands of patent registrations which identified NNL as the owner of the patents, and the description, and inclusion as a plaintiff, of NNL as the patent owner in actions that were taken to enforce patent rights.
NNL's ownership of the IP bears directly on the second aspect of the allocation question, namely, the value of the property rights transferred. It was ownership of IP that was transferred in the Business Line Sales and, accordingly, it was ownership for which the purchasers paid. The proceeds that are attributable to that transfer of ownership is allocable to NNL as the IP's owner.
The characterization (including the scope) of the rights of the U.S. and EMEA Debtors as license rights, also bears directly on the second aspect of the allocation question, because it goes to the value of the rights that were surrendered. The license rights of the U.S. and EMEA Debtors were not transferred to the purchasers in any of the sales. They were non-transferrable rights, which were surrendered or terminated but not transferred. The question to be determined with respect to the terminated licenses raises a valuation issue: not one which inquires into what the purchasers paid for licenses (since the purchasers did not acquire the licenses), but rather one which inquiries into the value of what the U.S. and EMEA Debtors gave up. When a license is given up, what the licensee loses is the future opportunity to earn profit from using the license in accordance with its terms. A valuation of those license rights must be based upon the terms and scope of the license, in order to determine the profits, if any, that the licensees would have earned had they not surrendered their licenses but had operated under them in accordance with the licenses' terms. To the extent that, in terminating their license rights in connection with the sales, the U.S. and EMEA Debtors gave up something
The scope of the license rights requires careful examination. That examination, conducted pursuant to the Ontario law of contractual interpretation, reveals that the license rights granted by NNL under the MRDA were not unlimited. They did not grant to the licensees the right to use, for all purposes, the IP that NNL owned; they granted only the right, exclusive in the designated territories, to use the IP for the purpose of making or selling "Products", a term defined by the MRDA. The definition of "Products" is limited to those products, software and services that were developed or proposed to be developed by or for one or more of the signatories to the MRDA (each a Nortel entity), and no one else. In other words, the MRDA license grant only permitted the use of the IP in connection with Nortel Products made (or proposed to be made) by or for Nortel Entities.
Thus, with respect to the assets sold or surrendered in the Business Line Sales, the proper approach is as follows. First, tangible assets are valued based on their net book value, which approximates to their fair market value. Each Debtor should receive an allocation equal to the net book value, as identified in Nortel financial statements, of the tangible assets it contributed to each sale. Second, in-place workforce transferred to the purchasers in each sale is valued based on the cost that would be incurred to replace the employees in question. Each Nortel Debtor should receive an allocation equal to the replacement cost for the employees that were transferred to each purchaser in the Business Line Sales. Third, it is necessary to value the license rights the U.S. and EMEA Debtors had to the Nortel IP, which license rights were terminated in connection with the sales of Nortel's then operating businesses. As with any other contract-based right, the value of the license rights is equal to the amounts that the licensees could have earned had the licenses not been terminated. Thus, the value of the license rights is equal to the present value of the future operating profit that could have been earned by the U.S. and EMEA Debtors had the Nortel businesses continued to operate. This value includes the value of any customer relationships associated with the U.S. and EMEA Debtors, since the value of customer relationships is determined by the present value of the future cash flows that those relationships could produce — the very same cash flows that the licenses would have generated. Thus, a determination of the present value of the future cash flows that would have accrued to the U.S. and EMEA Debtors, if the Nortel businesses had continued to operate, gives them appropriate credit both for any interests they had in customer relationships and for the licenses they terminated. This approach takes into account the cash inflows (such as revenues) and cash outflows (such as the costs associated with earning those revenues, including the sharing of operating profits and losses required by the MRDA). Any Sales Proceeds that are in excess of the aggregate of the foregoing values (i.e. the aggregate of the value of the tangible assets, the in-place workforce, and the license rights) are attributable to the value of the IP (unencumbered by the license rights) owned by NNL and to the value of any customer relationships owned by NNL, being assets which NNL transferred to the purchaser. Those proceeds are properly allocated to NNL.
With respect to the sale of the residual patent portfolio, this involved the transfer of ownership of IP by NNL to Rockstar. There were no tangible assets and virtually no in-place workforce transferred as
A valuation of the license rights surrendered by the U.S. and EMEA Debtors in connection with the Rockstar Transaction requires consideration of the scope of the license as it relates to two categories of patents that were sold:
Accordingly, since there is no value attributable to the U.S. and EMEA license rights over and above the value that has already been ascribed to them in the context of the Business Line Sales, the proceeds realized on the Rockstar Transaction are attributable to the transfer of NNL's ownership of the patents and properly allocated to NNL.
The Monitor submits that the Courts should allocate the Sales Proceeds as follows:
Allocation of Sales Proceeds
(In Millions of USD)
Asset Canada U.S. EMEA Total
Tangible Assets $1,221.74 $317.59 $94.86 $534.19
IP Rights and Customer Relationship 1,379.85 438.20 164.20 1,982.25
In-Place Workforce 79.07 135.17 41.91 256.15
Wholly-Owned Businesses - 110.97 - 110.97
Residual Intellectual Property 4,453.45 - - 4,453.45
Total Allocation $6,034.11 $1,001.93 $300.97 $7,337.01
% of Total - Excluding Residual IP 54.8% 34.7% 10.4%
% of Total - Including Residual IP 82.2% 13.7% 4.1%
The CCC represents the interests of more than 20,000 Canadian creditors and includes pensioners, pension interests, and current and former employees who have approximately $3 billion in claims against the Canadian Estate. The Sales Proceeds consist of approximately $2.8 billion from
The Sales Proceeds should be allocated to the owners of the assets sold. Nortel was a Canadian-based technology company and its most valuable asset was its intellectual property, which was owned by Nortel's Canadian parent corporation, NNL. In contrast, NNL's main operating subsidiaries in the U.S. and the Europe, Middle East and Africa Regions (EMEA), held limited licenses granted by NNL within a carefully circumscribed field of use. As the owner of the most valuable asset owned and relinquished, NNL is entitled to receive most of the Sales Proceeds.
In the alternative, the Sales Proceeds should be allocated to the Nortel Debtors on a pro rata basis so as to provide each creditor having a valid claim the same common dividend. A pro rata allocation is the only fair and equitable alternative to an allocation based on the legal rights of the Nortel Debtors in the underlying assets sold.
Wilmington Trust, National Association ("Wilmington Trust"), appears in its capacity as indenture trustee for the notes NNL issued namely NNL 6.875% Notes due 2023, issued pursuant to that certain Indenture, dated as of November 30, 1988 (as amended, supplemented or modified) between Nortel Networks Limited and the Trustee, as successor trustee to The Bank of New York Mellon (formerly known as The Bank of New York) as successor trustee to the Toronto-Dominion Bank Trust Company.
Wilmington Trust argues that the proceeds from the sale of the Nortel IP should be distributed according to the legal ownership interests in those assets established by the unambiguous written agreement of the parties, and that NNL is the legal owner of the Nortel IP. The license rights, the only property interest of the Licensed Participants, as defined in the MRDA with respect to the Nortel IP, should be determined by analyzing the value of those licenses had Nortel continued operating. Once that determination is made, such value should be distributed to those respective Licensed Participants. The remainder of the proceeds, which Wilmington Trust expects to be the vast majority thereof, would then inure to the unquestioned title holder and the only party with a legally recognized ownership interest in those assets, NNL.
The U.S. Interests and EMEA Debtors as the Licensed Participants seek to have these Courts: (i) rewrite the clear terms of the MRDA so that they are more to the Licensed Participants liking and (ii) engage in a hindsight reevaluation of the propriety of the conduct of the parties and their respective disclosures in the sale process. The Licensed Participants post-facto arguments cannot change the plain meaning of the MRDA, or the fact that all of the parties acted in the best interests of all of the Nortel Estates when pursuing sales that undisputedly maximized value for all of the Estates and their respective creditors, while prudently setting aside what all knew could be protracted and heated disagreement about allocation.
There is no question that NNL owned the Nortel IP. The only source of rights of any of the parties to the Nortel IP arise from the terms of the MRDA. The MRDA could not be more clear that NNL owned the Nortel IP and licensed the use of specific Nortel IP in specifically designated territories to the Licensees. The Licensees owned beneficial interests in such license rights — but did not own rights to the Nortel IP itself.
If the Courts conclude that the MRDA is not clear with respect to the ownership of the assets that were surrendered in the sale, and choose to allocate the Sales Proceeds instead in a manner tailored to combat unfairness, Wilmington Trust submits that an approach based on the UK Pension Claimants' and/or the CCC's "pro rata" theory leads to the most equitable result. Allocation theories that have been advanced by the parties, including the U.S. Interests' "revenue" theory, the EMEA Debtors' "contribution" theory and the Pro Rata Theory are not based on the actual ownership of the assets that the Licensed Participants claim is the key question for allocation.
The Board of the UK Pension Protection Fund and Nortel Networks UK Pension Trust Limited (together, the "UK Pension Claimants" or "UKPC") represents over 36,000 involuntary creditors of Nortel who were former employees of Nortel. There is a deficit in excess of $3 billion in the pension plan of which they are members.
The UK Pension Claimants submit that the Courts should determine the Allocation Litigation on the basis of a Pro Rata Distribution Model which has the effect of allocating sufficient funds from the Lockbox to permit a distribution within each Estate to all unsecured creditors on a pro rata, pari passu basis, relative to the amount of their unsecured claim, irrespective of the entity against which they may have a claim. There are no secured creditors of Nortel, and only a small number of preferred or priority claims. The return to unsecured creditors from a pro rata distribution model would be dictated by a number of factors including the ultimate level of unsecured claims and equitable alternative to an allocation based on the legal rights of the Nortel Debtors in the underlying assets sold. Nortel operated prior to insolvency as a highly integrated multinational that derived significant benefits from operating as "one Nortel".
Based on the evidence, a pro rata distribution model is the most appropriate and just result for several reasons, including:
The Allocation Litigation should establish a precedent for future international insolvencies involving integrated multinational
If the Courts conclude that ownership should not form the basis for allocating the Sales Proceeds, then the only fair and equitable alternative is to allocate the Sales Proceeds, taking into account approximately $1.7 billion in additional "Residual Assets" (cash and other assets in the possession of Nortel Debtors in various jurisdictions), among the Nortel Debtors so as to effect a pro rata distribution among creditors, such that each creditor receives a common dividend on its claim. A pro rata allocation is appropriate in light of the globally integrated nature of Nortel's business. Pre-Petition, Nortel was an integrated multinational technology business operating along four interdependent Lines of Business that spanned borders and legal entities. Employees served dedicated Lines of Business for the benefit of the group as a whole.
The Business Line Sales reflected the integrated nature of the business. Purchasers bought Business Lines consisting of assets residing in various Nortel Entities scattered throughout multiple jurisdictions. Substantive consolidation, which contemplates the merger of the Estates under the supervision of a single court, is neither requested by the CCC nor necessary to effect an allocation that would yield a pro rata result. The Canadian Court and the U.S. Court each have equitable jurisdiction to order and direct that the Sales Proceeds be allocated in a manner that achieves a fair and equitable distribution to Nortel's creditors, including the retired, disabled pensioners and other employees who relied and depended on the promise of pensions, health, disability and other benefits as part of their compensation for the significant value they contributed to Nortel. A pro rata distribution would result in all Creditors receiving an approximate 71% return on their Claims.
The Courts have an opportunity to set a precedent that will avoid the time and expense that has plagued the Nortel proceedings for more than five years and has cost more than $1.3 billion in professional fees to date from occurring again in future. Territorial wrangling significantly diminishes value for stakeholders in a global insolvency involving a highly-integrated multinational enterprise whose assets are entangled, and ought not to be condoned or rewarded.
The parties contemplated and agreed that it would be appropriate and necessary for the U.S. Court and the Canadian Court to confer. In the Protocol which the parties presented and the Courts approved
Debtors' Motion for Entry of an Order Pursuant to 11 U.S.C. § 105(a) Approving Cross-Border Court to Court Protocol, ¶ 13 (D.I.18).
The Courts have conducted the cases independently, while cooperatively. They are mindful that the parties expect them to communicate and determine whether they can arrive at consistent rulings. Thus, the Protocol further provides that:
Protocol, ¶ 12 d(vi). The parties recognized the problems that could result were rulings by the Courts to diverge and one of the reasons the cases have progressed to date is that the Courts have communicated and have arrived at consistent rulings even while exercising their judicial independence.
The Courts have had discussions following the trial of the Allocation Dispute in an effort to avoid the travesty of reaching contrary results which would lead to further and potentially greater uncertainty and delay. Based on these discussions, the Courts have learned that although their approaches to the complex issues differ, they agree upon the result. The Courts have different interpretations of the MRDA, but agree that the MRDA does not apply to or control the allocation of the Sales Proceeds for reasons discussed below. The Courts also agree that the self-serving allocation positions of the Canadian Interests, the U.S. Interests and the EMEA Debtors are not determinative or helpful.
It is incumbent upon the Court to determine a presumptive, baseline allocation approach which leads to an equitable result in the absence of some guiding law or agreement. The Court is convinced that where, as here, operating entities in an integrated, multi-national enterprise developed assets in common and there is nothing in the law or facts giving any of those entities certain and calculable claims to the proceeds from the liquidation of those assets in an enterprise-wide insolvency, adopting a pro rata allocation approach, which recognizes inter-company and settlement related claims and cash in hand, yields the most acceptable result.
There is nothing in the law or facts of this case which weighs in favor of adopting one of the wide ranging approaches of the Debtors. There is no uniform code or international treaty or binding agreement which governs how Nortel is to allocate the Sales Proceeds between the various insolvency
The MRDA, a tax document, was clearly not meant to, nor does it even purport to, govern inter-company allocation of the proceeds from liquidated Nortel assets. The MRDA does not include any provisions addressing the global insolvency or liquidation of the Nortel Group. The evidence at trial was overwhelming and undisputed that the MRDA was not intended to address that contingency:
Pursuant to an amendment executed in December 2008 to January 2009 and effective retroactive to January 1, 2006, proceeds from business sales are expressly excluded from global revenues within the RPSM calculation.
The U.S. Debtors, Canadian Debtors, and EMEA Debtors advance allocation positions which suffer from fatal, substantive flaws. EMEA fails to recognize that spending does not necessarily create value. The Canadian Debtors are nothing short of narcissistic in allocating the bulk of the Sales Proceeds to themselves and in their failure to recognize the contributions of the other Nortel companies and the realities of the manner in which the Nortel enterprise operated on a day-to-day basis. And the U.S. Debtors equate revenue to value without any regard to where the value-generating assets were developed or recognition of the fact that the $2.02 billion inter-company claim already accounts for their contributions as the primary bread-winner of Nortel. The Court's determination to recognize inter-company and settlement claims as well as the cash in hand relegates the arguments raised against a pro rata approach to concerns for process
To be clear, the Court is not ordering cross-border, global substantive consolidation. The Court will respect the corporate separateness of the various Nortel operating subsidiaries by recognizing cash in hand and both the inter-company and settlement claims. The Court's recognition of the inter-company claims and, in particular, the FCFSA $2.06 billion allowed claim, pays heed to the undeniable fact that NNI generated the lion's share of enterprise-wide revenues. In other words, the fact that NNI is entitled to a greater share of the Sales Proceeds based on revenues is already baked into the case by virtue of the IFSA inter-company claim, thus making the U.S. Debtors' revenue-based approach redundant. Further, the Court is not ordering a consolidated or coordinated global distribution to ensure that each creditor of the various insolvency estates actually receives a set, pro rata distribution. The Court is merely ordering that each estate be allocated a pro rata share of the Sales Proceeds based on the amount of claims against it, recognizing all inter-company claims. Each Estate will distribute the funds as appropriate, through a plan process within the bounds of the applicable law.
The parties devoted great efforts to support their position on the MRDA. The Court and the Canadian Court do not agree on the meaning of the MRDA, but do agree that their respective analyses do not control the Allocation Dispute because the MRDA was never intended to govern the liquidation scenario which they are now deciding. The Canadian Court favors the ownership position which the Canadian Interests advocate for reasons the Canadian Court explains in its Endorsement. The U.S. Court finds that the U.S. Debtors' and the EMEA Debtors' positions that the factual matrix contravenes the "ownership" claim of the Canadian Interests is what the evidence shows. The Court's discussion of the MRDA explains why the Court is fully satisfied that even in the MRDA, there is no basis to find that the Canadian Debtors owned all rights to the IP. Reading the MRDA in the manner required, the Court finds that the Canadian Debtors held bare legal title.
The Court and the Canadian Court have concluded that the MRDA does not control the Allocation Dispute. Nonetheless, because the MRDA is at the very center of the parties views of the Allocation Dispute, the Court must address the parties respective arguments. The starting point for the analysis of the MRDA is the law on contract interpretation.
All the parties agree that Ontario law governs the interpretation of the MRDA. Article 14(f) of the MRDA so provides. Such a choice of law provision is binding under both Ontario law and U.S. law. Hilgraeve Corp. v. Symantec Corp. 265 F.3d 1336, 1340-1341 (Fed.Cir.2001), cert. denied 535 U.S. 906, 122 S.Ct. 1206, 152 L.Ed.2d 144 (2002); Vasquez v. Delean Corp. (1998), 38 C.C.E.L. (2d) 230 at paras. 30-31 (Ont.S.C., Gen.Div.), citing Vita
The goal of contractual interpretation is to give effect to the underlying objective intention of the contracting parties. See, e.g., Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 47; Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., [1980] 1 S.C.R. 888 at paras. 25-26; Toronto-Dominion Bank v. Leigh Instruments Ltd., 1998 ONSC 14806, para. 415 (Can.Ont.S.C.J.). To determine the parties' intent, a court examines two related components: (i) the words of the contract and (ii) their context. See G.R. Hall, Canadian Contractual Interpretation (Markham: LexisNexis Canada, 2d ed.2012) at 9; Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 50 (holding that "[c]ontractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix."). As the Supreme Court of Canada has recently held, "[t]he parole evidence rule does not apply to preclude evidence of the surrounding circumstances." Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 60. The basic principles of contractual interpretation were clearly and concisely set out by the Ontario Court of Appeal in Salah v. Timothy's Coffees of the World Inc. (2010), 74 B.L.R. (4th) 161 explained as follows:
See also In Kentucky Fried Chicken v. Scott's Food Services Inc. (1998), 41 B.L.R. (2d) 42 (Ont. C.A.) stating the following regarding the interpretation of a commercial agreement at para. 27
The "cardinal presumption" about the primacy of the language of the contract involves determining the parties' intentions in accordance with the language that they have used. The court's goal in
Eli Lilly & Co. v. Novopharm Ltd., [1998] S.C.J. No. 59 at para. 54 (S.C.C), See also Merck & Co. Inc. v. Apotex Inc., 2010 FC 1265 at para. 47.
Evidence of subjective intention — i.e., evidence of what a party "understood" the contract to mean — is wholly inadmissible. A courts inquiry does not seek to determine what the parties actually intended or what they believed the words of their contract to mean. A leading text on contractual interpretation Canada provides:
Geoff Hall, Canadian Contractual Interpretation Law (2012) at para. 2.4.1; see also Ontario v. Imperial Tobacco Canada Ltd., 2012 ONSC 6027 at para. 29
The Ontario Court of Appeal in Dumbrell held that the interpretive exercise should focus on the words used, and not on the parties' subjective beliefs:
Dumbrell v. The Regional Group of Companies Inc., 2007 ONCA 59 at para. 51; see also Eli Lilly & Co. v. Novopharm Ltd., [1998] S.C.J. No. 59 at para. 54
Courts simply must not consider evidence of what a party says he or she intended to agree to at the time of contracting, nor can courts consider evidence of what a party understands the words of the contract to mean. In Zaccardelli v. Kraus the Court explained that:
Zaccardelli v. Kraus, [2003] A.J. No. 442 at paras. 29-30 (Master).
Subjective understandings of the meaning of a contract do not become admissible by characterizing those understandings as forming part of the factual matrix. As the Court of Appeal stated in Primo Poloniato Grandchildren's Trust (Trustee of) v. Browne:
Primo Poloniato Grandchildren's Trust (Trustee of) v. Browne, 2012 ONCA 862 at para. 71 See also Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 57:
Evidence of the parties' post-contracting conduct by definition is not part of the factual matrix and is generally
Introductory recitals in a contract may not alter the operative terms of the contract, but may be used as an interpretive guide to the parties' intent. See, e.g., Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129 at para. 57 (relying on recitals to determine whether an agreement was a sublicense); Sistem v. Kyrgyz Republic, 2012 ONSC 4983 (Newbould, J.) at paras. 25-26 (using recitals to find that a party had an equitable interest in the property at issue). Accord Time Warner Entm't Co., L.P. v. Everest Midwest Licensee, L.L.C., 381 F.3d 1039, 1048 (10th Cir.2004) (relying on a preamble to determine the purpose of a licensing agreement); Blackstone Consulting Inc. v. United States, 65 Fed.Cl. 463, 470 (Fed.Cl.2005) (noting that "recitals may be read in conjunction with the operative portions of a contract in order to ascertain the intention of the parties" (internal quotations omitted)); see also Stowers v. Cmty. Med. Ctr., Inc., 340 Mont. 116, 172 P.3d 1252, 1255 (2007) ("Recitals in a contract should be reconciled with the operative clauses of the contract and given effect as far as possible.")
A contract should always be interpreted "so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity." Downey v. Ecore International Inc., 2012 ONCA 480 at para. 38 (quoting Salah v. Timothy's Coffees of the World Inc., 2010 ONCA 673 at para. 16); see also Unique Broadband Systems, Inc. (Re), 2014 ONCA 538 at para. 88 ("[A]n interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result." (quoting Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10(SCC), [1980] 1 S.C.R. 888, at p. 901)); id. at para. 89 ("[C]ommercial contracts should be `interpreted in the way in which a reasonable commercial person would construe them.'"). Accord Pan Am. Realty Trust v. Twenty One Kings, Inc., 408 F.2d 937, 939 n. 4 (3d Cir.1969) ("Business contracts must be construed with business sense, as they naturally would be understood by intelligent men of affairs." (quoting N. German Lloyd v. Guar. Trust Co. of New York, 244 U.S. 12, 24, 37 S.Ct. 490, 61 L.Ed. 960 (1917) (internal quotations omitted))); see also Baldwin Piano, Inc. v. Deutsche Wurlitzer GmbH, 392 F.3d 881, 883 (7th Cir.2004) ("When there is a choice among plausible interpretations, it is best to choose a reading that makes commercial sense, rather than a reading that makes the deal one-sided."). In this analysis, courts may also consider objective manifestations of the parties' intent. See Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 57 (holding that the purpose of examining the "surrounding circumstances" of a contract "is to deepen a decision-maker's understanding of the mutual and objective intentions of the parties as expressed in the words of the contract").
A patent confers valuable exclusivity by providing the party holding rights to the patent the ability to prevent others from making, using or selling the patented invention. See 35 U.S.C. § 154(a)(1); Patent Act (Canada), § 42. Patents are territorial; thus, a patent filed in the United States, for example, excludes others from utilizing the patent or the patented invention in the United States or importing the patented product into the United States. See 35 U.S.C. § 271(a). A Canadian patent likewise confers in Canada "the exclusive right, privilege and liberty of making, constructing and using the invention and selling it to others to be used, subject to the adjudication in respect thereof before any court of competent jurisdiction." Patent Act (Canada), § 42.
A patent "is a bundle of rights which may be retained in whole or in part, divided and assigned." Morrow v. Microsoft Corp., 499 F.3d 1332, 1341 n. 8 (Fed. Cir.2007); see also Patent Act (Canada), § 42; Harvard College v. Canada, [2002] 4 S.C.R. 45 at para. 64. The bundle of rights" that comprise a patent may also be transferred to another party through a license. See, e.g., McCoy v. Mitsuboshi Cutlery, Inc., 67 F.3d 917, 920 (Fed.Cir. 1995); see also Patent Act (Canada), § 50(2); Rite Manufacturing Ltd. v. Ever-Tite Coupling Co. (1976), 27 C.P.R. (2d) 257 at para. 20 (Can. Registrar of Trade Marks) citing National Carbonising Co., Ltd. v. British Coal Distillation Ltd. (1936), 54 R.P.C. 41 (C.A.) at 56-57 (noting that "a patentee is fully entitled to assign his rights under the Letters Patent to another").
The Canadian Debtors' position in the Allocation Dispute is that the MRDA establishes that they own all of the IP and therefore are entitled to all of the IP Sales Proceeds less a relatively minor value attributable to what they view as limited licenses held by the U.S. Debtors and the EMEA Debtors. The Canadian Debtors rely on the words of the MRDA which support them.
NNL's claim of legal title to the IP is reflected in the MRDA's first recital, which states: "Whereas legal title to all NN Technology is held in the name of NNL." Article 4(a) of the MRDA states:
The MRDA further provides that "legal title" survives termination of the MRDA:
The Canadian Debtors argue that with this language and the MRDA taken as a whole, legal title meant ownership. The Canadian Debtors point to other provisions of the MRDA describing the ownership rights of NNL which include:
In support of its ownership claim, the Canadian Debtors look to the licenses under the MRDA. Article 5(a) grants two licenses: an exclusive license and a non-exclusive license. Those two licenses confer rights to perform the same activities, with those rights being granted on an exclusive basis to the Licensed Participants in their respective "exclusive territories", and the rights being granted on a non-exclusive basis in the designated "non-exclusive territories". Article 5(a) states as follows:
NNL granted a license to make "Products" that use or embody such IP. Article 5(a) states that the license is "to make, have made, use, lease, license, offer to sell, and sell Products ..." and "rights to patents... as necessary or appropriate in connection therewith". The definition of "Products" at Article 1(g) of the MRDA states:
The license rights thus consist of a right to make, use or sell products, software or services that used or embodied Nortel IP and that were made or sold (or proposed to be made or sold) by, or for, any of the parties ("Participants") to the MRDA, and the use of certain Nortel IP as necessary or appropriate in connection with the making, using or selling of "Products". The license also included a right to sublicense.
The MRDA also granted Licensed Participants the right to assert actions and recover damages in their respective territories for infringement or misappropriation of NN Technology by others.
The Canadian Debtors' reliance on a strict interpretation of the MRDA ignores both the factual matrix from which the MRDA arose and a reading of the MRDA as an integrated whole. The MRDA simply does not capture the economic reality that the non-Canadian participants, and the U.S. Debtors in particular, were generating the majority of the value of the Nortel Enterprise. The U.S. Debtors' interpretation of the MRDA accurately incorporates the MRDA as a whole.
As discussed earlier, the Court is required to review the MRDA in the context of the factual matrix which aids in determining the meaning of the words against the relevant background. Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 at para. 48. Indeed, a court should consider the factual matrix even if a contract is unambiguous. Sattva, 2014 SCC at 53. While the evidence of the factual matrix may not include the subjective intent of the parties, it does include "the genesis of the transaction, the background, the context [and] the market in which the parties are operating." Kentucky Fried Chicken Canada v. Scott's Food Services, Inc., [1998] O.J. No. 4368 at para. 25 (Can. Oct. C.A.)
Contrary to the arguments of the Canadian Debtors, the MRDA establishes the Participants' shared ownership of the Nortel assets which are now the Sales Proceeds. The facts make it clear to the Court that the U.S. Debtors and the EMEA Debtors held an economic and beneficial ownership interest in Nortel's assets and thereby are entitled to an equitable allocation of the Sales Proceeds.
The MRDA grants the Licensed Participants all valuable rights to and beneficial ownership in NN Technology in their respective territories. The Court looks to the purpose, rules, and representations underlying Nortel's transfer pricing agreements, including the R & D CSAs and the
Transfer pricing rules and regulations require that each entity in an MNE "price its related party transactions as if the entity were at arm's length from its parent and affiliated entities within the MNE."
Nortel's transfer pricing agreements satisfied these principles:
Nortel personnel represented to tax authorities that each Licensed Participant enjoyed economic and beneficial ownership of Nortel IP in its exclusive territory under the R & D CSAs and the MRDA. See, e.g., The Canada Trust Co. v. Russell Browne et al., [2012] ONCA 862 at paras. 21-23,83-88 (ruling that correspondence with the CRA regarding the potential adverse tax consequences of a proposed amendment to a contract, as well as a CRA advanced ruling on that subject, must be considered to discern the parties' intent). For example:
Nortel's enforcement and sublicensing practices prior to the bankruptcy confirm the Licensed Participants' exclusive economic and beneficial ownership and rights. For example:
This interpretation of the MRDA is further supported by evidence on custom and practice. Daniel Bereskin, an expert on the custom and practice in the field of intellectual property, concluded that a sophisticated business person would understand the MRDA as follows:
The MRDA provides that each participant holds exclusive rights to practice, sublicense and enforce NN Technology, including patents, in its territory.
In Article 4 — titled "Legal Title to NN Technology" — the parties agreed to vest "legal title" to NN Technology in NNL "in consideration" for a grant to each of the Licensed Participants of exclusive, perpetual, and royalty-free rights to NN Technology in its respective territory. See id. at 6 (Art. 4(a)). "NN Technology" is broadly defined as "any and all intangible assets including but not limited to patents, industrial designs, copyrights and applications thereof, derivative works, technical know-how, drawings, reports, practices, specifications, designs, software and other documentation or information produced or conceived as a result of research and development by, or for, any of the Participants, but excluding trademarks and any associated goodwill."
The right to sublicense enables a licensee to grant another party the ability
The MRDA also grants the Licensed Participants both a "have made" right and the right to sublicense. Article 5(a) states that the exclusive license includes the "rights to make, have made, use, lease, license, offer to sell, and sell."
Under Article 4(e) of the MRDA, the "Licensed Participants have the right to assert actions and recover damages or other remedies in their respective Territories for infringement or misappropriation of NN Technology by others," with no requirement to join NNL or any other entity as a plaintiff.
A licensee's right to bring infringement suits is a particularly critical factor in the "all substantial rights" analysis. See, e.g., Vaupel Textilmaschinen KG v. Meccanica Euro Italia SPA, 944 F.2d 870, 875 (Fed. Cir.1991) ("This grant [of the right to sue for infringement] is particularly dispositive here because the ultimate question confronting us is whether [the licensee] can bring suit on its own or whether [the patentee] must be joined as a party."). Given the expansive scope of rights that the MRDA conveyed to NNI, the MRDA comfortably meets the "all substantial rights" test, such that NNI could unilaterally bring infringement actions in the United States. Even if NNI did not have "all substantial rights" to NN Technology in the United States, NNI could enforce its rights as an exclusive licensee simply by joining or inviting or compelling NNL as a party, which NNL could not prevent. See, e.g., Intellectual Prop. Dev. Inc. v. TCI Cablevision of California, Inc., 248 F.3d 1333, 1348 (Fed.Cir.2001) ("As a prudential principle, an exclusive licensee having fewer than all substantial patent rights possesses standing under the Patent Act as long as it sues in the name of, and jointly with, the patent owner and meets the [Article III standing] requirements."); Abbott Labs. v. Diamedix Corp., 47 F.3d 1128, 1133 (Fed.Cir.1995) ("A patentee that does not voluntarily join an action prosecuted by its exclusive licensee can be joined as a defendant or, in a proper case, made an involuntary plaintiff if it is not subject to service of process."); see also Indep. Wireless Tel. Co. v. Radio Corp. of Am., 269 U.S. 459, 469, 46 S.Ct. 166, 70 L.Ed. 357 (1926).
The MRDA grants the Licensed Participants the rights to exploit, exclude, and
The recitals to the MRDA describe the Licensed Participants' ownership rights, stating that "each Licensed Participant held and enjoyed equitable and beneficial ownership of certain exclusive rights under [NN] Technology" for its exclusive territory under the R & D CSAs and that "it is the intent of NNL and the Licensed Participants that the Licensed Participants continue ... to hold and enjoy such rights."
Schedule A to the MRDA — an operative provision — repeats these statements, explaining that the "Participants bear the full entrepreneurial risk of the Nortel business such as the risks attendant with the substantial and continuous development and ownership of the NN Technology." Id. at 18 (Sched. A). Amended Schedule A to the Second Addendum, signed in December 2007, provides the same, as does Second Amended Schedule A, introduced as part of the Third Addendum signed in December 2008 through January 2009, Id. at 30 (Second Addendum, Sched. A), Id. at 48 (Third Addendum, Sched. A). Again, the Second Addendum states that "each Participant holds and enjoys equitable and beneficial ownership of NN Technology." Id. at 27 (Second Addendum, Whereas Clauses).
Similarly, the Memorandum of Understanding ("MOU") — which was drafted "to provide a record of" the Participants' "understandings" with respect to the MRDA and related agreements — states that the Licensed Participants enjoyed "ownership" of NN Technology.
Article 9(b) provides that: Upon termination of the MRDA, each Licensed Participant "shall be deemed to have acquired a fully paid up license permitting it to continue to exercise the rights granted to it herein, and, in particular, the rights granted to it in Article 5 as though this Agreement had continued." Id. at 9 (Art. 9(b)).
Article 10(a) provides that: NNL Licensed Participants could not add Participants without the consent of all other Licensed Participants.
Article 11 provides that: When a Participant exits from the MRDA due to insolvency, NNL is obligated to pay fair market value in exchange for the cancellation of the exclusive license and the acquisition by NNL of the rights held by the former Licensed Participant. The entitlement of each Licensed Participant to be paid fair market value for its exclusive license in an insolvency substantiates the Licensed Participants' broad rights to NN Technology.
The Licensed Participants held the right to enforce all the NN Technology in the Exclusive Territories, including the patents
In the United States the effect of a transfer of title to a U.S. patent on the rights of an existing licensee to the patent is governed by U.S. patent law, even if the underlying license agreement is governed by foreign law. Innovus Prime, LLC v. Panasonic Corporation, 2013 WL 3354390, at *3 (N.D.Cal.2013). Under U.S. law, a party cannot place a buyer of its patent interests in any better position than the party itself occupied or confer upon the buyer rights that the party itself did not hold. See id. at *5. The same is true under Ontario law. See National Carbonising Co., Ltd. v. British Coal Distillation, Ltd. (1937), 54 R.P.C. 41 (C.A.) (holding that an assignment of a patent cannot defeat the rights of the licensee under a license); see also P. Bradley Limpert, Technology Contracting: Law, Precedents and Commentary (Toronto: Carswell, 2011) at 5-31.
Therefore, NNL had no right to practice or otherwise exploit Nortel patents or other NN Technology in the United States and could not place a buyer of its interests in any better position than NNL itself occupied or protect such a buyer from an infringement suit by NNL
The Court has concluded that the MRDA does not govern allocation. In the absence of agreement, and because the Estates' allocation positions are flawed, the Court finds that a modified pro rata allocation method is appropriate by default.
The U.S. Debtors and the EMEA Debtors had broad, exclusive licenses to use the NN Technology. Accordingly, NNL's "legal title" to IP was fully encumbered by the Exclusive Licenses in the Licensed Participants' territories. It had little to sell in the Rockstar Sale and, in fact, the IP Sale could only have been the success it was because the Licensed Participants agreed to terminate their Exclusive Licenses.
NNI held the right to enforce all of the NN Technology in the United States. This right included the IP in the Patent Portfolio. It is obvious that no buyer of Nortel IP would purchase the IP if NNI — and Exclusive Licenses in other territories — did not terminate such rights. Otherwise, the Exclusive Licensees, including NNI, could enjoin a purchaser from exploiting the IP it purchased.
The Monitor also claims that NNL could freely transfer its rights in NN Technology, but that NNI and the other Licensed Participants could not do so. This is wrong, and the Monitor's "value in use" approach to allocation that rests on this claim is thus necessarily wrong.
The Monitor's value in use analysis inflates NNL's allocation. On the Business Line Sales, the Monitor and its expert, Philip Green do not value what portion of the purchase price paid for the Business Lines was due to the transfer or surrender of assets and rights by any of the Selling Debtors. The Canadian Interests value — only for NNI and the EMEA IEs, but not for NNL — what the assets and rights might have been worth if not sold. Thus, the Monitor and Mr. Green allocate to
Had the Monitor and Mr. Green applied to NNL the same value in use methodology and cash flow projections they used for NNI and the EMEA IEs, their allocation to NNL would be reduced by approximately $1 billion. Moreover, applying their methodology consistently to all parties would leave this $1 billion unallocated to any Selling Debtor. The Monitor and Mr. Green simply "allocate" this $1 billion solely to NNL without any basis.
On the IP Sale, the Monitor's theory is that NNL is entitled to all of the proceeds. In addition, Green conducts an alternative analysis whereby the Monitor and Green calculate an aggregate value in use that is short by $1.8 to $4.1 billion. Again, they allocate these billions to NNL for no good reason despite admitting they do not know to what that value is allegedly attributable.
The EMEA Debtors agree with NNI's allocation position (with certain modifications) as an alternative theory, but argue as their principal allocation theory that allocation should be based on the Selling Debtors' contribution to the development of NN Technology. The contribution theory erroneously equates the cost of developing an asset with its value. The EMEA Debtors' own valuation expert, Paul Huffard, conceded that the contribution approach is not a valuation approach:
Were the Court to adopt the EMEA Debtors' contribution approach, which it is not, the amounts allocated to the Selling Debtors must be adjusted to reflect properly the parties' actual contributions to the development of NN Technology, including using an appropriate useful life and accounting for the costs actually incurred by the parties in developing NN Technology.
The basic problem with the U.S. Debtors' revenue approach to allocation is that it is not based upon valuation of specific assets and rights transferred by each Estate in the sales. For the Business Line Sales, the U.S. Debtors' expert, Mr. Kinrich, did not perform a valuation but, instead, compared the relative revenues. A discounted cash flow analysis, i.e., a projection
Mr. Kinrich did not perform such a calculation.
Although the U.S. Debtors argue that the revenue-based approach is a "standard income-based method" of valuing the assets that were relinquished,
Mr. Kinrich agreed that the value of a license is driven by the profits that the licensee could earn by using the patented technology, but he did not determine what those profits would have been in the case of the U.S. and EMEA Debtors.
The "authoritative" text relied upon by Mr. Kinrich as supporting his revenue-based methodology in fact made it clear that his approach was not appropriate to the valuation task at hand. The authority Mr. Kinrich relied on, Valuing Small Businesses and Professional Practices, stated that valuing a business based on a revenue approach may be useful:
The text explained that a revenue approach would require the comparable businesses to have a fairly standard cost structure.
The MRDA does not control allocation. In the absence of an agreement governing allocation or a preponderance of evidence showing entitlement to assets and the value of those assets, the Court's task is to arrive at a fair and equitable mechanism to
The parties' complex arguments for their positions and against others supported by the enormous volume of supporting papers go around and around without end and without a definitive correct answer. It is fair to find that there is validity and error in all of the arguments, largely because the arguments are not rooted in an agreement which applies to the facts. In the meantime, the case remains in stasis. The evidence presented to the U.S. Court and the Canadian Court only serves to magnify the differing and irreconcilable approaches taken by the U.S. Debtors, the Canadian Debtors and the EMEA Debtors. All of their approaches yield an unsatisfactory result and the evidence upon which they rely does not comport with the manner in which Nortel operated.
The Court's answer to the dilemma is to a adopt a modified pro rata allocation model which recognizes both the integrated approach which the CCC and the NNUK urge, while maintaining — or at least recognizing — the corporate integrity of the Nortel Entities.
The extreme allocation proposals of the various debtors is best conveyed by reference to the following comparison chart contained in the UK Pension post trial brief which the Court copies here:
These allocation positions, of course, stand on the shoulders of the parties' interpretations of the MRDA. Yet the evidence establishes that the MRDA simply does not apply to allocation. The chart reveals that the Debtors have lost sight of the irrationality of their respective positions. The variance of the positions are of such magnitude that highly capable and responsible attorneys were unable, or in the heat of the fight were unwilling, to find a middle ground despite three extensive and costly mediations. Because the Debtors have been unable to prove the plausibleness
Similarly, the Courts are not dismembering the guaranties provided to the Bondholders which can only be accomplished if the Courts do not recognize separate corporate identities of the Nortel Entities. Doing so would ignore the facts discussed above that the Nortel Entities carefully maintained separate corporate identifications. It could also dangerously impair multinational businesses from raising capital.
Much of Nortel's global General and Administrative support ("G & A") was largely performed by NNL. There were four primary global G & A organizations within Nortel: (1) Finance; (2) Information Technology; (3) Human Resources, and (4) Other Real Estate, Legal, Compliance, and Strategy groups.
Ernie Briard, an accountant with the Chief Technology Office, testified: "[W]e did not run the business with any real knowledge of the statutory entities at all. We ran it as a global Nortel corporation."
Employees testified there was one Nortel.
The Nortel Networks name and logo were used throughout Nortel to refer to an integrated whole. To the outside world, including Nortel's customers, suppliers, and the rest of the world, the logo referred to all of Nortel, and not to any one geographic entity.
R & D was geographically distributed. Nortel's R & D operations were distributed and were conducted across the globe. "Nortel's R & D function [was] a global undertaking aligned with its business strategy of technology leadership. Engineers in each of Nortel's geographic markets work[ed] to develop next generation products."
Nortel's laboratories often worked collaboratively and as a unified whole to develop technology. As Simon Brueckheimer testified:
Technology assisted collaboration. As Mr. McFadden testified: "At Cisco they'd use a water cooler. We used telephones."
Nortel determined R & D priorities and budgets world-wide. Nortel did not allocate R & D budgets by geographic entity or subsidiary, but rather by line of business.
The goal of Nortel's R & D was to create technology that could be commercialized, although it was not necessarily possible to trace research efforts to immediate commercial results. In its Functional Analysis (2000-2004) prepared for the tax authorities, Nortel explained:
Pro rata allocation takes into account Nortel's operations as a unified endeavor. The pro rata allocation model reflects the underlying economics of the "One Nortel" integrated global business. The U.S., Canadian and EMEA Debtors allocation methods do not account for the complete absence of any ex ante agreement among the Nortel entities as to the division of assets in the event of a global insolvency. They wrongly assert that the individual geographic regions functioned autonomously and can thus claim credit for, and retain proceeds from the sale of Nortel's assets. Their proposals lead to wildly divergent allocation outcomes. Each proponent seeks to obtain a disproportionate share of the proceeds.
The RPEs' common endeavor was to maximize global profits and the sales of assets likewise crossed borders. The parties signed the IFSA, affirming that they would share proceeds from the sales to further the best interests of Nortel's creditors. They recognized that a cooperative, multi-jurisdictional sale of the Business Lines was the only way to maximize proceeds. Likewise, the RPEs recognized that a collaborative sale of the Residual IP would create the most value and they agreed to facilitate that sale by executing LTA's.
In this unprecedented, complex and massive dispute involving highly integrated MNE's, the U.S. Court has the authority to adopt a pro rata allocation. The Bankruptcy Code permits courts to "issue any order, process, or judgment
The Court has toiled mightily to reach a correct and equitable result, consistent with the evidence adduced at trial. The Court, like the Canadian Court, is ordering a modified pro rata allocation — not distribution — which both recognizes the integrity of the corporate separateness and the integrated synergistic operations of Nortel. The Court's adoption of pro rata allocation is the only outcome that reflects uncontroverted evidence and leads to a just result. The master facts are that Nortel functioned as a unified global enterprise and there was no agreement which governed how the individual entities would or could allocate their assets in the event of an insolvency. All parties agree, as they must, that Nortel was centrally managed with employees and assets from many countries and subsidiaries contributing to the R & D which led to the businesses, IP, products and licenses to which they now lay claims of ownership and beneficial interest. The ramifications of the insolvency must be borne by all of the Nortel Entities and, consequently, all of its creditors. A pro rata allocation is driven by the unique facts, the after the fact justifications by parties for their positions and the disparity of those positions.
The Court's ruling is not a substantive consolidation because no one estate is entitled to any specific asset. In In re Owens Corning, the U.S. Court of Appeals for the Third Circuit observed that substantive consolidation "treats separate legal entities as if they were merged into a single survivor left with all the cumulative assets and liabilities, (save for inter-entity liabilities which are erased). The result is that claims of creditors against separate debtors morph to claims against the consolidated survivor."
The decision of the Third Circuit Court of Appeals in In re Owens Corning, 419 F.3d 195 (3d Cir.2005), is a clear and concise exposition of the law on substantive consolidation for domestic insolvencies. It includes the history of the legal precept, the standards and the economic ramifications of substantive consolidation. Therefore, Owens Corning is worthy of a detailed discussion.
The Third Circuit succinctly framed the issue as follows:
Owens Corning, 419 F.3d at 199.
In the case, Banks had made $2 billion in unsecured loans to Owens Corning and certain subsidiaries, and obtained guarantees from other subsidiaries. The Banks appealed from the district court's order consolidating the assets and liabilities of the borrowers and guarantors. The Third Circuit's discussion included the following:
Id. at 205.
Corporate disregard as a fault may lead to corporate disregard as a remedy. Id. The Third Circuit further discussed approaches courts take for allowing substantive consolidation. The two "themes" are:
Id. at 207-208, quoting from Union Sav. Bank v. Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 518 (2d Cir.1988).
After thoroughly discussing the approaches and the economic impact of substantive consolidation, the Third Circuit settled on the following requirement for substantive consolidation:
Id. at 211. The Third Circuit found that substantive consolidation on the facts presented in Owens Corning was inappropriate.
The discussion of a pro rata allocation requires a discussion of substantive consolidation and, more importantly, why the Court's approach is not that seemingly offensive outcome. The Court understands that the NNUK is campaigning for global substantive consolidation; and to a lesser extent the CCC is doing likewise. The Court's methodology departs from those views. The Court, for one, is not ordering payments to the "most deserving" creditors as the Bondholders fear. The Court is not ordering a distribution scheme. Instead, the Court is directing an allocation among the Estates for the Estates to distribute in an appropriate manner. It is a distinction with a difference. The difference is that intercompany claims, settlements, cash-on-hand will all be honored in the allocation. The logistics and practical concerns with the pro rata calculation are manageable — certainly as much if not more than any prospect of
The basic principal of substantive consolidation is the treatment "of separate" legal entities as if they were merged into a single survivor left with all cumulative assets and liabilities (save for inter-entity liabilities, which are erased)." In re Owens Corning, 419 F.3d 195, 205 (3d Cir.2005). The more relevant inquiry, as the U.S. Debtors point out, is whether creditors of each Nortel estate would have to "share those assets with all creditors of all consolidated entities", thereby raising the specter for some of a significant distribution diminution." Id. at 206.
The Estates opposing the pro rata allocation are correct to express concerns over "rough justice" and "free floating discretion." But in giving validity to IFSA, intercompany claims, settlements, and guaranties, there is nothing rough about the justice. Instead, the Court is attempting to apply an equitable result where parties could not agree upon one and did not prove the validity of any one of the conflicting views. The bases asserted — ownership, revenue, contribution — result in valuations which simply do not match operations. It is highly significant that the U.S. Court and the Canadian Court independently arrived at the same conclusion.
One only has to read the parties' briefs (as the Court has done numerous times) and to have presided over the trial to understand that no Estate — U.S., Canadian or EMEA — was able to raise its position above the others. The Court compares the Allocation Dispute to three people trying to reach the top of a mountain by pulling the others down. In other words, no one gets to the top.
Under U.S. law, a proponent of substantive consolidation must show that either "[1] prepetition [the debtors] disregarded separateness so significantly [that] their creditors relied on the breakdown of entity borders and treated them as one legal entity, or [2] postpetition [the debtors'] assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors." In re Owens Corning, 419 F.3d at 211.
The following principles govern: (1) the "general expectation" is that "courts respect entity separateness absent compelling circumstances calling equity (and even then only possibly substantive consolidation) into play"; (2) the "harms substantive consolidation addresses are nearly always those caused by debtors (and entities they control) who disregard separateness"; (3) "[m]ere benefit to the administration of the case ... is hardly a harm calling substantive consolidation into play"; (4) the "rough justice" remedy of substantive consolidation "should be rare and, in any event, one of last resort after considering and rejecting other remedies"; and (5) substantive consolidation "may not be used offensively (for example, having a primary purpose to disadvantage tactically a group of creditors in the plan process or to alter creditor rights)." Id. at 211. Although not for the Court to decide, the law in Canada appears to be similar. Northland Properties Ltd., Re., [1988] 69 C.B.R. (N.S.) 266 at para. 49 (Can.B.C.S.C.), citing In re Baker and Getty Fin. Services Inc., 78 B.R. 139 (Bankr.N.D.Ohio 1987). This is accomplished with reference to the following seven factors: (1) difficulty in segregating assets; (2) presence of consolidated financial statements; (3) profitability of consolidation at a single location; (4) commingling of assets and business functions; (5) unity of interests in ownership; (6) existence of intercorporate loan guarantees; and (7) transfer of assets without observance of corporate formalities. Northland Properties Ltd., Re., [1988] 69
The record of Nortel's operations does not satisfy the legal and factual requirements for substantive consolidation. While Nortel operated as a highly integrated multinational enterprise, the evidence establishes that the Nortel affiliates respected corporate formalities and did not commingle their distinct assets or liabilities. Given that Nortel respected and maintained corporate separateness among its distinct legal entities both before and during its insolvency, substantive consolidation cannot be applied in this case.
Again, the Court is not adopting pro rata distribution. Pro rata distribution would result in substantial prejudice to creditors who have bargained for separate contractual rights. It would make the Sales Proceeds available for distribution to all debtor entities regardless of whether a debtor sold assets in a particular sale, with the practical effect of moving cash from one Estate to another to the detriment of creditors.
In ruling that substantive consolidation is not justified here, the Court wants to be clear that pro rata allocation does not constitute substantive consolidation. Nonetheless, it is worth noting that the Owens Corning facts differ from the Nortel facts. The affiliated Owens Corning entities had different, independent, separate business purposes, logos and trade names, and other features which made separating their assets and liabilities straightforward.
In further contrast to Nortel, Owens Corning's affiliated debtors were contractually bound to maintain their corporate separateness. The Owens Corning loan agreement guaranteed by all affiliated debtors, expressly limited how a borrower could deal with its subsidiaries. The Nortel cross-over bonds indentures do not contain such restrictive characteristics.
The evidence at trial established the uniquely integrated nature of Nortel's global enterprise and the extensive integration of IP assets giving rise to the proceeds of the sale in the Lockbox. The evidence further confirmed that Nortel was a truly global enterprise.
By agreeing to the IFSA, the Estates confirmed that the Courts had jurisdiction to determine the appropriate allocation of the Sales Proceeds absent agreement. The IFSA does not require or suggest any allocation method. The IFSA does not suggest the fair market value of the assets and rights sold or relinquished in connection with the sale of Nortel's Business Lines and Residual IP as argued by the U.S. Debtors. Nor does the IFSA indicate any preference for the EMEA Debtors'
The pro rata allocation method which the Court is adopting is not substantive consolidation of the Estates. The Court is not directing a central insolvency administrator in one jurisdiction, that all of the Nortel Entities be treated as one, that all claims be determined within one proceeding under the supervision of one insolvency administrator, that there be one plan of reorganization for all Nortel Entities or that creditors receive a common dividend on a pro rata, pari passu basis.
The Court is not adopting a pro rata distribution, but an allocation to separate interests. The Court's pro rata model recognizes that separate Estates exist, will continue to exist, and will ultimately be utilized to make distributions to creditors through whatever means is determined by the Courts following the Allocation Dispute.
Moreover, the Court recognizes the separate and distinct integrity of each of the Debtors by recognizing cash-on-hand intercompany claims and settlements. To be clear, the Court's pro rata allocation is not the "new order" which the pro rata proponents urge with terms such as "universalism".
The UKPC's call for Modified Universalism is premised upon the Model Law on Cross-Border Insolvency which the United Nations Commission on International Trade Law proposed in 1997.
The pro rata proponents also argue that rejecting the guaranties will not negatively impact the marketplace. The pro rata proponents also cite in support of disregarding the guaranties to the following from Widen, Corporate Form and Substantive Consolidation, 75 Geo. Wash. L.Rev. at 274, 277:
The chart shows that Nortel bonds that carried an NNI guarantee traded at higher or equal spreads to Nortel bonds that did not carry an NNI guarantee. Bonds with a lower spread are considered less risky in the marketplace.
Additionally, the documents evidencing the issuance of the bonds (i.e., the offering memoranda and indentures) do not provide a basis for any Bondholders to have reasonably relied on any particular partitioning of assets among the individual entities.
The guarantees did not restrict NNC or its subsidiaries from lending cash to, or making investments in, affiliates, or from incurring substantial amounts of additional indebtedness,
In addition, the June 29, 2006 Offering Memorandum for NNL's Senior Notes due 2011, 2013, and 2016,
The pro rata proponents suggest the Courts should consider the identities of the Bondholder Group's members, their purchase history, and the prices they paid for the Bonds when evaluating allocation. The Court answers with a resounding "No." When and at what prices the members of the Bondholder Group acquired their Bonds is irrelevant to this litigation. The purchaser of a debt instrument on the secondary market is entitled to the exact same rights as the original purchaser of that instrument. See In re 785 Partners, LLC, 470 B.R. 126, 133 (Bankr.S.D.N.Y. 2012) (if a creditor is the assignee of the original lenders, then that creditor "stands in the shoes of the assignor, and takes neither more nor less than the assignor had").
Moreover, the price paid by a secondary purchaser has no impact on its substantive rights. In 785 Partners, the court found that although "the Debtor's existing default may have been factored into the price that [the creditor] paid to the Original Lenders," this was "a matter between those parties." 785 Partners, 470 B.R. at 133. Were the Court to accede to the suggestion that secondary purchase prices are relevant, the effect on the distressed market would be devastating.
The U.S. Interests and the EMEA Debtors take strong exception to a pro rata allocation. The Court understands their disagreement.
The EMEA Debtors and U.S. Interests argue that the pro rata "distribution" theory is not legally or factually supportable. The pro rata "distribution" theory does not allocate to each Selling Debtor the fair market value of the assets it sold or relinquished in the Sales. It would therefore
The parties opposing the pro rata allocation argue that it is "unadministrable" due to uncertain treatment of claims, timing and creditor recoveries. In particular, there is concern with inflated claims, particularly the UKPC $3 billion claim against the EMEA Debtors. Inflated claims would, of course, skew a pro rata allocation and destroy the equitable allocation method.
The Court has answers to the concerns expressed.
1. Any claims not resolved by a date certain would not be recognized.
2. The Court will resolve any disputed claims to prevent claim inflation.
3. Claims will be recognized only once. For example, the UKPC claim will be included in the allocation calculation only once and not against multiple EMEA Debtors. Similarly, for allocation purposes the Bondholder claims will be included only against the primary obligor, but the guarantees will be entitled to seek distribution from the appropriate Debtor of any deficiency resulting from the allocation.
4. Intercompany claims and settlements approved by the U.S. Court and the Canadian Court will be included in calculating the allocation. They will not be deducted as the UK Pension Claimants propose. Doing so would violate the Courts' Orders.
5. Once all claims are resolved, the amount in the Lock Box will be divided by the total claims and each Estate will be allocated its proportionate amount.
6. The U.S. Estate will then propose a distribution plan for the Court's consideration.
The administrative steps for allocation contained in the accompanying Order will be prompt, fair and definitive, thereby addressing the concerns expressed by those opposing a pro rata allocation.
Over three years ago, the Third Circuit Court of Appeals noted with both poignancy and command, which the parties disregarded, that:
In re Nortel Networks, Inc., 669 F.3d 128, 143-44 (3d Cir.2011) (footnote omitted).
The Courts have now ruled on allocation of what remains of Nortel. It is now the parties who have to make a decision: accept the Court's rulings and give them effect, take appeals and thereby prolong the hardship and deplete the remaining estate, or utilize the Courts' rulings resolve any remaining differences.
The Court will issue its Order making its ruling final.
Glossary of Terms
Allocation Protocol Order Entering Allocation Protocol, dated May 17, 2013
APA An advanced pricing arrangement, which is a contract between a
multi-national enterprise and a tax authority specifying the transfer
pricing methodology that the affiliate will be permitted to use for an
agreed period of time.
APA Team A team of employees formed by Nortel to determine the appropriate
transfer pricing policy to propose to taxing authorities in the APA
process.
Bondholders The Ad hoc Group of Bondholders, consisting of entities holding
bonds which NNC, NNL, NNI and NNC issued or guaranteed.
Business Line Sales The post-filing sales in 2009 to 2011 involving tangible and intangible
assets of, for the most part, operating Nortel businesses.
Business Lines Nortel's lines of business
Canadian Court The Ontario Superior Court of Justice.
Canadian Debtors The Canadian Nortel companies that, on January 14, 2009, filed for
and obtained protection under the Companies' Creditors Arrangement
Act from the Ontario Superior Court of Justice, being Nortel Networks
Corporation (NNC), Nortel Networks Limited (NNL), Nortel
Networks Technology Corporation, Nortel Networks International
Corporation and Nortel Networks Global Corporation.
Canadian Estate Collectively, the entities that make up the Canadian Debtors.
Canadian Proceedings Canadian Debtors commenced a proceeding with the U.S. and
Canadian Courts under the Companies' Creditors Arrangement Act
(Canada), seeking relief from their creditors
CCAA Companies' Creditors Arrangement Act (Canada)
CCC The Canadian Creditors Committee, which represents the interests of
Canadian pensioners and other pension interests, long-term disabled
and other employees and former employees of Nortel who have
claims against the Canadian Debtors.
CDMA Code Division Multiple Access line of business
Committee The Official Committee of Unsecured Creditors, appointed by the United States Trustee for the District of Delaware on January 22, 2009. Cost Sharing Parties involved in cost sharing agreements, including NNL, NNI, Participants NNUK, NN Ireland, and NNSA (the "CSPs"). Courts The U.S. Court and the Canadian Court. CRA The Canadian Revenue Authority Cross Border Protocol Canadian Court approved the Court-to-Court Protocol on the Petition Date, which was later amended by order of this Court on June 29, 2009 [D.I. 990] and by an order of the Canadian Court on that same date. CSA Cost Sharing Agreements between NNL and each of the other R&D performing Nortel entities. CTO Nortel's Chief Technology Officer CVAS Carrier Voice Over Internet Protocol Applications Solutions line of business Debtor(s) The companies or entities comprising the Canadian Debtors, the U.S. Debtors and the EMEA Debtors, either individually or collectively. EMEA The Europe, Middle East and Africa regions EMEA Debtors The 23 Nortel entities that, on January 15, 2009, were granted administration orders in the U.K. under the Insolvency Act, 1986 and whose registered offices were in England, Europe, the Middle East and Africa, including Nortel Networks UK Limited (NNUK), Nortel Networks S.A. (NNSA) and Nortel Networks (Ireland) Limited (NN Ireland). EMEA Estates Collectively, the entities that make up the EMEA Debtors. Ericsson Telefonaktiebolaget LM Ericsson (publ) Exclusive License The MRDA sets forth a clear exchange of consideration between the signatories (NNL, NNI, NNUK, NNSA, and NN Ireland). Pursuant to Article 4(a), each Licensed Participant vested legal title in NNL to the intellectual property it created. Expressly "in consideration therefor," NNL granted an exclusive license back to each Licensed Participant.
FCFSA Final Canadian Funding and Settlement Agreement First Expansion of the An order expanding the Monitor's powers, dated August 14, 2009. Monitor Powers Order The Order provides, among other things, the Monitor with the authority to cause the Canadian Debtors to take various actions in connection with the sale of the business units and to conduct, supervise, and direct any procedure regarding the allocation and/or distribution of proceeds of ay sale. G&A Nortel's global General and Administrative support. There were four primary global G&A organization within Nortel: (1) Finance; (2) Information Technology; (3) Human Resources; and (4) Other Real Estate, Legal, Compliance, and Strategy groups. Global IP The Global IP Law Group, which Nortel retained to provide advice on monetizing its Patent Portfolio. Google Bid The U.S. Debtors', NNL's, and NNC's agreement with an affiliate of Google Inc. to sell Nortel's residual patent and patent-related assets for $900 million, subject to higher or better offers. GSM Global System for Mobile Communications line of business Horst Frisch Report Functional analysis prepared by Horst Frisch for APA applications covering the 2000 to 2004 period. The reports set forth Nortel's justification for its proposed RPSM. IEs Individual entities IFSA Interim Funding and Settlement Agreement, June 9, 2009 (TR43794) Inland Revenue The Inland Revenue Service in the U.K. Intercompany DIP Loan NNI loaned to NNL $75 million under a revolving loan agreement. This loan was approved by the U.S. Court on the Petition Date. IP Intellectual Property IP Assets Nortel's remaining patent portfolio and related assets IP Stalking Horse Agreement dated April 4, 2011 between each of the IEs as Sellers and Agreement Ranger, Inc., for a purchase price of $900 million
IP Steering Committee Formed in January 2010, a committee of representatives of Nortel and their advisors which led the evaluation process. IPCo A proposed IP licensing service and enforcement business that Nortel began developing even before the insolvency filings. IRS The U.S. Internal Revenue Service Joint Administrators Ernst & Young LLP was appointed administrator of the EMEA Debtors by the High Court of England and Wales on January 14, 2009 Layer 4-7 Sale Nortel sold its businesses and assets, including the sale of certain portions of its Layer 4-7 data portfolio to Radware Ltd. [D.I. 539] Lazard Lazard Freres & Co. LLC, financial advisor to the Debtors. Licensed Participant(s) As defined in Article 1(e) of the MRDA, a Participant (or all Participants) other than NNL. LREs Limited Risk Entities which were incorporated in most of the countries where Nortel products were sold, including in the EMEA region. LTAs License Termination Agreements LTE Long-term evolution wireless technology line of business MNE A multi-national enterprise Monitor Ernst & Young Inc. in its capacity as monitor of the Canadian Debtors appointed in the Initial Order granted January 14, 2009. By various orders, the Ontario Superior Court of Justice expanded the Monitor's powers and authorized it to exercise the powers of the boards of directors of the Canadian Debtors. MOU The Memorandum of Understanding, which was drafted "to provide a record of the Participants' "understandings" with respect to the MRDA and related agreements. MRDA Master R&D Agreement dated December 22, 2004 but with an effective date of January 1, 2001, between NNL, NNI, NN UK, NNSA, NN Australia and NN Ireland, as amended at least four times (TR21003).
NN Ireland Nortel Networks Ireland, being an entity formed under the laws of the Republic of Ireland, one of the EMEA Debtors, and a direct subsidiary of NNL. NN Technology As defined in Article 1(f) of the MRDA, NN Technology "shall mean, any and all intangible assets including but not limited to patents, industrial designs, copyrights and applications thereof, derivative works, technical know-how, drawings, reports, practices, specifications, designs, software and other documentation or information produced or conceived as a result of research and development by, or for, any of the Participants, but excluding trademarks and any associated goodwill." NNC Nortel Networks Corporation, being a corporation incorporated under the laws of Canada, which was the publicly traded, parent holding company of NNL and its subsidiaries. NNI Nortel Networks Inc., being a corporation incorporated under the laws of the State of Delaware, the main U.S. operating entity and a direct subsidiary of NNL. NNI Guaranteed Bonds In 2008, NNL issued an additional approximately $675 million in public debt also guaranteed by NNI (together with the 2006 Bond Issuance). NNL Nortel Networks Ltd., being a corporation incorporated under the laws of Canada, and the main Canadian operating entity. NNSA Nortel Networks, S.A., being an entity duly formed under the laws of France, one of the EMEA Debtors, and a direct subsidiary of NNL. NNUK Nortel Networks UK Limited, being an entity formed under the laws of the United Kingdom, one of the EMEA Debtors, and a direct subsidiary of NNL. Non-Exclusive License As defined in the MRDA, a non-exclusive, royalty-free license, including the right to sublicense, which except as hereinafter provided shall be in perpetuity, rights to make, have made, use, lease, license, offer to sell, and sell Products using or embodying NN Technology in and for the Non-Exclusive Territory, and all rights to patents, industrial designs (or equivalent) and copyrights, and applications therefor, and technical know-how, as necessary or appropriate in connection therewith.
Nortel Collectively, NNC and all of its direct and indirect subsidiaries, including the businesses they operated. Nortel Entity(ies) Any of the companies or entities, either individually or collectively, within the Nortel Group. Participant(s) As defined in the MRDA, any of the parties to the MRDA, namely NNL, NNI, NNUK NNSA, NN Australia, NN Ireland Petition Date January 14, 2009 PR&D Pricing payments attributable to R&D each year. Products As defined in Article 1(g) of the MRDA, Products "shall mean all products, software and services designed, developed, manufactured or marketed, or proposed to be designed, developed, manufactured or marketed, at any time by, or for, any of the Participants, and all components, parts, sub-assemblies, features, software associated with or incorporated in any of the foregoing, and all improvements, upgrades, updates, enhancements or other derivatives associated with or incorporated in any of the foregoing" (equivalent to "Nortel Products"). Protocol The Motion for Entry of an Order Pursuant to 11 U.S.C. § 105(a) Approving Cross-Border Court-to-Court Protocol, filed by the U.S. Debtors on the Petition Date. R&D Research and Development R&D CSA A cost sharing agreement governing R&D Residual IP A substantial number of intellectual property assets belonging to Nortel's "Patent Portfolio." Residual Patent Sale The $4.5 billion sale of Nortel's Residual IP to Rockstar. Rockstar Rockstar Bidco L.P. is a consortium comprised of Apple, Ericsson, Microsoft, Blackberry, EMC and Sony Rockstar Transaction The sale to Rockstar Bidco, LP in 2011 of the residual patent and patent-related assets owned by NNL (equivalent to "Rockstar Sale"). RPEs Residual Profit Entities (NNL, NNI, NNUK, NNSA and NN Ireland)
RPS Residual profit split RPSM Residual Profit Split Methodology - the transfer pricing methodology used by Nortel from 2001. Sales Proceeds The money received from Line of Business Sales and the Residual IP. Second Expansion of An order dated October 3, 2012, adding to the powers of the Monitor Monitor Powers Order by, among other things, authorizing and empowering, but not obligating, the Monitor to exercise any powers which may be properly exercised by a board of directors of any of the Canadian Debtors. U.S. Court The United States Bankruptcy Court for the District of Delaware. U.S. Debtors The U.S. Nortel companies that, on January 14, 2009, filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware for protection under Chapter 11 or Title 11 of the U.S. Code, being Nortel Networks Inc. ("NNI") and several of its U.S. affiliates, namely Nortel Networks Capital Corporation, Nortel Altsystems Inc., Nortel Altsystems International Inc., Xros, Inc., Sonoma Systems, Qtera Corporation, CoreTek, Inc., Nortel Networks Applications Management Solutions Inc., Nortel Networks Optical Components Inc., Nortel Networks HPOCS Inc., Architel Systems (U.S.) Corporation, Nortel Networks International Inc., Northern Telecom International Inc., Nortel Networks Cable Solutions Inc. and Nortel Networks (CALA) Inc. UK Pension Claimants Collectively, the Nortel Networks UK Pension Trust Limited and the Board of Directors of the Pension Protection Fund. (the "UKPC") UK Proceedings On the Petition Date, the High Court of England and Wales placed the EMEA Debtors into administration under the control of the Joint Administrators. Wilmington Trust Wilmington Trust, National Association
Asset Name (Code Name) Key Dates Stalking Horse (Code Name) Auction Other Purchaser & Price bidders Layer 4-7 Sale hearing: 3/26/2009 Radware (Velocity) No auction N/A Radware (Velocity) Signing: 2/19/2009 SH agmt. signed: 2/19/2009$17.7 million Closing: 3/31/2009 CDMA/LTE Sale hearing: 7/28/2009 Nokia Siemens Networks Auction Yes Ericsson (Eckberg) Signing 7/24/2009 (Narnia) 7/24/2009$1.13 billion Closing: 11/13/2009 SH agmt. signed: 6/19/2009 Enterprise Sale hearing: 9/16/2009 Avaya (Equinox) Auction Yes Avaya (Equinox) Signing: 9/14/2009 SH agmt. signed: 7/20/2009 9/11/2009-$900 million Closing: 12/18/2009 9/14/2009 Next Generation Packet Core Sale hearing: 10/28/2009 N/A Auction No Hitachi (Seville) Signing: 10/25/2009$10 million Closing: 12/8/2009 Metro Ethernet Networks Sale hearing: 12/2/2009 Ciena (Snow) Auction Yes Ciena (Snow) Signing: 11/24/2009 SH agmt. signed: 10/7/2009 11/20/2009-$774 million Closing: 3/19/2010 11/22/2009 GSM/GSM-R Sale hearing: 12/2/2009 N/A Auction Yes Ericsson & (Isis) Signing: 11/24/2009 11/24/2009 Kapsch CarrierCom Closing: 3/31/2010$103 million CVAS Sale hearing: 3/3/2010 GENBAND (Paragon) No auction N/A GENBAND (Paragon) Signing: 12/22/2009 SH agmt. signed: 12/22/2009$282 million Closing: 5/28/2010 GSM Retained Contracts Sale hearing: 5/24/2010 N/A No auction Ericsson (Horns) Signing: 5/11/2010$2 million Closing: 6/4/2010 (add-on to GSM sale) Multi Service Switch Sale hearing: 9/30/2010 PSP Holding LLC (Marlin) Auction Yes Ericsson (Pluto) Signing: 9/24/2010 SH agmt. signed: 8/26/2010 9/24/2010$65 million Closing: 3/11/2011Layer 4-7: See TR50324 (Transcript of Proceedings, In re: Nortel Networks, Inc., et al., Hearing re: Layer 4-7 Sale) (Hearing Date); TR50171 (NNI Proposed Disclosure Statement) at 38 (Closing Date); TR50165 (U.S. Motion to Approve the Layer 4-7 Sale) at 2,8 (Signing Date and Purchase Price); TR50188 (U.S. D.I. 539 Sale Order re Layer 4-7), TR50033 (Mar. 30 2009 Layer 4-7 Approval and Vesting Order) (Sale Approval).
CDMA/LTE: See TR50114 at 2 (U.S. D.I. 1205 CDMA and LTE Sale Order) (Hearing Date); TR50171 (NNI Proposed Disclosure Statement) at 39 (Closing Date); TR49971 (Canadian Motion Record, Approval and Vesting Order CDMA & LTE Business Sale Transaction) at 5 (Signing Date); TR21541 (2010 NNC 10-K) Purchase Price) at 24-25; TR50114 (U.S. D.I. 1205 CDMA and LTE Sale Order), TR50029 (July 28, 2009 CDMA and LTE Approval and Vesting Order), TR49998 (Oct. 28, 2009 Amendment to Approval and Vesting Order re CDMA and LTE) (Sale Approval).Enterprise: See TR50128 (U.S. D.I. 1514 Enterprise Sale Order) (Hearing Date); TR50171 (NNI Proposed Disclosure Statement) at 39-40 (Closing Date); TR50570 (Canadian Motion Record, Approval and Vesting Order Enterprise Solution Business) at 5 (Signing Date); TR21541 (2010 NNC 10-K) at 25 (Purchase Price); TR50128 (U.S. D.I. 1514 Enterprise Sale Order), TR50030 (Sept. 16, 2009 Enterprise Approval and Vesting Order) (Sale Approval).Next Generation Packet Core: See TR50361 (Transcript of Proceedings, In re: Nortel Networks, Inc., et al., Hearing re: Next Generation Packet Core Sale) (Hearing Date); TR50171 (NNI Proposed Disclosure Statement) at 40 (Closing Date); TR50136 (U.S. D.I. 1760 Next Generation Sale Order) at 1 (Signing Date); TR21541 (2010 NNC 10-K) at 25 (Purchase Price); TR50136 (U.S. D.I. 1760 Next Generation Sale Order), TR50001 (Oct. 28, 2009 Next Generation Approval and Vesting Order) (Sale Approval).Metro Ethernet Networks (MEN): See TR50336 (Transcript of Proceedings, In re: Nortel Networks, Inc., et al., Hearing re: MEN Sale and GSM Sale) (Hearing Date); TR50171 (NNI Proposed Disclosure Statement) at 41 (Closing Date); TR40551 (Canadian Motion Record, Approval and Vesting Order MEN) (Signing Date) at 5; TR21541 (2010 NNC 10-K) at 25 (Purchase Price); TR50140 (U.S. D.I. 2070 MEN Sale Order), TR50060 (Dec. 2, 2009 MEN Approval and Vesting Order) (Sale Approval).GSM/GSM-R: See TR50336 (Transcript of Proceedings, In re: Nortel Networks, Inc., et al., Hearing re: MEN Sale and GSM Sale) (Hearing Date); TR50171 (NNI Proposed Disclosure Statement) at 42 (Closing Date); TR50139 (U.S. D.I. 2065 GSM/GSM-R Sale Order) at 2 (Signing Date); TR21541 (2010 NNC 10-K) at 26 (Purchase Price); TR50139 (U.S. D.I. 2065 GSM/GSM-R Sale Order), TR50032 (Dec. 2, 2009 GSM/GSM-R Approving and Vesting Order) (Sale Approval)CVAS: See TR50149 (U.S. D.I. 2632 CVAS Sale Order) at 2 (Hearing Date); TR50171 (NNI Proposed Disclosure Statement) at 43 (Closing Date); TR50141 (U.S. Motion to Approve the CVAS Sale) at 2 (Signing Date); TR21541 (2010 NNC 10-K) at 26 (Purchase Price); TR50055 (Mar. 3, 2010 CVAS Approval and Vesting Order), TR50149 (U.S. D.I. 2632 CVAS Sale Order) (Sale Approval). The initial purchase price was for $282 million subject to balance sheet and other adjustments of approximately $100 million resulting in a final purchase price at closing of $182 million. Subsequently a dispute arose between the parties over a defined term in the asset sale agreement which would impact the final purchase price. To resolve the dispute the parties engaged in settlement discussions resulting in the final purchase price of $157 million. The settlement was approved by the U.S. Court and Canadian Court on August 23, 2011. See TR40190 (2011 NNC 10K) at 25.GSM Retained Contracts: See TR50271 (Transcript of Proceedings, In re: Nortel Networks, Inc., et al., Hearing re: GSM Retained Contracts Sale) (Hearing Date); TR50171 NNI Proposed Disclosure Statement) at 42 ((Closing Date); TR50157 (U.S. Motion to Approve the Sale of Certain Assets of the GSM/GSM R Business) at 2, 9 (Signing Date and Purchase Price); TR47776 (Canadian Approval and Vesting Order, GSM/GSM-R Remaining Contracts), TR50159 (D.I 3048, U.S. Order Approving the Sale of Certain Assets of the GSM/GSM-R Business) (Sale Approval).Multi Service Switch (MSS): See TR50172 (U.S. D.I. 4054 MSS Sale Order) at 2 (Hearing Date); TR40190 (2011 NNC 10-K) at 25 (Closing Date); TR40633 (Canadian Motion Record, Approval and Vesting Order, MSS Business) at 4 (Signing Date); TR21541 (2010 NNC 10-K) at 27 (Purchase Price); TR50172 (U.S. D.I. 4054 MSS Sale Order), TR50056 (Sept. 30, 2010 Approval and Vesting Order MSS Business) (Sale Approval). Total value. There were separate sales for the North America; Caribbean & Latin America (CALA); and Europe, Middle East & Africa (EMEA) regions.
Bankruptcy Code on July 14, 2009, which was consolidated and is being jointly administered with the other Debtors' chapter 11 cases for procedural purposes [D.I. 1098].
