Nortel Networks reaches global settlement

08 May 2017

On May 8, 2017, eight years after commencing formal insolvency proceedings, Nortel Networks Corporation ("Nortel Canada") reached a global settlement with its international creditors.

Nortel Canada is the Canadian parent company of what was one of the largest telecommunications businesses in the world. In early 2009, formal insolvency proceedings were commenced in Canada, the United States and England, among other places. Nortel's worldwide business was liquidated through a number of Court-approved sales of its business units and a US$4.5 billion sale of its residual patents, resulting in US$7.3 billion of global sale proceeds to be allocated amongst the Nortel debtor companies in Canada, the United States and Europe.

Ernst & Young Inc. was appointed as CCAA Monitor in respect of Nortel Canada and, after the resignation of Nortel Canada's board of directors, its powers and responsibilities were expanded to protect the interests of Nortel Canada's stakeholders.

Following the failure of several mediations, an unprecedented "joint" trial to determine the allocation of these sale proceeds among the Nortel debtors (the "Allocation Dispute") was held before the Ontario Court and Delaware Bankruptcy Court.

This trial took place in the spring of 2014. The lead-up discovery and litigation process involved approximately 150 fact and expert depositions in various cities worldwide, the production and review of millions of documents and the exchange of dozens of expert reports.

In May 2015, the Ontario and Delaware courts released separate decisions in the Allocation Dispute, each of which provided for a modified pro-rata allocation of the proceeds amongst the Nortel debtors based on the amount of creditor claims against each debtor.

Those decisions were appealed by the US interests. In Canada, leave to appeal was denied by the Ontario Court of Appeal in an unprecedented 42-page decision, with Lexpert magazine citing this as one of its "Top 10 Business Decisions of 2016" and calling it "undoubtedly a major catalyst to the global settlement that followed."

Leave to appeal to the Supreme Court of Canada was sought by the US interests.

In an effort to avoid further protracted litigation and following months of further mediation and negotiations, in October 2016 the Nortel debtors and certain of their significant creditors from Canada, the United States and Europe reached a global settlement of the Allocation Dispute and various other matters.

The global settlement entitled Nortel Canada to 57.1 per cent of the global sale proceeds of US$7.3 billion, Nortel's US debtors to 24.35 per cent and Nortel's European debtors to 18.55 per cent. Stemming from and in order to implement the global settlement, coordinated plans of arrangement were also negotiated amongst the Nortel Canada and US debtors and their key stakeholders and these plans were filed in Canada and the US Creditors and the courts approved the plans in January 2017, with in excess of 99 per cent of voting creditors (both by number and value) voting to approve the Canadian plan. Two individual unrepresented opposing creditors sought leave to appeal the Canadian sanction order. The leave application was dismissed by the Ontario Court of Appeal in March 2017.

The Monitor then led the negotiation of a waiver and reserve agreement, which permitted the global settlement and plans to become effective in early May 2017 notwithstanding the intention of an individual opposing creditor to seek leave to appeal to the Supreme Court of Canada. (The Supreme Court of Canada ultimately denied this leave application in July 2017.)

On May 25, 2017, Nortel Canada announced receipt of its allocation entitlement of approximately US$4.165 billion plus a further US$237 million of additional sale proceeds and US$35 million on account of cost reimbursements. Initial distributions to unsecured creditors of Nortel Canada commenced in July 2017.

The case involved the coordinated, multi-jurisdictional — Canada, US, Europe and various other jurisdictions — sale of Nortel's global business units and patent portfolio for more than US$7.3 billion, followed by an unprecedented simultaneous joint, video-linked trial before the Ontario and Delaware courts to address the allocation of those proceeds.

A far-reaching global settlement was ultimately negotiated amongst numerous international parties leading to creditor and court plan approvals and distributions of billions of dollars to Nortel creditors worldwide.

Derrick Tay and Jennifer Stam of Gowling WLG and a team of lawyers from Norton Rose represented Nortel Canada in these proceedings.

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