Canadian employees from Nortel Networks Corp. will receive as little as 11 per cent of their $3-billion claim if judges accept bondholders' "inequitable and extreme" allocation of the company's remaining assets, courts in Canada and the U.S. heard Monday.
Closing arguments began Monday in the long-running case to determine how to divide Nortel's remaining $7.3-billion in assets – mostly proceeds from the sales of the company's patents and technology – among different divisions based in Canada, the United States and Europe. The joint U.S.-Canada trial is being held before two judges in courtrooms in Toronto and Wilmington, Del., linked by video conferencing.
Lawyer Mark Zigler, who is representing more than 20,000 former Nortel employees and pension plan members in Canada, said the judges have an obligation to reach a decision that is fair, and does not produce the "inequitable and extreme" result that would occur if most of the assets are allocated to the U.S. division, primarily for the benefit of bondholders.
He said his clients want a decision "that accords with the type of Nortel they believed they worked for."
Mr. Zigler said the U.S. bondholders' proposal would allow Canadian employees to collect just 11 per cent of what they are owed, while another allocation proposed by European creditors would result in Canadian employees getting just 25 per cent of their claims. At the same time, U.S. bondholders would recover 100 per cent of the value of their bonds, and possibly even a further $1-billion in interest that has accrued since Nortel filed for bankruptcy protection in 2009, he said.
The Canadian employee group has proposed an alternative "ownership allocation," based on the argument that the Canadian parent company had ultimate ownership of the patents.
Under that proposal, the Canadian creditors would recoup 59 per cent of their claim, while the U.S. secured bondholders would receive 100 per cent. European claimants would recover just 27 per cent of their claims, however, and the British pension trust would recoup 44 per cent of its claim.
Mr. Zigler said the Canadian parent company has become "the dumping ground" for claims from creditors worldwide, yet is being told by other claimants that it doesn't have the right to proceeds from the sale of Nortel's assets because they belonged to individual subsidiaries.
He said the judges cannot divide Nortel's assets based on theories about how much each subsidiary contributed to their development, or how much each asset contributed to the company's annual revenues.
A U.S. lawyer for Nortel's subsidiaries in Europe, William McGuire, told the Delaware courtroom the Canadian arguments that Nortel's Canadian parent simply owned the patents and therefore should benefit the most from the billions reaped from their sale are wrong.
According to provisions in an internal Nortel agreement, Nortel's global subsidiaries agreed to share the "beneficial ownership" of the company's intellectual property, even though legal title resided in Canada, he argued.
"The provision could hardly be more clear," he said, later adding that there was "no wiggle room in the words 'beneficial ownership.'"
The internal agreement was set up by Nortel to sort out how its various arms would allocate profits in order to pay taxes in the different countries where they operated.
The closing arguments are expected to take two days. The judges will not determine how the funds will be split among individual groups of creditors, but only on how much will be allocated to each geographic region.