January 21, 2010
Court Approves Final Canadian Funding Agreement
The Canadian and U.S. Courts have approved a final Canadian Funding Agreement (“CFA”) which will see the flow of additional funds from Nortel’s U.S. entities to its Canadian entities. This additional funding is critical to the continued operations of Nortel’s Canadian entities, and was necessary in order to facilitate the ongoing sales processes of Nortel’s business units. It also contains funding for retiree health benefits and pension contributions but only to March 31, 2010. Our main concern is to extend funding past that date as well as to obtain additional funding for LTD coverage and for severance pay issues arising from Nortel’s ongoing operations.
As part of the CFA settlement, it has been recognized that Nortel Networks Inc., one of the company’s U.S. entities, will have a $2.067 billion claim against the Canadian estate. This $2 billion claim relates to overpayments by NNI to NNL under the Transfer Pricing Agreements that existed during the period from January 1, 2001 to December 31, 2005. Nortel’s transfer pricing arrangements that were in place during the 2001 to 2005 period have been under review by Canadian and United States taxing authorities for several years. After extensive discussion and review of Nortel’s transfer pricing structure, it has been determined that during this period, NNI made a number of transfer pricing overpayments and that a $2 billion inter-company adjustment is necessary to satisfy this overpayment. To rectify the overpayments, NNL and NNI have both entered Advanced Pricing Arrangements with their respective taxing authority. These arrangements will apply to the years of 2001 through 2005, and will provide for a negative adjustment to NNL’s income of $2 billion and a corresponding positive adjustment to NNI’s income. The $2 billion pre-filing claim that has been established in favour of NNI will settle these extremely complex tax issues that exist involving both the Canada Revenue Agency and the U.S. Internal Revenue Service.
The claim, and in particular its magnitude, was of great concern to counsel for the Former and Disabled Employees, the NPRC, the CNELTD, and to all Canadian creditors generally. After much discussion with counsel for the company, the Monitor and other interested parties, Koskie Minsky was satisfied that the settlement reached is the best outcome given the circumstances. While the existence of this large claim clearly is undesirable, the settlement of the claim at $2.067 billion will avoid a potentially larger claim against the Canadian estate in the future. Further, the settlement will avoid delays in the distribution of Nortel’s estate, and will preclude uncertain, risky and expensive litigation regarding Nortel’s past Transfer Pricing Arrangements which would involve various taxing authorities and dilute recoveries from the estate. The claim is “unsecured”; i.e., at the same ranking as the pensioner, former employee and disabled employee claims.
To address our main concern, Representative Counsel insisted that the order approving the CFA specifically express the Court’s ongoing ability to determine and grant relief concerning pension, health and disability benefits. Representative Counsel together with the court appointed Representatives are currently involved in negotiations surrounding the continuance of these benefits past the date of March 31, 2010 and possible resolution of some other claims. We insisted that language be included in the order to ensure that the Court was in no way precluded from approving any future settlement and/or any related cash expenditures. The order as entered reflects Representative Counsel’s requests. The judge noted that parties are expected to negotiate in good faith to attempt to reach a settlement with respect to these benefits prior to January 29, 2010. The order also directs the Monitor to advise the Court on the status of these negotiations by January 29, 2010. Your Representatives and Representative Counsel will report further as developments arise. If we cannot reach an agreement, we will take action before the court to obtain ongoing funding and seek a court order to that effect. If this course of action is necessary, Representative Counsel will fight strongly for the continuation of health benefits and LTD income benefits, and the judge will be required to make an ultimate determination as to the length and source of your benefit funding.
Both Courts approved the CFA. Although the majority of objections were resolved in the days leading up to the hearing, there was one formal objection to the motion in Canada, made by the U.K. pension administrator. The Court, however, dismissed this objection with written reasons to follow. We believe that simply opposing the CFA would have been counterproductive as it would have prevented funds flowing into Canada which can be used to fund your benefits, and furthermore, an objection likely would have been overruled by the Courts.
After approving the Canadian Funding Agreement, the Court granted an extension of Nortel’s stay of proceedings in Canada until April 23, 2010. The Court also extended the Employee Hardship Process until April 23, 2010. Representative Counsel and the Representatives are currently negotiating the benefits funding extension agreements and other issues of concern with the company, the Monitor and other stakeholders.