Nortel

March 05, 2010

KANATA - A number of constituents have approached me with questions about Nortel. Their questions relate to four issues; the sale of Nortel in whole or part, pensions, long term disability and severance pay.

The following is my assessment of the situation based on the information I have at this time.


Sale of Nortel

Nortel is an international company currently under court protection within three legal systems, the United Kingdom, the United States and Canada. Within Canada Nortel issues are being managed under the Companies’ Creditors Arrangement Act (CCAA).

Because Nortel, in Canada, is registered in Ontario, the Ontario Superior Court of Justice oversees the CCAA arrangements. CCAA presents an opportunity for a company to avoid bankruptcy and allows the creditors to receive some form of payment for amounts owing to them by the company.

It was the intention of the current management of the company to exit CCAA as a smaller but complete Nortel. Their hope was that Nortel could maintain an acceptable level of sales through its downsizing and restructuring. This has not happened.

The current management of Nortel with the approval of the court has decided that they cannot make the company viable and therefore they intend to sell it in whole or part to potential bidders.

On July 21, 2009 Ericsson issued a bid for $730 million (US) for the CDMA and LTE parts of the Company. On July 25, Ericsson was the successful bidder for the CDMA and LTE at $1.13 billion. They have agreed to protect 500 jobs in Ottawa.

The Government of Canada has approved the sale of CDMA and LTE to Ericsson.

Avaya won the bidding process by offering $900 million for the Enterprise division.

Ciena Corp. won the bidding process by offering $770 million for Nortel’s ethernet network division.

As the sale of various parts of the company progress, the resulting funds will be held centrally for a disposal decision by the courts. In Canada, the disposal is guided by the Bankruptcy and Insolvency Act (BIA). 


Pensions

In a meeting with representatives of the company they advised that the pension fund had an estimated 69% of its required value. If nothing is done to change this, pensioners will be receiving reduced pensions.

As a registered Ontario company, the pension rules are governed by the Government of Ontario under the Ontario Pension Benefits Act. Ontario has a fund called the Pension Benefits Guarantee Fund which offers limited protection for single employer defined benefit pension plans. For example, the Ontario Government recently provided funds to the General Motors and Chrysler pension plans.

Dwight Duncan, Finance Minister of Ontario, confirmed that the Government of Ontario will provide limited protection to Nortel pensions through the Pension Benefits Guarantee Fund.

The other source of funds could come from commercial sources should the courts decide to award a portion of asset sales to the pension fund.

Originating from Budget 2009, the Finance Department struck a Federal-Provincial research group on pensions. Several provinces also commissioned parallel studies to complement the working group. In December 2009, that important research was reviewed by federal, provincial and territorial governments.

Together, we’re moving forward and studying policy options to address issues identified in that in-depth research.  All potential pension reform options are on the table and all will be studied in good faith, but we must also make sure we safeguard the strengths of the current system.  This government study will include public consultations, as we want to hear the opinions of Canadians on available options.

That work will lead up to the next meeting of provincial and territorial Finance Ministers in May 2010, where Ministers will consider how best to put into action specific options.

Within the overall Federal-Provincial process, the BIA will be analyzed to determine whether or not any changes should flow from the review.


Long Term Disability

There are an estimated 400 plus former members of Nortel on Long Term Disability (LTD).  It was believed that the LTD benefit was guaranteed by an insurance company. This has proven to be inaccurate. An insurance company is managing a self financed fund set up by Nortel but does not guarantee the benefit. This is likely in the realm of the provincial government but funds may come from commercial sources should the courts decide to award a portion of the assets.

Subject to court approval, an agreement has been reached between Nortel and groups representing former employees that will:

• provide those who are on long term disability benefits with payments, until the end of 2010; and
• continue to provide pensioners and employees on long term disability with medical, life and dental benefits, until the end of 2010.
  
  

Severance Pay

Former employees who were laid-off following entry of Nortel into the CCAA have not received any severance pay. Nortel management offered the explanation that they were prevented from paying severance so that they could maintain available cash to run the ongoing company.  Effected employees might get funds should the courts decide to award a portion of assets.

Subject to court approval, an agreement has been reached between Nortel and groups representing former employees that will provide $3000 in a lump sum to workers who were terminated before court protection filing, who did not receive all of their promised severance pay.


Bankruptcy and Insolvency Act (BIA)

The Bankruptcy and Insolvency Act sets out the rules for dissolving a company. At some point in the sale of the various assets Nortel will enter bankruptcy. The courts using the rules set out in this act will decide how the assets are distributed.

Some people have suggested that the BIA needs to be amended so that pensioners and other creditors would move forward in the ranking of security. To bring this about, a committee of the House of Commons would have to recommend changes and then legislation would have to be introduced and passed through both Houses of Parliament. If the will is there, to pass changes to the BIA, it likely would take at least a year until it could become law. Then it would take another year or two before regulations would be issued by the appropriate department to implement the changes. Long before this process is completed, Nortel would be in bankruptcy and subject to the current rules. As an example, the most recent amendment to the BIA, C-12 originated in 2005 and eventually passed in 2007. These regulations came into effect in fall, 2009.

An amendment to the BIA is not a solution for the immediate Nortel problem.


Investment Canada Act

The purpose of the Act is to encourage investment in Canada by Canadians and non-Canadians that contributes to the economic growth and employment opportunities to benefit Canada.
Some people have suggested that the government use its authority under the Investment Canada Act to set conditions to ensure proceeds from sales go to pensioners, disabled and severed employees. However the disposal of Nortel is under court supervision. The Government of Canada will not interfere with the court decision that effects the disposal of assets. Therefore the Investment Canada Act is not a solution for the immediate Nortel problem.


Patents

There are two classes of patents at issue:

The first comprises “CDMA patents”. These are patents that deal with older wireless technology that will eventually be replaced by newer more efficient Long Term Evolution (LTE) wireless technology. Nortel is selling CDMA patents as part of the sale of Nortel’s CDMA business to Ericsson. It is a private sale of assets from one party to another.

The second comprises “Long Term Evolution (LTE) patents”. These are patents that deal with new technology that promises to transform the wireless industry. The LTE technology is developed according to an open standard developed by a standard setting organization. There are several corporations that own patents relating to LTE technology, Nortel is one of these.
Nortel retains ownership of its LTE patents.  It can grant licenses to other corporations/parties to use its LTE patents.


Questions

Did Nortel comply with the tax insurance rules with respect to Long Term Disability?

Only the Canada Revenue Agency (CRA) is in a position to determine if Nortel has complied with its tax obligations and CRA is required to keep this information strictly confidential.

Can tax credits be applied to the Long Term Disability Fund? Can tax credits be applied to the Pension fund?

Assuming the above reference to tax credits pertains to the pool of unused federal Scientific Research and Experimental Development (SR&ED) tax credits that Nortel has accumulated over the years, the following are comments how they can be used.

For large public companies like Nortel, the federal tax rules only allow SR&ED tax credits to be applied to reduce federal income tax payable. Although the tax rules allow unused SR&ED tax credits earned in a particular year to be applied to the previous three taxation years or up to 20 future taxation years to reduce income taxes that would otherwise be payable in those years, there is no mechanism in the tax system to allow unused SR&ED tax credits to be applied to pay other liabilities including pension liabilities or liabilities related to long term disability plans. 

Is there anything that can be done to reinstate the severance payments?

In a CCAA proceeding, the payment of, and timing for payment of, claims including for severance, is determined by the court and/or a vote of the creditors on a plan of arrangement under the CCAA. There may be leeway within the court process to make earlier payments of some claims- through for example, a hardship fund- but those matters are dealt with by the court and a party must bring the matter to the courts attention.

In general severance payments are unsecured claims against the assets of Nortel. Anyone with a severance claim would stand as an unsecured creditor along with all other unsecured creditors, and would receive a pro rata portion of the distribution.

If Nortel were to file for bankruptcy, severance would be determined by the distribution scheme under the BIA. Workers would also be potentially eligible for a payment of up to approximately $3250 for unpaid wages and severance through the Wage Earner Protection Program. 

Why can’t companies in good times substantially over contribute to pension funds to offset bad times?

The Income Tax Act contains an “excess surplus” rule which precludes additional contributions to a plan once the plan’s surplus hits a certain threshold. In those cases, the sponsor is not entitled to a deduction for over contributions. Therefore, there is no benefit to a company over-funding its pension plan.

The existing Nortel pension fund is currently invested and is slowly gaining value as the stock market recovers. Once bankruptcy is declared, it is reported that the fund will be wrapped up and turned into annuities. Is there any way to delay the closing of the pension fund or to have it carry on as a separately managed fund?

The pension funds are regulated by the Province of Ontario.  The Ontario pension legislation provides that the Superintendent of Financial Services Ontario may wind-up a pension plan upon the sponsor's bankruptcy. 

Therefore, ultimately, the decision is made by the Ontario Superintendent. The federal government has no authority in this regard.  Moreover, the BIA does not affect when, if or how a pension plan is wound up.‪ ‪In a CCAA restructuring, the courts will review the asset sales.  The courts may accept or reject a condition regarding use of proceeds.    


Comment

The demise of Nortel is a very unfortunate event for Canada and the Ottawa area. It was the lynch pin of the high tech industry in this area and is the source of many current high tech companies. It is difficult to accept the fact, that over the years, Senior Management could not stabilize this great icon and employer of thousands of employees in our area. The result is that the company is being broken up and sold by division most likely to foreign buyers. This has left the former employees in a very difficult situation.


Additional Information

Prior to Nortel entering CCAA, RIM was asked to consider bidding for Nortel.

Nortel’s former CEO had reported that in discussions with RIM, the equipment businesses were never discussed.  RIM only indicated an interest in the LTE patents.

Nortel’s former CEO said that Nortel’s underlying problem is that it lacked a big enough scale to compete in any of its business areas.

Nortel approached the federal government seeking financial assistance without having a credible plan for the future.

The bonding facility provided by Export Development Canada (EDC) was reduced from $750 million to $30 million because Nortel management believed that the latter amount was sufficient for their needs.

The Board of Directors of Nortel decided to place the company under CCAA protection.

The Export Development Bank can consider assisting other bidders of Nortel assets on a case by case basis.

In the normal course of events, federal and provincial governments try to maximize the potential buyer’s investment in Canada, by presenting them with tax incentives and programs.

The only way a creditor can take assets from the Canadian entity is if they had a right to them prior to the filing for CCAA.  

Intellectual property can be purchased by buyers.  Even after its business units are sold, Nortel will still own about 3000 patents.

The rules governing LTD are set by the provinces.

The government will review the BIA and the CCAA in the future.

Nortel will sell its remaining assets under the supervision of Ernst & Young. Nortel has no intention of replacing the departed CEO.

Koskie Minsky LLP was appointed by the court, at Nortel expense, as the representative legal counsel for former employees and pensioners.