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The bankruptcy of Nortel Networks in 2009 after the financial crisis has been sending out shockwaves ever since. The demise of the Canadian telecoms equipment maker — which had 130 subsidiaries in 100 countries — sparked years of court battles criss-crossing the world.
An unprecedented three-way legal tussle emerged between Nortel businesses in the US, Canada and Europe over who would receive $7.5bn of sale proceeds from the failed group.
Last year, Nortel became the first case in which global assets were distributed cross-border in accordance with creditors’ claims. The complex litigation involved underscores the challenges of untangling a cross-border business that undergoes a catastrophic failure.
Nortel shaped the working lives of one group of lawyers at Herbert Smith Freehills for the best part of eight years. The law firm represents Ernst & Young, the joint administrators of Nortel Networks UK and the 18 other group companies in the Europe, Middle East and Africa (Emea) region.
The litigation has taken so long that some of the lawyers have retired and others have moved to new firms, including Kevin Lloyd, who joined Debevoise & Plimpton in 2013 as a partner.
The litigation is “groundbreaking”, says John Whiteoak, a partner at Herbert Smith who has worked on Nortel since 2008. “Every sort of insolvency conference you go to now has a whole section on Nortel and how important it is.”
The lawyers faced some unique challenges, not least numerous lawsuits and appeals to decide key points of insolvency and pensions law in several legal jurisdictions, from Canada and the US to France, the UK, Italy and Poland.
A landmark cross-border trial was held simultaneously in two courts in Canada and the US between May and September 2014 where Herbert Smith was also lead counsel to the Emea joint administrators.
The trials in Delaware and Ontario were linked by a private live stream to hear a dispute about how the money should be carved up. Some 10 parties were represented, including different parts of the Nortel estate such as the Emea companies, as well as bondholders and pensioners.
Everyone in court was acutely aware of the importance of the case to former employees. Nortel pensioners gathered outside the Ontario court, some wearing T-shirts that read: Bondholders profit! Nortel pensioners suffer!” Thousands of pensioners were anxious to see how the money would be shared out.
Mr Lloyd says one reason early attempts at mediation failed was because it was unclear how much Nortel’s intellectual property portfolio would raise. “Some people put it at $1bn when it turned out to be nearer $5bn,” he says. “No one knew how much would be raised, so how could they settle?”
Another difficulty was achieving agreement among such large numbers of creditors and bondholders. Mr Lloyd recalls a mediation meeting in wintry Toronto when the temperature outside was -13C, yet 200 people showed up, including creditors and bondholders.
The preparations for trial were wide-ranging. Herbert Smith undertook a document review involving 2.8m documents disclosed by the parties and co-ordinated with 20 sets of counsel worldwide. Herbert Smith offices working on Nortel included Belfast, Dubai, Hong Kong, Madrid and Shanghai.
In one year Mr Lloyd, who was based in London, went to New York 15 times and Canada six times: “For two years I basically never stopped travelling,” he says.
Ultimately, a global settlement was reached in October 2016 that saw the Emea companies receive $1.2bn. This was far more than the $280m the Canadian estate had originally said they should receive.
Mr Lloyd points to three cautionary aspects of the Nortel case:
- “If you have too many people it overcomplicates [a case] and makes it more difficult to resolve through a court process or negotiated settlement.”
- “There has to be a lesson about the clarity of the underlying inter-group documents, which needed to have detail about what would happen in the event of an insolvency.”
- “The process could have been streamlined and simplified, and done to a tight timeframe.”
Linklaters and National Grid
Not all transactions are as long and complicated as the Nortel settlement. But as business becomes more global, most deals involve some element of cross-border co-operation, whether with regulators or international investors. Technology is often key to managing the complexity of merger and acquisition deals. When National Grid, the UK electricity and gas transmission utility, sold a majority stake in its gas distribution network in December 2016, it was one of the biggest British infrastructure deals there had been.
Linklaters, which acted as lead adviser for National Grid, had to deal with many interested bidders across the world. The majority stake ended up with a consortium backed by Macquarie, the Australian investment bank, and China Investment Corporation, China’s sovereign wealth fund, for an enterprise value of £13.8bn including debt.
For Linklaters, the deal involved layers of financial complexity, with more than 150 lawyers working on the deal. The gas distribution had to be identified, categorised and transferred into a corporate entity to make the distribution business one that could be of interest to a third party. Questions included the amount of debt the hived-off company could hold under UK rules.
The deal was also closely watched in political circles. It was the first big foreign investment in UK energy assets since the government had announced a review of the rules on the sale of “critical infrastructure” after Theresa May, the prime minister, signalled she would be more interventionist than her predecessor, David Cameron.
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