Nortel Bankruptcy and Transfer Pricing

Michael Lewis reports on what is emerging to be a complex issue over who gets the value from the sale of certain assets from the now bankrupt Nortel:

Claims on proceeds from a lucrative patent auction dominated opening arguments Monday in the bankruptcy trial of former tech giant Nortel Networks. The proceeding follows mediation and other failed attempts to divvy up remaining assets of the Ontario-based telecom that have rang up more than $1 billion (U.S.) in professional fees so far ... Nortel, once North America’s largest telecom equipment maker, filed for protection from creditors in the U.S. and Europe after an acquisition spree built debt and in the wake of an accounting scandal and financial restatements. At its peak Nortel posted $30 billion in annual revenue, a stock market value of $250 billion (U.S.) and had more than 90,000 employees. But the fallen tech giant left tens of thousands of pensioners fighting for a share of its assets, with retirees pitted against hedge funds, governments, former suppliers and other creditors in Europe, the U.S., Africa and the Middle East. Before dealing with claims from pensioners and other creditors, however, the courts must decide on how to divide assets among debtors, referring to the company’s former head office in Canada and its subsidiaries around the world. Canadian creditors argued in depositions filed with the courts that the Canadian Nortel operation legally owned the patents and is therefore entitled to the bulk of the sale proceeds. U.S. bondholders say U.S. businesses held licenses for the patents and are thus entitled to a fair share, while lawyers for Nortel’s European units argued in court that the patents covering technologies for mobile phones and tablet PCs were largely developed in Europe and sale revenue should accrue where it was produced.

Nortel was a Canadian based multinational with operations in the U.S. and Europe. It had complex and confusing transfer pricing arrangements which could be questioned in terms of whether they were arm’s length. Professional fees here mean the cost of lawyers and expert witnesses who are debating how much of the value of $7.3 billion in assets should accrue to Canada versus the U.S. versus Europe. Alas the professionals get rich “while the debtors fight like jackals over the carcass.”