Accounting & Tax

Nortel Agrees to $2.5B Settlement

Under the proposal, the company would pay $575 million in cash and issue more than 628 million common shares.
Stephen TaubFebruary 8, 2006

Nortel Networks Inc. has agreed to pay nearly $2.5 billion in cash and stock to settle lawsuits stemming from its accounting scandal.

Under the terms of the proposed settlement, Nortel would make a cash payment of $575 million and issue 628,667,750 common shares, representing 14.5 percent of its current equity.

The company would also contribute one-half of any recovery from litigation by Nortel against former president and chief executive officer Frank Dunn, former chief financial officer Douglas Beatty; and former controller Michael Gollogly, who were fired for cause in April 2004. In addition, the company stated that it would commit to benchmarking its corporate governance practices to those of companies ranked in the top quartile by Institutional Shareholder Services.

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“The company and the lead plaintiffs are continuing discussions towards a definitive settlement agreement,” Nortel stated in a press release.

As a result of the agreement in principle, the company expects to establish a litigation reserve and record a charge of $2.473 billion to its full-year 2005 financial results.

The telecom equipment maker stressed that in addition to court and regulatory approvals, the proposed settlement would be conditioned on the company’s settling all outstanding shareholder litigation; on Nortel and the lead plaintiffs reaching agreement on corporate governance matters; and on the contribution of available insurance.

Nortel also stressed that the proposed settlement would contain no admission of wrongdoing by the company or any other defendants. The company is still cooperating with U.S. and Canadian securities regulators and law-enforcement authorities, and the proposed settlement does not relate to their investigations.

The proposed settlement also does not encompass a related ERISA action and a possible shareholder derivative action against certain current and former officers and directors.

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