Saving face at Nortel

Shareholders sue for cash and better governance.

The long-suffering shareholders of Nortel Networks Corp. (TSX: NT) are one step closer to getting a portion of the billions they lost in the wake of the company's now-infamous accounting debacle. Earlier this month, the Brampton-based telecom announced a proposed US$2.5-billion settlement with plaintiffs in two of the largest class-action lawsuits against the company.

In addition to paying out US$575 million in cash and issuing more than 628 million new shares, Nortel, under CEO Mike Zafirovski's new regime, has committed to implementing a number of governance changes. “Governance is an important part of the settlement,” says Murray Gold, a lawyer with Toronto-based Koskie Minsky, representing the Ontario Public Service Employees Union Pension Trust–one of the lead plaintiffs. “The bulk of the settlement is shares, so we want to ensure that something like this doesn't happen again.”

Neither Gold, Nortel, nor the Ontario Teachers' Pension Plan–another lead plaintiff–would comment on those reforms. And what changes the pension funds might demand are not immediately clear. Many of the executives and directors who oversaw the company's decline are gone. And since its stock trades in the U.S., Nortel already complies with Sarbanes-Oxley.

At the company's annual general meeting last year, angry Nortel shareholders certainly had some suggestions for better governance–11, to be precise. Those proposals included everything from demands that shareholders approve the compensation of top executives to a commitment the company would only cover economy-class airfare for executive travel. All of the proposals were defeated.

However, despite Teachers' opposition, a management proposal to increase the shares in Nortel's stock option plan did pass at the AGM. (Teachers' routinely votes against option plans with potential dilution above 10%.) Yet ironically, this new settlement–approved by Teachers'–will increase dilution of Nortel's stock by an additional 14.5%, making it that much more difficult for shareholders to benefit from a potential recovery in the stock.