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34 March 15, 2010
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AbitibiBowater Equity Committee Request March 15, 2010
1 Table of Contents
2
3 Table of Contents .......................................................................................................................................... 2
4 1. Introduction .......................................................................................................................................... 3
5 2. Legal Basis for Equity Committee in Bankruptcy Cases ........................................................................ 3
6 2.1. Section 1102(a)(2) of the Bankruptcy Code .................................................................................. 3
7 2.2. The Standard for Appointment of An Equity Committee ............................................................. 4
8 2.3. Equity Committees in International Cases .................................................................................... 5
9 2.4. Recent Precedents for Equity Committees Relevant to AbitibiBowater Case .............................. 6
10 2.4.1. WAMUQ ................................................................................................................................ 6
11 2.4.2. CEMJQ ................................................................................................................................... 7
12 2.4.3. Consultative Committee of Unrepresented Affected Stakeholders ..................................... 8
13 3. Parties Involved ..................................................................................................................................... 9
14 3.1. Description of the Debtors ............................................................................................................ 9
15 3.2. Description of the Common Shareholders Requesting EC .......................................................... 10
16 3.3. Names and Addresses of Common Shareholders Requesting EC ............................................... 10
17 4. Complexity of the case ........................................................................................................................ 12
18 4.1. Company Description .................................................................................................................. 12
19 4.2. Trading History Complexities ...................................................................................................... 12
20 4.3. Bond Price Posting Irregularities ................................................................................................. 13
21 4.4. Pension Issues ............................................................................................................................. 13
22 4.5. NAFTA Arbitration ....................................................................................................................... 14
23 4.6. Communications, Energy and Paperworkers Union of Canada (CEP) Negotiations ................... 15
24 4.7. Summary of Complexities ........................................................................................................... 16
25 5. Solvency of AbitibiBowater ................................................................................................................. 16
26 5.1. Causes for Bankruptcy versus Insolvency ................................................................................... 16
27 5.2. Current Equity Estimates ............................................................................................................ 18
28 6. Expectations of Equity After Bankruptcy ............................................................................................ 18
29 6.1. Current Market Conditions for ABWTQ ...................................................................................... 19
30 6.2. Statements from Management Regarding Shareholder Equity After Bankruptcy Emergence .. 19
31 7. Whether the interests of shareholders are already represented ....................................................... 21
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AbitibiBowater Equity Committee Request March 15, 2010
1 1. Introduction
2
3 It is intended that the following report details the argument for an Equity Committee in the bankruptcy
4 case for AbitibiBowater. The informal group of common shareholders that have banded together to
5 request an equity committee have drafted this report to demonstrate the following points:
6
7 There is significant legal precedence for equity committees in bankruptcy proceedings
8 There is precedence in this specific case for the implementation of an ad hoc committee
9 The informal group of common shareholders represent a significant block of shares
10 This particular bankruptcy case is very complex due to its international nature, history of credit
11 default swaps, trading irregularities, involvement of unions, and size of the company
12 AbitibiBowater is not hopelessly insolvent
13 There is clear evidence of positive equity now and after emergence
14 The interests of the common shareholders are not currently being addressed, and
15 There is value to the common shareholders, AbitibiBowater and other creditors to allow for the
16 enactment of an Equity Committee.
17
18 The informal equity committee that drafted this report represents more than 19% of the outstanding
19 shares which is the second largest block of outstanding shares, second only to the largest shareholder,
20 Fairfax. Yet, to date, no attempt has been made to formally or informally involve the common
21 shareholders in the decisions and actions being taken by AbitibiBowater as it makes its plans for
22 emergence. This report will clearly argue the merits of an equity committee in this case.
23
24 2. Legal Basis for Equity Committee in Bankruptcy Cases
25 2.1.Section 1102(a)(2) of the Bankruptcy Code
26
27 An official committee charged with safeguarding the interests of the class it represents is one of the
28 critical protections for creditors and shareholders provided for in the Bankruptcy Code. As prescribed in
29 section 1102(a)(1) of the Code, the Court may order the appointment of such a committee: as soon as
30 practicable after the order for relief under chapter 11 under this title, the United States Trustee shall
31 appoint a committee of creditors holding unsecured claims and may appoint additional committees of
32 creditors or of equity security holders as the United States Trustee deems appropriate.
33
34 Section 1102(a)(2) goes on to state: On request of a party in interest, the court may order the
35 appointment of additional committees of creditors or of equity security holders if necessary to assure
36 adequate representation of creditors or of equity security holders. The United States trustee shall
37 appoint any such committee [11 U.S.C. §1102(a)(2)].
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AbitibiBowater Equity Committee Request March 15, 2010
1
2 Congress has previously recognized the vulnerability of public investors in Chapter 11 bankruptcy cases.
3 In enacting the Bankruptcy Code of 1978, Congress viewed reorganization proceedings as "literally the
4 last clear chance to conserve for [shareholders] values that corporate financial stress or insolvency has
5 placed in jeopardy" [S. Rep. No. 989, 95th Cong., 2d Sess. 10 (1978)]. The Senate found it “essential for
6 [public investors] to have legislative assurance that their interests will be protected”, and concluded that
7 “[s]uch assurance should not be left to a plan negotiated by a debtor in distress and senior or
8 institutional creditors who will have their own best interest to look after.”
9
10 The legislative history indicates that Congress intended for official committees to “be relied upon in
11 cases in which the debtor proposes to affect several classes of debt or equity holders under the plan and
12 in which they need representation" [H.R. Rep. No. 595, 95th Cong., 1st Sess. 401 (1977)]. In particular,
13 Congress explained that official committees are to serve as "the primary negotiating bodies for the
14 formulation of the plan of reorganization.” It is apparent from both the legislative history and Section
15 1103 of the Bankruptcy Code, however, that the function of committees is not limited to negotiating
16 plans. Official committees, including equity committees, also represent creditors or equity security
17 holders in all other aspects of the case, "provide supervision of the debtor,” and “execute an oversight
18 function in the pursuit to protect constituents' interests" [See Penn‐Dixie Indus., Inc., 9 B.R. 941, 944
19 (Bankr. S.D.N.Y. 1981)]. Thus, Congress recognized that in certain Chapter 11 cases, appointment of an
20 official equity committee with wide‐ranging powers and duties will be necessary in order for
21 shareholders’ interests to be adequately represented.
22
23 Section 1103 of the Bankruptcy Code describes the powers and duties of an official committee
24 appointed under Section 1102. In addition to participating in the formulation of a plan, these powers
25 and duties include: (i) investigating the acts, conduct, assets, liabilities, and financial condition of the
26 debtor; and, (ii) performing such other services that are in the interest of those represented [11 U.S.C. §
27 1103].
28 2.2.The Standard for Appointment of An Equity Committee
29
30 Courts have articulated several common factors to consider in determining whether an additional
31 committee is necessary to assure adequate representation of investors under Section 1102. Such factors
32 include: (1) the widespread holdings of the securities of the debtor; (2) the size of the debtor; (3) the
33 size and complexity of the debtor's business; (4) the likelihood of a heavily negotiated plan; (5) whether
34 the cost of the committee to the bankruptcy estate significantly outweighs the concern for adequate
35 representation; and, (6) whether the interests of security holders are already adequately represented.
36 [Johns‐ Manville Corp., 68 B.R. 155, 159 (S.D.N.Y. 1986); Kalvar Microfilm, Inc., 195 B.R. 599, 600 (Bankr.
37 D. Del.1996); Wang Laboratories, Inc., 149 B.R. 1, 2 (Bankr. D. Mass. 1992); Beker Indus. Corp., 55 B.R.
38 945, 949 (Bankr. S.D.N.Y. 1985)].
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AbitibiBowater Equity Committee Request March 15, 2010
1
2 Bob Rajan, Director, PricewaterhouseCoopers Corporate Advisory and Restructuring LLC, New York, US
3 and Brett Harrison, Partner, McMillan Binch Mendelsohn LLP, Toronto, Canada, argue that there are five
4 concerns which the courts must address to decide upon an equity committee (2006). These five
5 concerns are:
6 Number of shareholders;
7 Complexity of the case;
8 Solvency of Debtor;
9 Cost to Estate outweighs the adequate representation interest of shareholders; and
10 Whether the interests of shareholders are already represented.
11
12 Courts are in agreement that the weight to be accorded each factor depends on the circumstances of
13 the case and accordingly, the determination of the need for an equity committee is made on a case‐by‐
14 case basis [Kalvar Microfilm, 195 B.R. at 600‐01; Beker, 55 B.R. at 948; Wang, 149 B.R. at 2]. The vast
15 majority of courts also agree that regardless of whether these factors are met, an equity committee
16 would serve no purpose in a case where the debtor “appears to be hopelessly insolvent” [Emons Indus.,
17 Inc., 50 B.R. 692, 694 (Bankr. S.D.N.Y. 1985); Wang, 149 B.R. at 3; Beker, 55 B.R. at 950]. If the debtor
18 does not appear to be hopelessly insolvent, courts will apply the above described factors in deciding
19 whether to appoint a committee [Wang, 149 B.R. at 3; Beker, 55 B.R. at 950‐51]. However, whether or
20 not the debtor is solvent is not a controlling or even determinative factor {Mansfield Ferrous Castings,
21 Inc., 96 B.R. 779, 781 (Bankr. N.D. Ohio 1988)]. This is largely because, as one court rightly pointed out,
22 equity security holders “might possibly have a different view on the issue of insolvency than [creditors]”
23 [Emons, 50 B.R. at 694]. Indeed, one court went so far as to find that the issue of insolvency is in fact
24 “irrelevant” since the Bankruptcy Code specifically authorizes the formation of equity committees and
25 equity’s interests cannot be determined until a plan has been formulated [White Motor Credit Corp., 27
26 B.R. 554, 558 (N.D. Ohio 1982)].
27 2.3.Equity Committees in International Cases
28
29 In the paper “The New Wave of Equity Committees in Bankruptcy: What Are They and Are They Here to
30 Stay?”, Bob Rajan, Director, PricewaterhouseCoopers Corporate Advisory and Restructuring LLC, New
31 York, US and Brett Harrison, Partner, McMillan Binch Mendelsohn LLP, Toronto, Canada, state:
32
33 “Because of the extensive cross‐border interconnectivity of businesses between Canada and the US, the
34 concept of ‘shareholder opinion’ during a restructuring may start to be given a voice at the table during
35 large Canadian restructurings. Although the statute under which most large Canadian restructurings
36 occur, the Companies Creditors’ Arrangement Act does not provide for the recognition of committees in
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AbitibiBowater Equity Committee Request March 15, 2010
1 the way that section 1102 of the [US] Code does, the Canadian courts have historically followed US
2 jurisprudence on the use of committees in restructurings”
3 2.4. Recent Precedents for Equity Committees Relevant to AbitibiBowater
4 Case
5
6 In determining the efficacy of an equity committee (EC) in the AbitbiBowater, Inc., case, it is important
7 to review previous bankruptcy cases in which an EC was formed. It is also important to review some
8 recent actions by AbitibiBowater, Inc., in creating a structure for currently non‐represented stakeholders
9 to organize an ad hoc committee.
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AbitibiBowater Equity Committee Request March 15, 2010
1 2.4.2. CEMJQ
2
3 Chemtura Corporation (NYSE: CEMJQ) on March 18, 2009 announced that it and 26 of its U.S. affiliates
4 (together, the "Company") filed voluntary petitions for relief under Chapter 11 of the United States
5 Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York.
6 Chemtura's non‐U.S. subsidiaries were not included in the filing. Chemtura's U.S. and worldwide
7 operations are continuing without interruption during the restructuring process.
8
9 Craig A. Rogerson, Chemtura's Chairman, President and Chief Executive Officer, said, "Like other
10 companies in our industry (specialty chemicals) and around the world, Chemtura's order volumes have
11 declined markedly in recent months due to the impact of the global economic recession on our
12 customers and the industries they serve. This has led to a significant decrease in our liquidity and cash
13 flow. Despite our efforts to increase liquidity, including through the potential sale of a business, our
14 reduced liquidity position, combined with the anticipated expiration of our bank waiver, led us to
15 determine that a court‐supervised restructuring was the best course of action. Through this process, we
16 will continue to focus on operating our business while continuing our efforts to strengthen our balance
17 sheet and gain financial flexibility in order to position Chemtura as a strong, viable, and profitable
18 competitor in the specialty chemicals marketplace."
19
20 On Dec 29, 2009 an Equity Committee (EC) was approved by the trustee after shareholders banded
21 together and petitioned for an appointment of an EC. The shareholders were displeased with
22 inconsistencies of the company’s counsel in reportings to the court. A letter writing campaign ensued
23 and shareholders were granted their request for an EC. Chemtura like many companies was caught in
24 the credit crunch and the downward spin of the global economy in 2007‐2008, and is currently working
25 to emerge from bankruptcy by the middle of this year.
26
27 The Chemtura case is similar to ABWTQ because Chemtura also got caught with low liquidity, but still
28 retained assets and other characteristics that demonstrated solvency. Also, Chemtura is a multinational
29 company with many different aspects not included in the bankruptcy proceedings, much like
30 AbitibiBowater.
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AbitibiBowater Equity Committee Request March 15, 2010
1 2.4.3. Consultative Committee of Unrepresented Affected Stakeholders
2
3 In establishing the legal basis for an EC in this case, it is important to review recent court rulings in this
4 bankruptcy case that have an impact on this case. In the 32nd report of the Monitor [Ernst & Young,
5 Inc.] dated, February 19, 2010, it was reported that AbitibiBowater, Inc., has “filed a motion seeking the
6 issuance of the Consultative Committees Order which would, among other things: (i) authorize the
7 formation of Consultative Committees from within those groups of the Petitioner’s [AbitibiBowater’s]
8 nonunionized employees, former non‐unionized employees and pensioners who were non‐unionized
9 while employed by the Petitioner and who remain, as at the date hereof, unrepresented in the CCAA
10 Proceedings (the "Unrepresented Affected Stakeholders"); (ii) authorize the Petitioners to engage in
11 consultation and negotiations with these Consultative Committees in order to assess the impact of
12 proposed restructuring efforts on the various stakeholder groups; and (iii) authorize the Consultative
13 Committees to make representations before this Honorable Court, should the need arise.”
14
15 “The Monitor agrees with the Petitioners' view that, while certain groups of stakeholders are well
16 organized and have been represented throughout the course of the CCAA Proceedings, other
17 stakeholders, such as the Unrepresented Affected Stakeholders, have not been formally represented
18 in the CCAA Proceedings. As the Petitioners formulate their plan of compromise and arrangement and
19 prepare to emerge from the CCAA Proceedings, the Monitor is of the view that it would assist both the
20 Petitioners and the Unrepresented Affected Stakeholders if the Unrepresented Affected Stakeholders
21 are able to review proposals, provide feedback and otherwise assist in the formulation of proposals
22 where the result may impact the Unrepresented Affected Stakeholders.” [emphasis added]
23
24 “The Monitor notes that while the Petitioners, to date, have engaged in discussions with informal
25 committees of the Unrepresented Affected Stakeholders, certain Unrepresented Affected Stakeholders
26 have expressed concern that they may attract personal liability by continuing in an informal
27 consultative role. Accordingly, the proposed Order provides that the Consultative Committees would be
28 authorized to have standing permitting them to hire legal counsel and make representations before this
29 Honorable Court without incurring personal liability, provided that their submissions would not bind any
30 Unrepresented Affected Stakeholders who have not specifically agreed to be bound in writing.”
31 [emphasis added]
32
33 “The Monitor also notes that the Petitioners are also seeking to create a framework which will permit
34 present or future informal or ad hoc committees of other affected stakeholders to form and engage in
35 non‐binding discussions with the Petitioners.” [emphasis added]
36
37 It is clear that the Monitor and the Petitioner both agree that there are other stakeholders that have not
38 been well represented in the current proceedings. Also, they both agree that an informal, ad hoc
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AbitibiBowater Equity Committee Request March 15, 2010
1 committee representing some of these currently unrepresented stakeholders may well incur some legal
2 liabilities. Finally, AbitibiBowater has already sought to create the necessary structure for the formation
3 of other ad hoc committees beyond that which represents the nonunionized current and former
4 employees and pensioners.
5
6
7 3. Parties Involved
8 3.1.Description of the Debtors
9
10 The Debtors in this case, along with the last four digits of each Debtor's federal or Canadian tax
11 identification number, are: AbitibiBowater Inc. (6415), AbitibiBowater US Holding 1 Corp. (6050),
12 AbitibiBowater US Holding LLC (N/A), AbitibiBowater Canada Inc. (3225), Abitibi‐Consolidated Alabama
13 Corporation (4396), Abitibi‐Consolidated Corporation (9050), Abitibi‐Consolidated Finance LP (4528),
14 Abitibi Consolidated Sales Corporation (7144), Alabama River Newsprint Company (7247), Augusta
15 Woodlands, LLC (0999), Bowater Alabama LLC (7106), Bowater America Inc. (8645), Bowater Canada
16 Finance Corporation (8810), Bowater Canadian Forest Products Inc. (2010), Bowater Canadian Holdings
17 Incorporated (6828), Bowater Canadian Limited (7373), Bowater Finance Company Inc. (1715), Bowater
18 Finance II LLC (7886), Bowater Incorporated (1803), Bowater LaHave Corporation (5722), Bowater
19 Maritimes Inc. (5684), Bowater Newsprint South LLC (1947), Bowater Newsprint South Operations LLC
20 (0186), Bowater Nuway Inc. (8073), Bowater Nuway Mid‐States Inc. (8290), Bowater South American
21 Holdings Incorporated (N/A), Bowater Ventures Inc. (8343), Catawba Property Holdings, LLC (N/ A),
22 Coosa Pines Golf Club Holdings LLC (8702), Donohue Corp. (9051), Lake Superior Forest Products Inc.
23 (9305) and Tenex Data Inc. (5913). The Debtors' corporate headquarters are located at, and the mailing
24 address for each Debtor is: 1155 Metcalfe Street, Suite 800, Montreal, Quebec H3B 5H2, Canada.
Page 9 of 22
AbitibiBowater Equity Committee Request March 15, 2010
1 3.2.Description of the Common Shareholders Requesting EC
2
3 The common shareholders of the ABWTQ securities have already been working together in an informal,
4 non‐represented group using communications through the AbitibiBowater blog on Investorshub.com as
5 well as a blog developed and maintained by two of the common shareholders (CS). The common
6 shareholders are self‐described as distressed and disenfranchised due to the lack of communications
7 from ABWTQ management throughout the bankruptcy process and the lack of specific representation
8 during that process. Through the use of the Investorshub.com board and the CS blog, an informal
9 accounting of the shares held by those CS interested in participating in an EC total a little over 10 million
10 shares or 19.4% of the outstanding shares of ABWTQ. This makes the informal EC the second
11 largest block of outstanding shares, second only to Fairfax Financial Holdings LTD who has 40.9% as of
12 March 23, 2009. Recent data from EDGAR (http://www.fatpitch.biz/cgi‐
13 bin/f.cgi/psp/extn/lmt_entry/cik.1393066.974.html) demonstrates that the informal EC has more than
14 each of the Directors and the CEO of the company. In fact, the informal EC has twelve (12) different
15 members who each have more of the outstanding shares than the CEO, Dave Patterson. The seventy‐
16 three (73) different members of the informal EC reside in seven (7) different countries with the majority
17 in the USA and Canada. Many of the informal EC had positions in the Abitibi (ABY) or Bowater (BOW)
18 securities prior to merger, some added or became new holders after the merger into AbitibiBowater
19 (ABH) and several more have added shares or developed new positions after bankruptcy. Those
20 members who added or developed new positions after bankruptcy are especially deserving of goodwill
21 because each of them is long in this stock and consequently interested in the long‐term profitability and
22 success of AbitibiBowater. Though some of the informal EC members may actually be past or present
23 employees, many are not.
24 3.3.Names and Addresses of Common Shareholders Requesting EC
25
26 Below is a table of the names and addresses of the people who are requesting this equity committee.
27
Name Address Postal Code (ZIP) Country
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AbitibiBowater Equity Committee Request March 15, 2010
Name Address Postal Code (ZIP) Country
1
2
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AbitibiBowater Equity Committee Request March 15, 2010
1 4. Complexity of the case
2
3 The bankruptcy case for AbitibiBowater is extremely complicated in comparison to most other
4 bankruptcy cases. First, AbitibiBowater is multinational and there are concurrent filings under U.S.
5 Section 1102 as well as Companies Creditors’ Arrangement Act (CCAA) in Canada. Second, there has
6 been a history of severe shorting of this stock combined with large failures‐to‐deliver commonly
7 referred to as naked short selling prior to merger, through merger and into bankruptcy. Third, the bond
8 prices have been posted irregularly on the FINRA website. Fourth, there has been a pension issue to
9 resolve which impacts the local union (Communications, Energy and Paperworkers Union of Canada
10 (CEP) and the Quebec government. Fifth, AbitibiBowater has recently entered into arbitration against
11 the Newfoundland government under NAFTA. Sixth, the company is undergoing significant negotiations
12 with the union. Seventh, though AbitibiBowater is a large company, not all of the company is included
13 in the filings.
14 4.1. Company Description
15
16 AbitibiBowater, Inc., is a multinational company headquartered in Montreal, Canada, and incorporated
17 in Delaware. AbitibiBowater has approximately 16,000 employees worldwide and produces a wide
18 range of newsprint, commercial printing papers, market pulp and wood products. It is the eighth largest
19 publicly traded pulp and paper manufacturer in the world. AbitibiBowater owns or operates 23 pulp and
20 paper facilities and 30 wood products facilities located in the United States, Canada, the United Kingdom
21 and South Korea. Marketing its products in more than 90 countries, AbitibiBowater is also among the
22 world's largest recyclers of old newspapers and magazines, and has third‐party certified 100% of its
23 managed woodlands to sustainable forest management standards.
24 4.2.Trading History Complexities
25
26 On their own initiative and without legal representation or accounting insights, two of the members of
27 the informal EC undertook an evaluation of the trading activity of the AbitibiBowater securities. This
28 analysis was driven by a sentiment expressed by several of the members of the Investorshub.com
29 discussion board that the stock had been trading unusually with a large amount of failures‐to‐deliver.
30 The report of that analysis is available at http://www.scribd.com/doc/27652733/Stats‐Report‐Feb‐26‐
31 2010.
32
33 The failures‐to‐deliver data prior to bankruptcy show an interesting pattern of high fails most likely
34 being due to naked shorting. The shorting was at a level meeting threshold for reporting nearly 90% to
35 100% of the trading days for 11 months prior to bankruptcy after the Bowater merger which appears in
36 part responsible for the bankruptcy. After bankruptcy, the price seemed to be driven to the range
37 between $.10 to $.20 USD shortly after bankruptcy and apparently was purposely kept there by
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AbitibiBowater Equity Committee Request March 15, 2010
1 manipulating the trades resulting in a positive or negative difference in price along with those that
2 resulted in no change. The failures in the first few months of bankruptcy also put pressure on the price
3 and decreased the interest in trading the stock. When interest in acquiring the stock increased, so did
4 the volume of shorts, thus keeping the price fairly flat and decreasing upward momentum of the stock.
5 An important analysis was to examine the total share volume traded per month by each market maker
6 as available on OTCBB.com. This data clearly indicates that Natixis Bleichroeder LLC (ABLE) and Knight
7 Equity Markets, L.P. (NITE) are the largest traders of this stock since bankruptcy.
8 4.3.Bond Price Posting Irregularities
9
10 In addition to the securities trading history, the two informal EC members were made aware of some
11 interesting irregularities in the bond price posting information on the FINRA website. Namely, during
12 the first hour of the normal system operating hours, the bond prices for ABWTQ bonds (BOW.GB ,
13 ABY.GB, BOW.GK, ABY.GH, ABY.GN, ABY.GO, ABY.GO, BOW.GA, BOW.GD, BOW.GJ, ABY.GK, ABY.GP,
14 ABY.GD, BOW.GC, ABY.GE, ABY.GI ABY.GF) were unavailable and then returned with prices at or near
15 par. This did not last for more than a few minutes, nor did it occur every day. Thus far, FINRA has been
16 unable to offer explanations, though they did state this was abnormal and unknown to them. Such data
17 posting irregularities would make it difficult for investors including common shareholders making a good
18 evaluation of the equity in the company.
19 4.4.Pension Issues
20
21 During the restructuring process, AbitibiBowater has been negotiating with both unionized and non‐
22 represented employees regarding the pension promises. Even prior to bankruptcy, the pension was
23 underfunded and emerging from bankruptcy will require the company to develop and file a plan for
24 properly funding the pension plans. AbitibiBowater has approached the Canadian government for
25 assistance in extending the time to repay the pension shortfall. In negotiations with union
26 Communications, Energy and Paperworkers Union of Canada (CEP)) the pension issue shortfall has
27 proven to be a complex issue. In order to move forward in negotiations with the union, the pension
28 needed to be addressed. AbitibiBowater and the union have asked the Canadian Government to allow
29 for an extension in the amount of time the company has to repay the pension shortfall. With no
30 movement from the government for over three months, the company and the union forged ahead. The
31 company has just recently agreed to take the pension benefit cut of 25% off the table in exchange for
32 cost savings from the union. Now, both the union and the company are lobbying the Quebec
33 government to extend the time the company has to repay the shortfall from the current time of five (5)
34 years to an extended time frame. Without the cooperation of the union, the company, and the
35 government, this agreement though fair is still fragile and there are many more hurdles before it is seen
36 to fruition.
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AbitibiBowater Equity Committee Request March 15, 2010
1 4.5.NAFTA Arbitration
2
3 According to the Feb. 25, 2010 Canada NewsWire via COMTEX, AbitibiBowater filed a Notice of
4 Arbitration under the North American Free Trade Agreement (NAFTA) with regards to the expropriation
5 of its assets and rights in Newfoundland and Labrador, Canada. The Company contends that the
6 provincial government's enactment in December 2008 of Bill 75, which expropriates much of the
7 Company's rights and assets, was arbitrary, discriminatory and illegal under international law. This
8 lawsuit adds a level of complexity and possible financial recovery for the company and its stakeholders.
9
10 The claim seeks direct compensation for damages of approximately C$500 million, plus additional costs
11 and relief deemed just and appropriate by the Arbitral Tribunal. Under international law, the Canadian
12 Federal Government is responsible for the actions of Newfoundland and Labrador in violation of the
13 investment protection provisions of NAFTA.
14
15 Below is a brief history of the events that unfolded. In early December 2008, AbitibiBowater announced
16 capacity‐reduction measures in Canada and the United States, including the permanent closure of its
17 Grand Falls‐Windsor, Newfoundland and Labrador mill, due to the economic downturn and decline in
18 product demand. The province responded with passing Bill 75, without any attempt to consult with the
19 Company and without holding any public hearings. The Company asserts in the Notice of Arbitration
20 that the province's Bill 75 breaches Canada's NAFTA obligations on a number of grounds, including:
21
22 Unlawful Expropriation: NAFTA explicitly details the grounds under which government
23 expropriation can lawfully occur. The criteria for lawful expropriation were not met by the
24 Government of Newfoundland and Labrador in Bill 75.
25 Fair Compensation: Under NAFTA, AbitibiBowater is entitled to compensation "without
26 delay" for the "fair market value" of each of its expropriated investments. Bill 75 does not
27 ensure payment for the fair market value of the expropriated rights and assets.
28 Treatment in Accordance with International Law: NAFTA obliges Canada to provide
29 treatment "in accordance with international law," which includes international standards of
30 "fair and equitable treatment." The Bill's seizure of AbitibiBowater's rights and assets was
31 arbitrary, irrational and discriminatory, in violation of these standards.
32 Denial of Justice: Bill 75 purports to strip AbitibiBowater of any rights to access the courts,
33 which is independently a violation of NAFTA.
34 Discrimination: AbitibiBowater should be afforded the same rights and privileges as all
35 other domestic and foreign investors. Bill 75 is retaliatory in nature and discriminates
36 against the company.
37
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AbitibiBowater Equity Committee Request March 15, 2010
1 "The expropriation was detrimental to the financial position of our Company," stated David J. Paterson,
2 President and Chief Executive Officer. "After operating in Newfoundland and Labrador for more than a
3 century and contributing significantly to the region's economic, social and sustainable development, the
4 nationalization of AbitibiBowater’s assets was unexpected and unnecessary."
5
6 "AbitibiBowater has been engaged with the Government of Canada and the Government of
7 Newfoundland and Labrador in an effort to achieve a fair and equitable settlement and avoid a
8 protracted NAFTA case. Unfortunately, despite those extensive discussions, we are unable to resolve the
9 matter at this time and the Company has no choice but to file a formal claim under NAFTA," added
10 Paterson.
11
12 "It is our obligation to defend the interests of our stakeholders and ensure we receive compensation
13 for the fair market value of the expropriated assets, plus additional damages. We are disappointed
14 that a settlement acceptable to all parties has not yet been reached and we still hope that this issue can
15 be resolved by a negotiated settlement with the Government of Canada," concluded Paterson.
16 [emphasis added]
17
18 The expropriation relates to a broad range of AbitibiBowater's rights and assets in Newfoundland and
19 Labrador, including land rights, timber rights, water use rights and various other related rights and
20 business partnerships. These rights and assets can be traced back in part to grants by the provincial
21 government and its predecessors, as well as to numerous third‐party transactions. In addition to the
22 substantial sums it expended to acquire these rights, the Company has invested hundreds of millions of
23 dollars in the province over the last century, ranging from capital investments in mill and hydroelectric
24 generation operations to road projects that have helped build rural Newfoundland.
25 4.6.Communications, Energy and Paperworkers Union of Canada (CEP)
26 Negotiations
27
28 AbitibiBowater and the Communications, Energy and Paperworkers Union of Canada (CEP) struck a deal
29 Sunday, March 7, 2010 with details that are sketchy until the union has a chance to look at the
30 agreement and vote on the issue March 15, 2010.
31
32 “AbitibiBowater Inc. has struck a new labor pact with its main union that a labor leader
33 says will help it stave off collapse as it prepares to file a plan by the end of the month to
34 vault out of bankruptcy protection. The insolvent paper giant, which has been under
35 creditor protection since last April, agreed to a tentative work agreement covering 8,000
36 workers with the Communications, Energy and Paperworkers Union of Canada following
37 arduous negotiations, the union said Sunday. The union said it won protection of the
38 retiree pension plan and recognition of past service for active employees, which the
39 company wanted to terminate. The unfunded liability for those plans was about $900‐
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AbitibiBowater Equity Committee Request March 15, 2010
1 million, said Dave Coles, CEP President. In return, workers gave up some pay.” [Financial
2 Post, Sunday, March 7, 2010 (Author: Nicolas Van Praet)]
3
4 “The Quebec government will now be asked to adopt regulatory changes giving Abitibi more time than
5 the current five‐year period to pay for the unfunded pension liability,” Mr. Coles said. In the view of the
6 informal EC members, the Company is stating that it will be able to pay off a $900 million dollar liability
7 with the improved conditions, reduction of costs, and a little bit more time. In the informal EC
8 members’ opinion the company’s actions demonstrate they intend to emerge a viable and profitable
9 company in the future.
10 4.7.Summary of Complexities
11
12 The bankruptcy case filed by AbitibiBowater is anything but simple. This is a multinational company who
13 has filed for bankruptcy protection in now three different countries. The company is fighting the
14 Canadian government for expropriation of assets, it is negotiating union contracts that are now
15 contingent on another government adoption of legislation. The bankruptcy process has to have
16 guidelines set up to file claims in a cross border manner. AbitibiBowater was partially drawn into
17 bankruptcy due to the global economic downturn and decline in newsprint sales; but was also partially
18 forced into bankruptcy due to Credit Default Swaps. The same bond holders who forced the company
19 into bankruptcy have a committee and representation, and the equity holders who are the most
20 effected by decisions about the common shares of this company are not.
21
22
23 5. Solvency of AbitibiBowater
24
25 In order to demonstrate the efficacy, need and viability of an EC, it is vital to demonstrate that
26 AbitibiBowater is not hopelessly insolvent. While actual valuation of the company through licensed,
27 respected auditors is not available to common shareholders at this time, there are some important
28 communications from the company that do demonstrate quite convincingly that AbitibiBowater is not
29 only solvent, but is operating in a growing market.
30 5.1. Causes for Bankruptcy versus Insolvency
31
32 Historically, it is important to point out that AbitibiBowater did not enter bankruptcy protection due to
33 insolvency, but rather due to the global recession causing low liquidity and issues surrounding cash flow.
34 It is also well publicized that AbitibiBowater was affected by the practice of a Credit Default Swap.
35 According to David Einhorn of Greenlight Capital on October 19, 2009:
36
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AbitibiBowater Equity Committee Request March 15, 2010
1 “Bondholders who also hold CDS [credit default swap] make a bigger return when the
2 issuing firms fail. As a result, holders of so‐called “basis packages” – a bond and a CDS –
3 have an incentive to use their position as bondholders to force bankruptcy triggering
4 payment on their CDS, rather than negotiate traditional out of court restructurings or
5 covenant amendments with troubled creditors. Press accounts have noted that this
6 dynamic has contributed to the recent bankruptcies of Abitibi‐Bowater, General
7 Growth Properties, Six Flags and even General Motors. They are a pending problem in
8 CIT’s efforts to avoid bankruptcy.” [emphasis added]
9
10 In “Ban Credit Default Swaps? These Corporate Bankruptcies Show We Should” by Martin Hutchinson,
11 Contributing Editor, Money Morning (April 23, 2009) just a week after the announced bankruptcy, the
12 following appeared:
13
14 “In the lead‐up to both bankruptcies, the lenders who had debt outstanding – who
15 would have the right to vote on any reorganization – had hedged their debt through
16 credit default swaps and so stood to benefit from the company’s bankruptcy. That made
17 it very difficult for both companies to get the majorities they needed for debt
18 reorganization, making bankruptcy inevitable.”
19
20 “In the AbitibiBowater bankruptcy case, holders of credit default swaps played two key
21 roles:
22
23 They were spectators and potential litigants.
24 And they were the generator of lawsuits.
25
26 When AbitibiBowater missed a bond payment on March 20, there were a lot of CDS
27 derivatives outstanding that were close to maturity. Holders of these securities wanted
28 to have AbitibiBowater immediately declared in default so that they could collect – a
29 delay would allow their credit default swaps to expire.”
30
31 “However, non‐payment of bond obligations generally does not become an actual
32 “default” for several days (because the company is given a few days to come up with the
33 money). Moreover, AbitibiBowater obtained a court order allowing the bond payments
34 to be suspended while the company completed its debt restructuring. Thus, the CDS
35 holders (to a value of about $500 million) were out of luck.”
36
37 “Or were they?”
38
39 “An International Swaps and Derivatives Association (ISDA) ruling on March 28 allowed
40 CDS holders (as of March 20) to claim payment through a cash‐auction system, as if a
41 default had actually occurred.”
42
43 “The second role that CDS holders played truly was analogous to sadistic spectators
44 placing bets at a suicide. Bowater (which had merged with Abitibi in an over‐leveraged
45 deal just two years ago) wanted to exchange its 9% bonds in order to improve its cash
46 flow and to remove the likelihood of bankruptcy. To do this, it needed 97% acceptance
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AbitibiBowater Equity Committee Request March 15, 2010
1 from holders of bonds maturing in 2009 and 2010. The company was only able to get a
2 54% acceptance – largely because many bondholders also held credit default swaps, and
3 so would actually benefit, rather than lose, from a Bowater bankruptcy.”
4
5 It is also critical to note that the fail‐to‐deliver on the stock trended almost exactly with the share price
6 decline immediately after merger. In other words, immediately after merger, the share price spiked to
7 around $36 USD. Almost immediately, the price dropped to under a dollar leading into the
8 announcement of BK and has stayed there since while the occurrence of fails‐to‐deliver spiked to
9 between 90% to 100% of the tradings days for nine (9) consecutive months after the merger. This
10 contributed to the bankruptcy of AbitibiBowater versus insolvency.
11 5.2.Current Equity Estimates
12
13 While a third party formal accounting valuation has not been completed, the Monthly Operating Reports
14 (MORs) have provided Asset & Liability estimates in each of the month’s the company has been in
15 bankruptcy protection. These MORs have been reviewed and the results for the last four months
16 available at the time of this request (October, 2009, through January, 2010). The results are shown in
17 the following table:
18
Current Current Total Shareholder
Months Total Assets
Assets Liabillities Liabillities Equity net
Oct‐09 4,439,657,059 21,149,411,962 613,036,410 8,154,598,837 12,992,613,127
Nov‐09 4,448,559,907 18,785,232,021 603,018,904 7,800,823,291 11,648,137,960
Dec‐09 4,739,445,895 21,465,101,109 585,046,407 8,221,071,595 13,242,029,505
Jan‐10 4,740,936,456 21,422,983,569 671,383,311 8,284,409,851 13,135,470,711
19
20 Clearly, the company’s assets have increased $301,279,397 USD from October 2009 to January 2010. In
21 addition, the Net Shareholder Equity has increased $142,857,584 over the same time period. The
22 company has stated that the Annual Report will be available at the end of March, 2010. However, with
23 the recent news and the upcoming dates for the Plan of Reorganization, this informal group of common
24 shareholders believe it detrimental to the EC request to wait for these figures.
25
26
27 6. Expectations of Equity After Bankruptcy
28
29 The informal EC has reviewed the situation of ABWTQ for evidence of the expectation of equity after
30 bankruptcy emergence. It should be pointed out that although the price has been flat for a long time,
31 the shares are still trading robustly. In terms of expected equity, the company currently boasts a total
32 Shareholder Equity Net (according to the January, 2010, Monthly Operating Report) of $13,135,470,711
33 USD and this is increasing each month. The total outstanding shares are approximately 54,701,507
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AbitibiBowater Equity Committee Request March 15, 2010
1 which are currently trading at approximately $0.12 USD per share, but have not traded above $0.20 USD
2 since bankruptcy except for a single period in October 2009 where it climbed to $0.32 per share. If we
3 take the high of $0.20 USD per share, that equates to $10,940,301 USD or only 0.08% of the current
4 monthly Shareholder Equity Net. This would seem a small cost to maintain the goodwill of the
5 multinational investors of this company which combined represent the second largest holders of the
6 common shares and whom individually consist of several members with more shares than the officers of
7 this company.
8 6.1.Current Market Conditions for ABWTQ
9
10 In the Thirty‐first Monitor Report dated January 21, 2010, the Monitor reviewed the current market
11 conditions as they apply to AbitibiBowater. “While the forest products industry has faced significant
12 challenges with respect to pricing and demand, as indicated in previous reports of the Monitor, the
13 Petitioners [AbitibiBowater] have advised the Monitor that the market has shown signs of rebounding.
14 The Monitor has [learned from] RISI.com (a leading forest industry publication), …that the Petitioners
15 currently plan to increase prices by $50 per ton beginning March 1, 2010.”
16
17 “According to a December 18, 2009 report on RISI.com (the “RISI Report”), the price of newsprint in the
18 eastern portion of North America has increased approximately $120 per ton since August, 2009
19 (excluding any price increases planned for Q1 of 2010). As publicly reported in the RISI Report, the
20 Petitioners intend to restart one paper machine at BCFPI’s Thunder Bay newsprint mill in February,
21 2010. This machine was indefinitely idled in August, 2009, and is capable of producing approximately
22 235,000 tons of newsprint annually. The decision to re‐start production at this machine is due to the
23 negotiation of a more favorable cost structure.”
24
25 The global market has improved significantly over recent months which should improve the overall
26 demand for AbitibiBowater’s products. In addition, the occurrence of three major earthquakes (Haiti,
27 Chile, and Turkey), while tragic and horrible, will add to the demand for lumber as those who are
28 affected rebuild.
29 6.2.Statements from Management Regarding Shareholder Equity After
30 Bankruptcy Emergence
31
32 Over the past months since the application for bankruptcy, the company has either maintained
33 statements or made new statements regarding the fact that it continues to work towards maintaining
34 value for its stakeholders which certainly includes the common shareholders. These statements have
35 contributed to the members of the informal EC maintaining their shares and their goodwill towards this
36 company during this process. A few examples are below.
37
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AbitibiBowater Equity Committee Request March 15, 2010
1 AbitibiBowater, Inc., maintains a public website at: http://www.abitibibowater.com/home.aspx. On
2 the very top of the homepage can be found the following (as of March 9, 2010):
3
4 “CREATING A STRONGER COMPANY
5 By delivering on our business goals and commitments, we are confident that we can
6 create significant long‐term value for shareholders. “
7
8 In an interview following the filing for bankruptcy protection, David Patterson, President and CEO, and
9 Dick Evans, Chairman of the Board of Directors, were both quoted as being concerned with the value for
10 the stakeholders.
11
12 "Today's announced decisions ensure business continuity for AbitibiBowater and were
13 made only after all other viable options to recapitalize our long‐term debt were
14 exhausted," stated David J. Paterson, President and Chief Executive Officer. "The steps
15 we are taking today and the vote of confidence given to us by our restructuring
16 financial partners will enable us to protect the value of the business for our many
17 loyal employees, customers, suppliers and other stakeholders."
18
19 "Over many months, we undertook an exhaustive examination of the Company's
20 recapitalization options," said Dick Evans, Chairman of the Board of Directors. "The
21 Board and management believe the actions initiated today will allow the Company to
22 make the necessary changes to ensure the long‐term viability of the Company within a
23 process that ensures fair and equitable treatment for all stakeholders, while allowing
24 it to continue to meet the needs of its customers." [April 16 PRNewswire‐FirstCall with
25 emphasis added]
26
27 In early February, 2010, the company spokesperson, Mr. S. Kursman, was asked to comment on the
28 emergence of AbitibiBowater from CCAA proceedings and Chapter 11. In this interview reported by the
29 Canwest News Service, Mr. Kursman states that AbitibiBowater has quite reasonably and expectedly
30 been ensuring their cash resources upon emergence.
31
32 “After nine months of cost‐cutting under the protection of U.S. and Canadian courts,
33 AbitibiBowater, Inc., has stacked up the cash and is ramping up to exit bankruptcy by
34 the middle of the year, company spokesman Seth Kursman said yesterday. The
35 newsprint producer plans to file its Chapter 11 plan in the United States and scheme of
36 arrangement in Canada "before the end of the first quarter," Mr. Kursman said in an
37 interview. Once the reorganization strategy is rolled out, AbitibiBowater has to line up
38 creditor votes and win court approval to emerge from creditor protection.” [Canwest
39 News Service Friday, February 5th, 2010, filed 4:31 am, with emphasis added]
40
41 Recently, the company has filed suit against the governments of Labrador and Newfoundland for
42 expropriation of its assets. In response, David Patterson, the President and CEO of AbitibiBowater, was
43 quoted as saying the following:
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AbitibiBowater Equity Committee Request March 15, 2010
1
2 "The expropriation was detrimental to the financial position of our Company," stated
3 David J. Paterson, President and Chief Executive Officer. "After operating in
4 Newfoundland and Labrador for more than a century and contributing significantly to
5 the region's economic, social and sustainable development, the nationalization of
6 AbitibiBowater's assets was unexpected and unnecessary."
7
8 "AbitibiBowater has been engaged with the Government of Canada and the
9 Government of Newfoundland and Labrador in an effort to achieve a fair and equitable
10 settlement and avoid a protracted NAFTA case. Unfortunately, despite those extensive
11 discussions, we are unable to resolve the matter at this time and the Company has no
12 choice but to file a formal claim under NAFTA," added Paterson.
13
14 "It is our obligation to defend the interests of our stakeholders and ensure we receive
15 compensation for the fair market value of the expropriated assets, plus additional
16 damages. We are disappointed that a settlement acceptable to all parties has not yet
17 been reached and we still hope that this issue can be resolved by a negotiated
18 settlement with the Government of Canada." [Montreal, Feb. 25, 2010 (Canada
19 NewsWire via COMTEX) with emphasis added]
20
21
22 7. Whether the interests of shareholders are already represented
23
24 In view of this request, it is important to understand whether the rights of the common shareholders are
25 currently being represented. Both AbitibiBowater, Inc., and the Monitor have agreed previously that the
26 current groups involved in the bankruptcy proceedings do not fully represent the interests of every
27 stakeholder and that the company would benefit from involving these other stakeholders more formally
28 (Thirty‐second Monitor Report, February 19, 2010).
29
30 On February 3, 2010, in the District of Montreal, Province of Quebec, a Motion for an Order Authorizing
31 the Petitioners to Consult With Committees of their Stakeholders was filed. In this docket, the attorney
32 for the non‐unionized employees, past and present, and pensioners argued that in the CCAA
33 proceedings, actions taken by AbitibiBowater will impact various and diverse groups of stakeholders.
34 The attorney further argued that some of these other stakeholders have not been represented in the
35 CCAA proceedings. The attorneys also argued that AbitibiBowater and other creditors will benefit from
36 the “review [of] proposals, solicit[ation of] feedback and otherwise assist[ance] in the formation of
37 proposals calculated to meet the needs of the Petitioners to emerge from proceedings while mitigating
38 where possible the impact of the process upon the Affected Stakeholders.”
39
40 The attorneys finally argue that “the restructuring of the businesses ABH and its subsidiaries raises
41 complex and difficult questions. In order to solve these and present a viable plan of arrangement to be
42 presented to their stakeholders, the Petitioners will need to assess the impact of proposed restructuring
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AbitibiBowater Equity Committee Request March 15, 2010
1 efforts on all Affected Stakeholders, engage in consultations with these groups and evaluate their
2 recommendations.”
3
4 The Thirty‐Second Monitor Report clearly states that both the Monitor and the Petitioners
5 (AbitibiBowater) agree with the need to engage an Ad Hoc committee of the non‐unionized employees,
6 past and present, and pensioners “in order to assess the impact of proposed restructuring efforts ….”
7
8 It is the combined belief of the common shareholders requesting this EC that the Petitioners
9 (AbitibiBowater) and other creditors will benefit from formally organizing the EC. The common
10 shareholders also believe that certain groups already formally represented may not be working toward
11 the best interests of the common shareholders. Recent previous bankruptcy cases have illustrated that
12 the bondholders tend to work against the interests of the common shareholders and often there are
13 additional administrative costs that will eat into the equity of the company as it emerges. Finally, by
14 formally involving an EC, communications to the common shareholders will increase and may lead to
15 additional investors in the company as it emerges.
16
17 The informal EC has been studying the trading irregularities with the AbitibiBowater stocks for several
18 weeks now and anticipate continuing to do so. The effort has uncovered some significant naked
19 shorting activity as well shorting which appears to have manipulated the stock price. A formal EC could
20 more effectively work with AbitibiBowater management to watchdog the trading activity for the
21 purposes of safeguarding the investments of the EC, AbitibiBowater and other creditors.
Page 22 of 22