Elpida, bondholders spar over patent transfer and licensing agreements

By Jim Witters

Wilmington, Del., Dec. 5 - Elpida Memory, Inc.'s foreign representatives and an informal group of Elpida bondholders are locked in a battle over the company's planned transfer of 28 U.S. patents to Rambus, Inc.

During a Dec. 5 hearing in the U.S. Bankruptcy Court for the District of Delaware, Elpida attorney James I. McClammy said the Rambus deal and an agreement for sharing of technology with potential plan sponsor Micron Technology, Inc. meet the requirements of the U.S. courts for approval.

The bondholders believe they should be allowed to dispose of the assets to recover their investment.

Bondholders' attorney J. Christopher Shore said Elpida is attempting to sell the U.S. assets for far less than they are worth.

Shore said that if his clients were allowed to sue, they would win, dispose of Elpida's U.S. assets and "get paid in full." But they are prohibited from filing a lawsuit by the automatic stay of litigation imposed in bankruptcy cases.

The terms of the Rambus agreement effectively lock in Micron as the plan sponsor, even though other companies may have been interested, Shore said.

Rambus transaction

Elpida's foreign representatives are seeking U.S. approval to sell the rights to 1,800 patents for $15 million to Rambus and then lease back the rights.

Elpida intends to use the proceeds to pay its administrative claim obligations.

Under the agreement, Rambus will grant a royalty-free, perpetual license to Elpida for these patents, protecting Elpida's estate from patent infringement suits and permitting Elpida continued use of the technology.

The patent purchase agreement was approved on Aug. 10 by the Tokyo District Court, Eighth Civil Division, where Elpida filed for corporate reorganization under the Japan Corporate Reorganization Act.

Seiji Nakashima, vice president of Elpida's intellectual property group, testified that Elpida entered into the agreement with Rambus to nix the possibility of a lawsuit by Rambus. He said Elpida feared a lawsuit if it simply terminated its existing agreement with Rambus.

Shore elicited testimony from Nakashima that both the U.S. and Japanese courts have issued litigation stays in the Elpida case, and no lawsuits may be initiated while the bankruptcy cases remain open.

The patent purchase agreement also includes a provision that protects Micron from a lawsuit by Rambus.

Nakashima, responding to Shore's questioning, testified that no other potential plan sponsor would receive such protection.

Shore argued to the court that the imbalance in protections tilts the table in favor of Micron.

Micron deal

In a separate deal with Micron, Elpida hopes to begin to share technology under an agreement that could continue for five years, even if Micron fails to close on its plan sponsorship and contemplated merger with Elpida.

Nakashima said the deal made sense, because Elpida executives are operating under the assumption that there is an 80% chance the Micron deal will close and implementing Micron's technology in the production process will save Elpida an estimated $200 million to $300 million a year.

Under cross-examination by Shore, Nakashima said those savings would not kick in for about a year, well after the expected closing of the Micron sponsorship deal.

Shore argued that the deal benefits only Micron because any savings would come after Micron owns Elpida. And, if the deal fails to close, Elpida would be required to pay a 3% royalty on net revenue generated from the products manufactured with the Micron technology or revert to its former production processes.

As previously reported, Micron agreed to a definitive sponsor agreement for Micron to acquire and support Elpida in connection with Elpida's corporate reorganization proceedings conducted under the jurisdiction of the Tokyo District Court.

Micron will acquire 100% of the equity of Elpida for ¥60 billion, or $750 million, to be paid in cash at closing.

Under the agreement, ¥200 billion, or roughly $2.5 billion, of total consideration, minus reorganization proceeding expenses, will be used to satisfy the reorganization claims of Elpida's secured and unsecured creditors.

In addition, ¥140 billion, or about $1.75 billion, of future annual installment payments through 2019 will be paid from cash flow generated from Micron's payment for foundry services provided by Elpida as a Micron subsidiary.

As a result of these payments, all of Elpida's pre-bankruptcy debt obligations will be fully discharged under the corporate reorganization proceedings.

The agreement also calls for Micron to provide financing support for Elpida capital expenditures, subject to specified conditions, and to maintain Elpida's operations and employees.

The bondholders said they believe that Micron should be paying for $1.4 billion, or ¥111 billion, of working capital in addition to the upfront ¥60 billion equity payment that Micron would make under the proposed sale.

In addition, the bondholders said there is no evidence that the estate will receive any compensation for its intellectual property assets under the Micron agreement.

Ruling delayed

Judge Christopher S. Sontchi said in a Nov. 16 ruling that Elpida's foreign representatives must demonstrate the sales meet the standard of sound business judgment, including showing that:

• A sound business purpose exists for the sale;

• The sale price is fair;

• The debtor provided adequate and reasonable notice; and

• The purchaser acted in good faith.

Those are the standards McClammy said Elpida met in both the Rambus and the Micron technology and patent transfers.

After hearing about 6½ hours of testimony and argument, Sontchi told the parties he plans to issue a ruling during the week beginning Dec. 10.

He gave the attorneys until midnight ET on Dec. 10 to submit written proposals for findings and conclusions of law regarding the two proposed transactions.

Sontchi said he would issue a ruling "as soon as possible."

Elpida, a Tokyo-based manufacturer of DRAM integrated circuits, filed for bankruptcy on March 19, 2012 to gain recognition of its Japanese proceedings. Its Chapter 15 case number is 12-10947.

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