GT Advanced Says It Can't Afford to Fight Apple, Must Settle
12:26p ET October 28, 2014 (Dow Jones)
By Peg Brickley
GT Advanced Technologies Inc. said it needs to settle disputes with Apple Inc. because "protracted litigation against one of the largest corporations in the world with over $100 billion of cash would be challenging and expensive."
Jilted by Apple as a supplier of sapphire screen material for iPhones, GT Advanced filed for Chapter 11 protection earlier this month and moved to put under seal the explanation of what went wrong between the two companies.
Papers filed near midnight Monday say Apple is threatening to crush the small, distressed company with "numerous liquidated damages provisions in the Apple Agreements pursuant to which Apple would likely assert millions, if not billions, of dollars in secured and unsecured claims against certain of the Debtors," lawyers for GT Advanced wrote.
Apple, which signed the pact, didn't respond Tuesday to questions about the settlement.
Court filings spell out why GT Advanced, less than a month into a bankruptcy that shocked shareholders and creditors, decided to cut a deal with Apple, which financed its entry into the sapphire material making industry but declined to use the company's products when the new iPhones rolled out.
GT Advanced believes it could win contract disputes with Apple and may have "various causes of action against Apple, including actions rooted in the Bankruptcy Code and breach of contract claims." Among other things, GT Advanced could attempt to prove that Apple "engaged in the requisite inequitable conduct and the misconduct resulted in an injury to creditors or conferred an unfair advantage on Apple" that would establish a legal case for knocking down the priority of Apple's high-ranking $439 million claim, the company's lawyers say.
Apple's claim relates to equipment financing for GT Advanced.
Additionally, GT Advanced could attempt to unwind the supply, financing, and confidentiality agreements it signed with Apple less than a year before it filed for bankruptcy protection on the grounds they were deals with an insolvent company.
The cost of standing up to Apple in court would be too much for the New Hampshire company, court papers say.
Attorneys for the official committee of unsecured creditors haven't responded to questions about whether they are going to support the settlement. Creditors' lawyers also didn't respond when asked whether they are conducting an independent probe of the chances of suing Apple.
GT Advanced cited one of its reasons for agreeing to the settlement as being that "it would also be compelled to investigate and eventually assert causes of action against Apple relating to the Apple Agreements and the business relationship with Apple." Instead, it has agreed not to disparage Apple, and Apple has agreed not to disparage GT Advanced.
As explained in court and outlined last week by GT Advanced, the settlement gives GT Advanced years to sell the sapphire-manufacturing furnaces to raise money to pay off the Apple debt. Court papers don't say what it will cost GT Advanced to store, maintain, market and sell the furnaces. The company gets 11 months free rent at the Arizona plant, court papers say.
Before agreeing to the settlement, GT Advanced moved to reject the agreements with Apple that contained the liquidated damages provisions. It won approval to shut down sapphire manufacturing operations at the Arizona facility and one in Massachusetts. If a bankruptcy judge approves the settlement, the contract rejection motion will be "moot," lawyers for GT Advanced wrote.
GT Advanced said it would "ultimately succeed" in its bid to shake off the Apple contracts in bankruptcy, including squashing restrictions that barred it from selling furnaces to Apple competitors. However, "it is almost certain that Apple would vigorously challenge GTAT's attempts to do so," and fighting with Apple "could significantly delay GTAT's emergence from chapter 11," the company's lawyers said.
Court papers say Apple has agreed not to interfere with GT Advanced's efforts to finance a bankruptcy turnaround.
"Without new post-petition financing, GTAT's current liquidity crisis would continue, placing its entire reorganization strategy in jeopardy," the company said.
GT Advanced doesn't have a bankruptcy loan but expects to have one "in several weeks," court papers say.
The agreement hangs on getting a court order that orders the destruction of all copies of papers GT Advanced filed with the U.S. Bankruptcy Court in New Hampshire which explain the trouble between the sapphire supplier and Apple, and the reasons for the bankruptcy. Besides striking the papers from the court docket, GT Advanced wants Judge Henry Boroff to order anyone who has copies of the documents to destroy them.
Dow Jones & Co, publisher of The Wall Street Journal; U.S. Trustee William Harrington, a Justice Department lawyer charged with monitoring the bankruptcy courts, and New Hampshire Attorney General Joseph Foster have challenged the secrecy in the case as illegal.
A hearing is scheduled for Thursday on the sealing order that GT Advanced won in a closed-door session with Judge Boroff. GT Advanced said it would ask that the sealing be continued until Nov. 25, when the settlement motion is to be heard. If that succeeds, GT Advanced will have had nearly two months of Chapter 11 protection without telling its creditors and shareholders why it needed to file for bankruptcy.
Write to Peg Brickley at peg.brickley@wsj.com
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