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1 <English translation for reference only> Case No. (ra) 1757 of 2012 Appeal Case against Dismissal Order on Petition for Recognition of and Assistance for Foreign Insolvency Proceedings and Administration Order (Case Number of the Court of First Instance: Case Nos. (Shou) 3 (the Preceding Case) & 5 (the Following Case) of 2011 at the Tokyo District Court) Order Via D Azeglio 19, Bologne, Emilia-Romagna, Italy Appellant (Petitioner of the following case) : Andrea Ferri, Bankruptcy Trustee of Think3 Inc. Attorneys of the Appellant : Shinnosuke Fukuoka : Yusuke Yukawa : YukikoTomimatsu Sub-attorneys of the Appellant : Sueo Kito : Hiroshi Yamagishi : Noriaki Shinoda 401 Congress Ave., #2650 Austin, TEXAS, U.S.A. (Its registered office: Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware, U.S.A.) Appellee (Petitioner of the preceding case) : Think3 Inc. CRO of the Appellee Attorneys for the Appellee : Rebecca A. Roof : Satoru Mitsumori : Noriyasu Kaneko : Masaru Okamoto Main Text 1. This court rejects the appeal. 2. The cost for the appeal case shall be borne by the Appellant. Reasons Chapter 1 Objects of the Appeal 1 The Appellant seeks a ruling revoking the original decision by the First Instance. 2 The Appellant seeks a ruling of recognition of the bankruptcy procedure regarding the debtor, as set forth in the Exhibit of the decision of the First Instance (hereinafter the Debtor ), for which the Bankruptcy Court of Bologna, Italy made a declaration of commencement of bankruptcy proceeding on April 12, 2011 (Case Number: 69/11). 3 The Appellant seeks a ruling for administration by a recognition trustee for the Debtor s business and assets in Japan. 1

2 Chapter 2 Outline of the Cases 1 History of the Cases (Basic facts referred in Section 2 of this chapter and obvious facts in court records) (1) The Debtor is a stock company which was established under the Laws of Delaware in the United States of America (hereinafter the US ), and has its registered office in Wilmington, New Castle of this state. The Debtor has a branch office in the Republic of Italy, as well as subsidiaries in 6 countries--including Italy and Japan--and had been doing business on an international scale. (2) Employees of the Italian branch office and tax authorities filed for bankruptcy proceedings against the Debtor (Case Number: 69/11), and on April 12, 2011, the Court of Bologna in Italy made a declaration of commencement of bankruptcy proceedings (hereinafter the Italian Bankruptcy Proceedings ), and Andrea Ferri, an accountant, was appointed as a bankruptcy trustee (hereinafter the Italian Bankruptcy Trustee ). (3) The Debtor appointed Rebecca A. Roof (hereinafter Ms. Roof ) as a chief restructuring officer (CRO) and filed for relief under Chapter 11 of the US Bankruptcy Code (Case Number: ), and on May 18, 2011, the United States Bankruptcy Court, Western District of Texas, Austin Division (hereinafter the US Bankruptcy Court ) made a declaration of commencement for the Chapter 11 Proceedings (hereinafter the Chapter 11 Proceedings ). The US Bankruptcy Court adopted the DIP style restructuring proceedings, which are the principle proceedings of said Code, where the Debtor--with Ms. Roof as its representative--remains in control of its business operations, as well as its right of administration and disposal of the Debtor s assets as a debtor in possession. (4) On August 11, 2011, before the Tokyo District Court, the Petitioner of the Preceding Case filed a petition for recognition of the Chapter 11 Proceedings, as well as a prohibition order on compulsory executions, etc. as a disposition of assistance in accordance with the Act on the Recognition of and Assistance for Foreign Insolvency Proceedings (hereinafter the Act ). On the same day, at 5 o clock in the evening, the Tokyo District Court recognized the Chapter 11 Proceedings, and issued a prohibition order on compulsory executions, etc. (the Preceding Case). (5) On October 14, 2011, the Appellant (the Petitioner of the Following case) filed a petition for recognition of the Italian Bankruptcy Proceedings, and an administration order by a recognition trustee as a disposition of assistance in accordance with the Act (the Following Case). (6) On March 22, 2012, the Tokyo District Court decided to consolidate the Preceding Case into the Following Case. (7) The petition of the Following Case falls under the provisions of Article 62 of the Act--that is, a recognition and assistance proceeding in relation to other foreign insolvency proceedings against the same debtor regarding which orders of recognition have already been issued at the time of the petition for recognition of foreign insolvency proceedings. The petitioner of the Following Case claims that the Debtor s principal place of business in accordance with Article 2(1)(ii) of the Act is in Italy, and that the Italian Proceedings are the foreign main proceedings. Therefore, the petitioner of the Following Case seeks 2

3 recognition of the Italian Proceedings and a disposition of assistance. In contrast, the petitioner of the Preceding Case claims that the Debtor s principal place of business is in the US, and that the Chapter 11 Proceedings are the foreign main proceedings. (8) On the petitions by the Appellant, the court of first instance rejected the petition for recognition of the Italian Bankruptcy Proceedings and dismissed the petition for an administration order by a recognition trustee as a disposition of assistance, confirming that the Debtor s principal place of business is in the US and that the Chapter 11 Proceedings are the foreign main proceedings. (9) The Appellant thus appealed against this decision. 2 Basic facts, controversial points and assertions by the parties are described in Section 2 and 3 under Chapter 2 Outline of the Cases of the original rulings are referred to here, in addition to the supplemental assertions by the Appellant in this Court of Appeal in the following Section 3 (however, 19-1, Hei-3 from 14 th line to 15 th line on page 3 of the decision, shall be corrected to 19, Hei-3. Note: when an enumerated section is cited hereinafter, all of its sub-sections are understood to be included in the citing).. 3 Supplementary assertions by the Appellant in this Court of Appeal (1) With regard to the timing to determine the debtor s principal place of business. The timing to determine the principal place of business shall be the time when the petition of a following case for recognition of foreign insolvency proceedings is filed, because the principal place of business as a basis of foreign main proceedings in accordance to the Act must be determined only when petitions for recognition of two or more insolvency proceedings are filed. Even if the timing of determination should be the time when a petition for commencement of the first insolvency proceedings is filed, or the time when the first insolvency proceedings are commenced, in the case of the Debtor, there are special circumstances to be taken into consideration before and after the timing. Thus, it is not appropriate to only consider the circumstances of the timing of determination in order to determine the principal place of business. For example, since its establishment of business in 1979, the Debtor has engaged in its business mainly in Italy, earning more than 40% or less than 60% of its proceeds in Italy from 2006 to On September 28, months before the petition of the Italian bankruptcy proceedings was filed on March 14, ESW, a limited liability company of the state of Delaware and a subsidiary of the Trilogy group, obtained 100% of the Debtor s shares, and from then on, the Trilogy group started to control the Debtor. In addition, in October of 2010, the Debtor executed the License Agreement with Versata, another subsidiary of the Trilogy group, in consideration of US$3,000,000. The consideration of the contract was low, and the contract was prejudicial to the Debtor. Then, on May 2, 2012, the Appellant terminated the License Agreement as it was an executory contract, and on May 3, the Appellant obtained permission from the Italian Bankruptcy Court to temporarily continue its business and restored its business with its sales of 1,100,000 Euro for the first few months. Even if there was a period when the principal place of business of the Debtor was in the US, it was only for 6 months after the acquisition of the Debtor by the Trilogy group. As the principal place of business of the Debtor has been located in Italy before and after this short period, there are special 3

4 circumstances to be taken into consideration before and after the timing to determination of the principal place of business as a basis of foreign main proceedings. (2) Factors to be taken into consideration in order to determine the debtor s principal place of business (i) With regard to the factors to be taken into consideration to determine COMI (a) (ii) (iii) (b) Discussions at UNCITRAL are in the process of concluding that the following factors shall be considered to determine COMI: (1) the location is easily ascertainable by creditors, (2) the location is the one in which the debtor s principal assets or operations are found; and (3) the location is where the management of the debtor takes place. Neither head office functions nor the nerve center is taken into consideration as a factor to determine COMI. Even if the abovementioned factor No. (3) may be interpreted as head office functions or the nerve center, as far as the Debtor is concerned, neither head office functions nor the nerve center, nor the location where the management of the debtor takes place should be considered an important factor to determine COMI, considering the fact that the circumstances under which the management of the Debtor s business by the US executives brought in from the Trilogy group were unjust and disordered. For example, they executed a License Agreement which was prejudicial to the Debtor, in spite of the confusion caused since the Debtor s business was managed in Italy, and the Trilogy group brought in the US executives to the Debtor only for six months, just before the commencement of the Italian Bankruptcy Proceedings. With regard to the location easily ascertainable by creditors The location easily ascertainable by creditors of the Debtor is Italy, considering that out of the top 20 unsecured creditors, 10 reside in Italy, which accounts for 80.95% of the total amount of debts, and that the petitions for commencement of the Italian Bankruptcy Proceedings were first filed in Italy. With regard to the location where the debtor s principal assets or operations are found (a) According to the investigation conducted by a registrar and an appraiser from May 3 to May 6 -- just after the commencement of the Italian Bankruptcy Proceedings -- regarding the Debtor s office in Bologna, movables and other assets were found in said location, and their value is estimated at 7,089,295 Euro. It is reported in the Italian Bankruptcy Proceedings that at the end of May, 2011, the Debtor owned accounts receivable of 2,110, Euro. (b) A computer server of the Debtor has been used to issue license keys for licensees to utilize software of the Debtor and to conduct daily administration. The server is located in Italy, and 4

5 (iv) (v) the issuance of license keys and the supervision have all been conducted in Italy. Customer services of the Debtor, for example, technical, sales, accounting services of software have been provided mainly by employees in Italy since the establishment of the Debtor. (c) Therefore, the location where the debtor s principal assets or operations are found is Italy. With regard to the location where the management of the debtor takes place From the end of 2006, Mr. Zuccarello played a key role in the Debtor s management. Even after the purchase of the Debtor by the Trilogy group, new executives from the US side did not issue substantial instructions or effect administration and coordination regarding the Debtor s business. Instead, Italian employees who lived in Italy, for example, Enrico Paglierani, Massimo Signani, Silvano Joly and others issued substantial instructions regarding sales, administration, development and customer service of software, which is the basis of the Debtor s business. Therefore, the location where the management of the Debtor took place is Italy. Considering the circumstances mentioned above, the principal place of business of the Debtor should be found to be in Italy. Chapter 3 Decision of this Court of Appeal 1 This Court of Appeal also finds that the Debtor s principal place of business is located in the United States, and that the Chapter 11 Proceedings in the US are the foreign main proceedings stipulated in Article 2(1)(i) of the Act. The reason for this decision is as correctly stated below, and the decision of this Court of Appeal regarding the supplementary documents of the Appellant is as mentioned in Section 2 of this chapter below. Besides these mentioned above, the reasons are as stated in Chapter 3 Decision of this Court in Reasons of the original rulings, to which this Court of Appeal refers here. (1) Page 18, Line 22 of the original rulings, when the petition for commencement of the preceding insolvency proceedings is filed, is to be changed to when the preceding insolvency proceedings are commenced, and 74 is to be added in front of Otsu-43 in Line 25. (2) Page 19, Line 1 of the original rulings, the timing of determination is generally considered to be when the petition for commencement of a preceding insolvency proceeding is filed, is to be changed to the timing of determination is generally considered to be when the petition for commencement of a preceding insolvency proceedings is filed, or when the preceding insolvency proceedings are commenced. Line 3, (5) As mentioned above is to be changed to (5) Also, given that there is no need for the foreign insolvency proceedings, which are subject to the Act, to be commenced, and the filing of a petition is sufficient. (3) The word Dollar in Page 20, Line 14 through 17 of the original rulings is to be changed to US Dollar. (4) The word Dollar in Page 24, Line 11 of the original rulings is to be changed to US Dollar. 5

6 (5) Page 30, Line 11 of the original rulings, unification, is to be changed to for unification. (6) The word Dollar in Page 34, Line 25 of the original rulings is to be changed to US Dollar. 2 The decision of this Court of Appeal regarding the supplementary assertions by the Appellant (1) Timing to determine the debtor s principal place of business The Appellant asserts that the timing to determine the principal place of business as a basis of foreign main proceedings in accordance to the Act shall be the time when the petition of a following case for recognition of foreign bankruptcy proceedings is filed. Even if the timing of determination is to be when the petition of the first foreign insolvency proceedings is filed, or when the first proceedings are commenced, the period which the Debtor s principal place of business existed in the United States is merely 6 months, right after the Trilogy group acquired the Debtor. Before then, the Debtor s principal place of business existed in Italy over the years, and after the acquisition, the Debtor terminated the License Agreement under the Italian Bankruptcy Proceedings, and generated large amounts of profit. Therefore, in order to determine the Debtor s principal place of business, the Appellant asserts that there are special circumstances which require consideration of the conditions before and after the timing of determination (Chapter 2, Section 3(1) mentioned above). However, the timing to determine the principal place of business as a basis of foreign main proceedings shall be construed as the time when the petition for the first bankruptcy proceedings is filed, and the reasons for that is as described in Section 2 under Chapter 3 Decision of this Court of the original rulings. Also, as the acquisition of the Debtor by the Trilogy group led to a fundamental change of the Debtor s shareholder and board compositions (2(1)(ii)and (iii) under Chapter 2 Outline of the Cases of the original rulings), much importance cannot be placed on the circumstances before the acquisition by the Trilogy group. Additionally, if factors such as the termination of the License Agreement by the Appellant after the timing of determination on the grounds that it was an executory contract, and the generation of large amounts of profit under the Italian Bankruptcy Proceedings were to be taken into account, as described in Section 2(3) under Chapter 3 Decision of this Court of the original rulings, the determination of foreign main proceedings would end up being different in every country, and would suffer lack of consistency. Also, there is a risk that many would file petitions for recognition at a timing arbitrarily chosen. Therefore, these factors mentioned above should not be considered when determining the principal place of business. Regarding the timing to determine the principal place of business as a basis of foreign main proceedings, the circumstances as claimed by the Appellant, before and after the petition for commencement of the first bankruptcy proceedings was filed, shall not be taken into consideration. Therefore, this Court of Appeal cannot agree with the abovementioned assertion of the Appellant. (2) Factors to be considered for the principal place of business and its applicability (i) With regard to headquarter function or nerve center as the criteria for judgment of COMI The Appellant asserts that according to discussions by UNCITRAL, factors 6

7 such as (i) the location easily ascertainable by creditors, (ii) the location of the debtor s main assets and operations, and (iii) the location where the debtor s management takes place shall be considered when determining COMI, and that factors such as head office functions or the nerve center shall not be taken into consideration (Chapter 2, Section 3(2)(i)(a) mentioned above). However, given that (a) in the 41st Session (held from April 30 through May 4, 2012) of UNCITRAL s Working Group V (Insolvency Law), taking into account the past discussions regarding the criteria for judgment, they merely came to a conclusion that the abovementioned (i) through (iii) are factors that determine a debtor s COMI and no conclusions were reached regarding the specific wordings of these factors (Kou-74); (b) as described in Section 3(4) under Chapter 3 Decision of this Court of the original rulings, in the Judicial Perspective of UNCITRAL in February 2012, it is stated that in some jurisdictions, factors like nerve center or headquarters are regarded as more important; (c) to deal with cross-border insolvency cases effectively, although it is preferable for the cross-border insolvency legal system in each country to be similar; however, Preamble Section 3 of the EU Regulation--which takes after the EU Convention (which was drawn up before the Model Law) on Insolvency Proceedings which was drawn up to streamline the recognition of insolvency proceedings and cross-border insolvency proceedings within EU--stipulates that COMI should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties (Kou-11); and (d) the abovementioned factor (iii) may be interpreted as head office functions or the nerve center; it can be said that in the 41st Session of UNCITRAL s Working Group V (Insolvency Law), factors such as head office functions or the nerve center were not denied as being a criteria for judgment of COMI Therefore, this Court of Appeal cannot agree to the abovementioned assertion of the Appellant. (ii) With regard to the importance of head office functions or the nerve center, and the location of where the Debtor is managed when determining the Debtor s COMI The Appellant claims that the management by the US executives brought in from the Trilogy group were unjust and disordered, such as the execution of the License Agreement which was damaging to the Debtor. However, despite such disorderly management, the Debtor s business was operated in Italy. Also, the US executives were brought in only a short period of time, merely 6 months prior to the commencement of the Italian Bankruptcy Proceedings. Taking these factors into account, the Appellant asserts that regarding the determination of the Debtor s COMI, factors such as head office functions or the nerve center, and the location of where the Debtor is managed should not be considered important (Chapter 2, Section 3(2)(i)(b) mentioned above). However, as described in Section 3(9) under Chapter 3 Decision of this Court of the original rulings, because the Debtor s business failed and incurred successive annual losses, it suffered from excessive debts and lack of funds. Due to this, the prior management of the Debtor, including Mr. Zuccarello, decided to look for a new sponsor and accepted the purchase and Reconstruction Proposal made by the Trilogy group. At present, the Chapter 11 Reorganization Plan has 7

8 been drafted and confirmed under the US bankruptcy proceedings. Therefore, this Court of Appeal is not able to adopt the assertion that the License Agreement was prejudicial to the Debtor, and that the management by the US executives were unjust and disordered. Also, as the acquisition of the Debtor by the Trilogy group led to a fundamental change of the Debtor s shareholder and board compositions, even if the executives from the Trilogy group were only brought in for 6 months, it cannot be said that factors such as the head office functions or the nerve center, and the location of where the debtor is managed may considered less important. Therefore, this Court of Appeal cannot agree to the abovementioned assertion of the Appellant. (iii) With regard to the location easily ascertainable by creditors The Appellant asserts that out of the 20 unsecured creditors of the Debtor, 10 reside in Italy, which account for 80.95% of the total amount of debts, and as creditors of the Debtor first filed for bankruptcy in Italy, the location which is easily ascertainable by creditors is Italy (Chapter 2, Section 3(2)(ii) mentioned above). However, given that the Debtor has a registered head office in the US, and that on the Debtor s homepage, compared to describing the headquarter in the US, the Italian Branch is listed as the European HQ (Otsu-11). Also, in the Italian Bankruptcy Proceedings Commencement Order, it is stated that a company who has its head office abroad may be declared bankrupt in Italy only if the said company has a branch office in Italy (Kou-4), based on the fact that the principal place of business is in the US. From these factors, it shall be said that the location easily ascertainable by creditors is the US. Therefore, this Court of Appeal cannot agree to the abovementioned assertion of the Appellant. (iv) With regard to the location of the debtor s main assets and operations The Appellant asserts that a large amount of movable assets and accounts receivable exist in Italy. Also, the issuance of license keys which is needed to use the software and the Debtor s server for daily management are all located and controlled in Italy. The Debtor s customer service has been consistently provided by Italian employees since its establishment. Therefore, the Appellant asserts that the location of the Debtor s main assets and operations is Italy (Chapter 2, Section 3(2)(iii) mentioned above). However, as the Debtor s main businesses are development and marketing of the computer-aided design software ( CAD ) and Product Lifecycle Management ( PLM ) software, etc. (Section 2(1)(i) under Chapter 2 Outline of the Cases of the original rulings), it can be said that the Debtor s most important asset is the software, and the Debtor s main operations are the development, marketing, and maintenance of the software. Therefore, it is hard to say that the Debtor s movable assets and accounts receivable are its main property to be considered as a criterion for judgment of COMI, and it is also hard to say that the usage and management of the server comprises the Debtor s main operations. Also, as described in Section 3(1)(ii)(b) through Section 3(1)(ii)(d) under Chapter 3 Decision of this Court of the original rulings, the new management that was put in place by Versata placed the Debtor s office in Austin, Texas, USA. The new management, according to the Reconstruction 8

9 (v) Plan, executed the License Agreement with Versata, by which the Debtor grants Versata for an indefinite period exclusive rights regarding the use of its intellectual properties worldwide (excluding China and India) for the production of computer software. Also, an agency agreement between the Debtor and Versata was executed to make the Debtor maintain the software products. From this, it can be said that the Debtor s software was managed by the new management working in the US office under the Trilogy group s control, and that the new management also controlled the business operations regarding the software. Thus, it shall be properly determined that the location of the Debtor s main assets and operations are in the US. Therefore, this Court of Appeal cannot agree to the abovementioned assertion of the Appellant. With regard to the location where the debtor s management takes place The Appellant asserts that even after the Trilogy group acquired the Debtor, the new management from the US side did not substantively issue instructions, manage, or coordinate the Debtor s business operations, and employees residing in Italy, such as Enrico Paglierani, Massimo Signani, and Silvano Joly, were the ones giving instructions regarding the Debtor s main operations--which is to market and manage the software, as well as development research and customer service. From this, the Appellant asserts that the location where the debtor s management takes place is in Italy (Chapter 2, Section 3(2)(iv) mentioned above). However, as described in Section 3(1)(ii)(b) through Section 3(1)(ii)(d) and Section 3(1)(ii)(g) under Chapter 3 Decision of this Court of the original rulings, after the purchase by the Trilogy group, new management was put in place by the group. The new management worked from an office in Austin, Texas, and according to the Reconstruction Plan, executed the License Agreement with Versata, as well as an agency agreement for the maintenance of the software. The new management of the Debtor also issued instructions regarding their business policy to the employees of the subsidiaries, and ordered payments of rent and fees which were due. From this, it can be said that the location where the debtor s management takes place is in the US. Therefore, this Court of Appeal cannot agree to the abovementioned assertion of the Appellant. 3 Conclusion Considering the circumstances mentioned above, the petition for recognition of foreign bankruptcy proceedings by the petitioner of the Following Case is without legal foundation, and this Court of Appeal rejects it accordingly. The petition for an administration order by the petitioner of the Following Case is unlawful, and this court dismisses it accordingly. The decisions of prior instance are appropriate. Therefore, this Court of Appeal rejects the Appeal and holds as written in the above Main Text. November 2, 2012 Civil Division No. 15 of the Tokyo High Court 9

10 Chief of Judge Judge Judge Shigenori Inoue Katsuhiko Kasai Tadaaki Miyanaga Intentionally left blank hereunder 10

11 This is a certified copy. November 2, 2012 Civil Division No. 15 of the Tokyo High Court Court Clerk Satoshi Ito [seal] 11