National Post (Latest Edition)

Sears Canada bankruptcy monitor to probe payments.

‘ Transactio­ns of interest’ to shareholde­rs

- Hollie Shaw

TORONTO• Sears Canada’ s bankruptcy monitor is investigat­ing more than half a billion dollars of controvers­ial dividend payments the retailer made to its shareholde­rs years before the defunct department store chain was declared insolvent last year.

In a court filing this week, court-appointed bankruptcy monitor FTI Consulting said it had identified “potential transactio­ns of interest” in the ongoing proceeding­s, including a $102 million special dividend payment issued to Sears Canada shareholde­rs at the end of 2012 and a $509 million special dividend issued at the end of 2013.

For years afterwards, those payments as well as several others stretching back to 2005 were met with consternat­ion by industry observers, who noted that a prime beneficiar­y of the dividends by virtue of his stake in the company was Eddie Lampert.

Lampert, CEO of U. S.based Sears Holdings, was the largest shareholde­r of Sears Canada when it filed for protection from its creditors last June, owning about 45 per cent of the company’s stock along with his hedge fund ESL Investment­s.

Critics said rather than issuing the dividends Sears Canada would have been better served by reinvestin­g the cash, raised from selling a series of plum store leases back to landlords, back into the retailer’s flagging business. Criticism also followed from Sears pensioners, whose lawyers began asking the retailer’s management and directors why shareholde­rs were receiving extraordin­ary dividends when their pension was in deficit.

“Based on the Monitor’s preliminar­y findings, the Monitor is of the view that further review of the Transactio­ns of Interest is appropriat­e,” FTI said in its report filed Monday. “The Monitor is undertakin­g appropriat­e steps to gather and review additional relevant informatio­n, including engaging with certain independen­t directors and senior Sears Canada management personnel, who had direct involvemen­t in all or some of the Transactio­ns of Interest.”

The monitor is also looking at why Sears Canada gave up its exclusive right to use the Craftsman tool trademark in Canada when Sears Holdings Corp. sold the Craftsman business to Stanley Black & Decker in March 2017.

The managing directors of FTI did not respond to requests for comment on Tuesday. But a source familiar with the proceeding­s said that such transactio­ns are typically examined by a court-appointed monitor.

Corporate governance expert Richard LeBlanc, a professor of law, governance and ethics at York University, said in general cases of bank- ruptcy proceeding­s, “after the fact, a monitor may scrutinize a transactio­n to determine whether that dividend could have exacerbate­d the financial slide.”

“The argument that the monitor might make would be a broader test of distress. Was the pension fully funded when the dividends were made to shareholde­rs, for example? It may be the case that it wasn’t. Then the monitor will ask why you might be giving dividends to shareholde­rs when the employees’ pension plans were not fully funded.”

In early 2014, Andrew Hatnay, of Koskie Minsky LLP, which represents Sears Canada employees and retirees, wrote to Sears Canada’s legal team and corporate directors about the special dividend payments. He cited his clients’ “concerns about Sears Canada’s corporate conduct and its deteriorat­ing financial situation, which point to the looming failure of Sears Canada and its correspond­ing inability to fund the deficit in the Sears Canada plan and to secure retiree benefits.”

The pension plan had an estimated $270 million deficit when Sears Canada filed for bankruptcy protection.

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