A shareholder lawsuit involving Sears Holdings Corp. has been settled. The settlement resolves complaints that conflicted insiders acquired control of $2.7 billion in company real estate while paying only about 60 percent of the overall value of its share. The suit, filed in mid-2015 as a derivative case on the company’s behalf, accused company CEO and majority owner Edward S. Lampert – along with a hedge fund Lampert controls and seven directors – of playing a role in unfair, undervalued agreements involving 266 of Sears Holdings’ most valuable properties, including both Sears and Kmart sites.
Seritage Growth Properties, a real estate investment trust (REIT), controlled by Lampert and ESL Investments Inc., acquired the properties by way of a rights offering structured to limit control or changes of control in the REIT. In turn, Seritage gained rights in some cases to evict Sears or Kmart and market the properties for more lucrative leases or redevelopment – a process already begun. The complaint alleged:
While [Sears Holdings] may be facing bankruptcy, Seritage has increased in value and attracted sophisticated investors because of the properties it obtained in the Seritage transaction and the terms of the master lease which favor Seritage.
There were claims in the complaint that the property maneuvers and fiduciary breaches could lead to a bankruptcy filing by Sears Holdings, at one time the nation’s third largest retailer. However, those named in the suit or their insurers will pay the $40 million, and not the company itself.
The lawsuit stems from Sears Holdings’ announcement in April 2015 of its plans to form Seritage as part of larger efforts to boost liquidity. At the time of the Seritage rights offering and store site acquisitions, half of the members of Sears Holdings’ board were affiliated with either ESL or Fairholme Capital, the company’s second-largest investor. The lawsuit stated:
The Seritage transaction is part of Lampert’s ongoing strategy to strip [Sears Holdings] of its valuable core assets. [Sears Holdings] board minutes confirm that Lampert was the driving force behind the deal.
Other funds, including Fairholme Capital and affiliate Fairholme Funds, were accused of aiding and abetting director breaches of duty. The suit alleged that four Sears Holdings directors had direct connections to the Fairholme funds or ESL and, as a result, stood on both sides of the store transactions. Fairholme Capital owns 25 percent of Sears Holdings’ common stock, while Lampert and ESL own 54.6 percent. Seritage, meanwhile, was directly controlled by Lampert and ESL, and “was privy to all information about the relative values of the properties” involved in the deal. All the directors involved, the suit said, “were acting at the behest of Lampert and ESL to approve the transaction. Seritage knew there was no independence between the parties.” The settlement, fee and incentive awards as well as broad liability releases agreed to by both sides all require approval by Vice Chancellor J. Travis Laster.
The Plaintiffs are represented by Christine S. Azar and Ralph N. Sianni of Labaton Sucharow LLP; Daniel C. Girard and Adam E. Polk of Girard Gibbs LLP; Brian J. Robbins, Stephen J. Oddo and Nichole T. Browning of Robbins Arroyo LLP; Peter B. Andrews and Craig J. Springer of Andrews & Springer LLC; Alexander Arnold Gershon and Michael A. Toomey of Barrack Rodos & Bacine; and Edward A. Wallace and Mark R. Miller of Wexler Wallace LLP. The case is In re: Sears Holdings Corp. Stockholder and Derivative Litigation (case number 11081) in the Delaware Court of Chancery.
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