Court Orders Inquiry into Sears Canada Dividend Payment

A litigation investigator has been appointed to review C$3 billion in shareholder payouts.

Canada’s Ontario Superior Court of Justice has appointed Toronto-based law firm Lax O’Sullivan Lisus Gottlieb as litigation investigator to review C$3 billion ($2.34 billion) in dividends paid out to Sears Canada’s shareholders, including Sears Holdings Corp. Chief Executive Edward Lampert.

The appointment was requested by members of Sears Canada’s underfunded pension, who are looking to recoup some of their losses after the pension was closed following the company’s 2017 bankruptcy.

According to FTI Consulting, which is the court-appointed monitor in the Sears Canada restructuring proceedings, Lax O’Sullivan Lisus Gottlieb will create a report to send to a creditors’ committee, which will include, among other things, recommendations regarding a proposed litigation plan. The committee will be comprised of members appointed by, or on behalf of, various creditor groups, and will consult with the law firm.

In a blog post, Lampert argued that the Sears pension funds weren’t as bad off as they were perceived to be. He said that as of the end of 2016, the Sears Canada pension plans had more than C$1 billion in assets, and argued that the frequently-cited deficit figure of C$266.8 million is misleading. He said the figure conflates two different obligations—the defined benefit retirement plan, and an unfunded, nonregistered “other benefits plan,” which covers health, dental, and life insurance, not retirement benefits.

Sears Canada made some real estate deals that generated cash proceeds of C$213 million in 2012, and C$906 million in 2013, according to Lampert.  With more than C$1 billion in cash as a result of these sales, the Sears Canada board of directors decided to make distributions to shareholders of C$102 million and C$509 million in 2012 and 2013, respectively. Lampert was among the recipients of these distributions.

“These dividend payments did not deprive the company of the cash needed to fund operations or to pay pension obligation,” said Lampert. “Assuming a reasonable rate of return on its C$1 billion in assets and accounting for the increase in interest rates, Sears Canada should be able to meet its pension obligations.”

He said the controversial dividends paid in 2012 and 2013 represented approximately half of the proceeds Sears Canada received from the sale of assets in those years, and that the company retained more than C$500 million in cash after the dividend payments, with virtually no funded debt.

“This substantial amount of cash was available to be used in the company’s operations going forward,” he said.

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