Sears Board Agrees to Settle Suit Over REIT Tied to Lampert

Updated on
  • Investors claim they were shortchanged in 2015 transaction
  • Chain sold $2.7 billion worth of stores to investment trust

Sears Holdings Corp.’s Chief Executive Eddie Lampert and other company directors agreed to a $40 million settlement of claims they shortchanged investors in a 2015 deal to sell the struggling retail chain’s prime real estate assets to a trust he allegedly controlled.

Lampert and the directors resolved four lawsuits filed in state court in Delaware over the retailer’s formation of a real-estate investment trust to acquire more than 250 properties, according to court filings. The settlement covers so-called derivative claims, which means the $40 million recovery will go to the company rather than individual investors who sued.

The settlement, made public Thursday, comes as Sears’s shares fell the most in more than three years earlier this week as concerns about its cash burn and dwindling options weigh on the chain. In December, Sears posted its biggest quarterly loss in more than four years and shareholders’ view of the company darkened in January after Moody’s Investors Service cut the chain’s credit rating deeper into junk territory, citing large operating losses.

Like other traditional retailers, Sears has lost customers amid competition from newer brands and a falloff in mall visits. But its decline has been steeper than most, and Evercore ISI analyst Matt McGinley, one of the few still following the company, has said he doesn’t see much chance of revival.

REIT Control

Under the challenged deal, $2.7 billion worth of Sears and K-Mart stores were sold in 2015 to Seritage Growth Properties, a real-estate investment trust formed by the retailer. Investors alleged that directors bowed to the wishes of Lampert, a billionaire who owns 49 percent of Sears’s stock, in approving the transaction that effectively gave him control of both the chain and REIT. Seritage leases the stores back to Sears.

Chris Brathwaite, a spokesman for Sears, said in a phone interview Thursday it’s the company’s position that “Mr. Lampert does not control the REIT.”

In an earlier e-mail, Brathwaite said “all Sears shareholders were free to take a stake in Seritage equivalent to their Sears stake, and 98 percent did so.” Shareholders were not shortchanged, he said.

Credit Letters

Lampert has stepped in to fund the failing retailer, which has lost more than $8 billion in the past five fiscal years. In recent weeks, he’s offered letters of credit worth as much as $500 million to reassure suppliers and extended an additional $500 million in loans.

The CEO and the other directors agreed to settle the investor cases to end “the costs, disruption, and distraction of continued litigation,” according to documents filed in Delaware Chancery Court. Part of the settlement may be paid from insurance covering Sears board members, according to the filings. Sears has denied board members violated legal duties to shareholders by approving the REIT deal.

Investors claimed the “highly conflicted transaction” would strip the retailer of “its last remaining valuable assets, its real estate, for an unfair and inadequate price.” The move was likely to “plunge the company into insolvency,” according to the 2015 complaint.

The settlement, reached after mediation, is still subject to final approval from Delaware Chancery Court Judge Travis Laster, according to court filings. It was the mediator, retired federal judge Layn R. Phillips, who suggested the parties settle the case for $40 million, according to the documents.

The case is In RE Sears Holdings Corp. Stockholder and Derivative Litigation, CA11081, Delaware Chancery Court (Wilmington).