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Handsome dividends paid to Sears Canada shareholders even as the company was faltering and its employee pension fund was running a deficit are being reviewed by the court-appointed monitor handling the company’s insolvency.
“The monitor is carrying out a review of certain material transactions,” according a new report on the insolvency by the monitor, FTI Consulting Inc., filed in Ontario Superior Court.
The transactions of interest, according to the monitor, include a dividend of $ 102 million paid to Sears Canada shareholders on Dec. 21, 2012, and $ 509 million paid on Dec. 6, 2013.
The largest shareholder was U.S. hedge fund manager Edward Lampert, through his holdings in Sears Holdings Corp. in the U.S. and ESL Investments Inc.
Lampert did not respond to a request for comment in time for this story’s deadline.
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The retailer was in steep decline when the dividends were issued: In 2012, Sears Canada recorded an operating loss of $ 83 million and, in 2013, it declared an operating loss of $ 188 million.
The pension deficit was $ 307 million in 2010 and $ 133 million in 2013.
When the company sought creditor protection in June, the pension fund had a deficit of $ 270 million, potentially leaving retirees with reduced incomes.
“Certainly from our standpoint, we felt that the payments of dividends, when the company was not making money and there was no investment in the company and there was a debt to the pension plan, were inappropriate,” said Ken Eady, a spokesperson for Sears Canada retirees.
Eady also took issue with the legal expenses outlined in the report totalling $ 53 million from June to December.
Sears Canada once did more than $ 6 billion a year in business in Canada, operating 123 full-line department stores. The last GTA stores closed on Sunday, ending a retail empire that launched in 1952.
If the dividend payments are found to have been improper, the dividends can be ordered to be repaid, which could be good news for Sears Canada pensioners and creditors, although the process will probably be fraught with litigation.
“It strikes me as the right thing to do, but Lampert is not going to just roll over and write a cheque,” said lawyer Lou Brzezinski, insolvency partner at Blaney McMurtry LLP.
Brzezinski is representing 351 claimants in a certified class action lawsuit brought by Sears Hometown Store dealers.
FTI is also looking into the sale by Sears Holdings Corp. of the Craftsman business to Stanley Black & Decker in March 2017, according to the report.
Both dividends were approved by the Sears Canada’s board of directors at the time.
“If I were a director on the Sears Canada board, and it was experiencing financial distress, I would be very careful about giving dividends to shareholders under those conditions,” said corporate governance expert Richard Leblanc, an associate professor of law at York University and author of The Handbook of Board Governance.
Sears pensioners had been trying for years to have the deficit in their pension fund topped up, petitioning government officials and Sears Canada’s executive leadership to stop the flow of dividends, in the years before the company sought creditor protection.