A group of Sears Canada Inc. pensioners will ask the Ontario Superior Court of Justice on Thursday to appoint a litigation trustee to review certain actions leading up to the company’s restructuring proceedings in 2017.
According to a notice of motion filed on Feb. 9, 2018, former Ontario Superior Court justice Frank Newbould, the group’s proposed trustee, would review, among other actions, the various dividend payments made by Sears Canada in recent years. In particular, the review would focus on payments after 2008, when the company’s actuarial reports began noting deficits in its defined benefit pension plan.
The retirees’ notice of motion noted Sears Canada has suffered from “continued financial deterioration” for more than a decade and thus takes issue with the prudence of paying out more than $1 billion in dividends to shareholders since 2010.
Now that the company has closed its stores and terminated the vast majority of its employees, “there will be significant shortfall in paying creditors’ claims,” the notice of motion states. It also names Edward Lampert, Sears Canada’s controlling shareholder since 2005 and a hedge-fund manager at ESL Investments Inc., as the main beneficiary of the dividend payments in question.
While not disagreeing with the fact that Sears Canada’s financial situation has suffered, Lampert wrote in a blog post over the weekend that he takes issue with the idea that the dividend payouts he received, most recently in 2012 and 2013, contributed negatively to an otherwise avoidable downfall of the company’s financial situation.
In the blog post, Lampert attributed Sears Canada’s decline to its failure to execute a strategy to mitigate the problems facing all brick-and-motor retail operations in a rapidly shifting marketplace.
“In 2016, the company made certain strategic decisions that proved unwise, including pursuing a more aggressive operating strategy to drive sales growth, which consumed cash and required incurring new borrowings in early 2017 for the first time in over a decade,” wrote Lampert.
“I raised concerns about this strategy with management, but the company decided to proceed with these actions. Ultimately, the deterioration in Sears Canada’s operating performance accelerated and the board made the decision to file for protection under the [Companies’ Creditors Arrangement Act], a decision which ESL was not consulted about and did not agree with.”
In 2012 and 2013, Sears Canada undertook real estate transactions that netted the company more than $1 billion, noted Lampert, arguing that the subsequent shareholder payouts of $102 million in 2012 and $509 million in 2013 didn’t create a situation where the company had insufficient cash to run its business and pay its pension obligations.
The notice of motion from the Sears Canada pensioners states that in addition to paying dividends, in the years prior to applying for protection under the Companies’ Creditors Arrangement Act, the company ”drastically reduced its investment and commitment to the retail business of the company.” Lampert disagreed, stating in his blog post that between 2005 and 2015, the company invested between $50 and $100 million in its operations per year and suggesting it was only in 2016 that that level of investment significantly dropped to $27 million.
In his blog post, Lampert also suggested the Sears’ Canada pension situation isn’t as bad as assumed since the overall shortfall noted in reports in recent months — $267 million — includes the deficit in its retiree benefits plan. He also said that with interest rates having risen recently and returns on the pension plan’s assets, the pension situation has likely improved and the company should be able to meet its obligations.
Nevertheless, the Sears Canada situation has sparked a debate over dividend payments amid pension shortfalls, with groups such as the Canadian Centre for Policy Alternatives suggesting that pension regulators should take action by, for example, restricting such distributions or shortening the time frame in which they must address deficits in their plans. Given the debate, should regulators address the issue or are shareholders matters out of their purview? Have your say in Benefits Canada‘s weekly poll.
Last week’s poll referenced a new report suggesting Americans’ retirement savings were in their best shape in a decade and asked whether Canadians were similarly on track. The vast majority (89 per cent) of respondents said no, suggesting that with defined benefit plans on the wane, uncertainty about future investment returns, high consumer debt loads and low pension participation and contribution rates, Canada still has a lot to do to improve retirement readiness. Only 11 per cent said yes, suggesting that with good investment returns, years of talk about the need to save more and improvements to public pensions in the works, Canadians have turned the corner on retirement readiness and are doing very well.