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$509M paid to Sears Canada shareholders could be subject of court case

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An investigation into millions of dollars in dividend payments to Sears Canada shareholders while the company was in decline could soon lead to court action.

On Nov. 19, the court-appointed monitor for the retailer’s insolvency will seek permission from Ontario Superior Court to initiate proceedings against Eddie Lampert and his U.S. hedge fund, ESL Investments, in connection to $509 million paid to Sears shareholders in 2013.

In its notice of motion, the monitor,  FTI Consulting, says it has identified « unresolved concerns » over the dividend payments. Of particular concern, it says, was the apparent limited analysis that informed the decision, which was made at a time when Sears was facing « worsening financial results, » and  ESL appeared « to have had an urgent liquidity need. »

Eddie Lampert is chair of Sears Holdings in the U.S. and ESL Investments. (Sears Holdings)

The monitor also claims there is evidence  Lampert and two then-Sears Canada directors « significantly influenced » the dividend payout decision.

The two former directors, William  Harker and William Crowley, are also named in the potential proceedings. They each had close links to  ESL and  Lampert, according to the court documents.​

Harker and Crowley’s lawyers declined to comment.

None of the allegations in the notice of motion has been proven in court.​

ESL, of which  Lampert is chair and CEO, said the 2013 dividend payments were authorized by Sears Canada’s board of directors at a time when no  ESL executives were members and the retailer was clearly solvent.

« We believe there is no legal basis to reclaim those dividends and any attempt to do so would be without merit, »  ESL spokesperson Michael  Mittelman said.​

Look into it

The investigation into dividend payouts began in January, when the monitor announced it was reviewing $611 million the company paid to Sears Canada shareholders in 2012 and 2013.

Next, Sears Canada retirees and other creditors asked Ontario Superior Court to scrutinize nearly $3 billion paid to Sears shareholders between 2005 and 2013.

That could be a great thing for the pensioners, fantastic thing. – Sears Canada pensioner Ron Husk

The retirees’ aim was to recover some of the money to top up their pension payments, which have been reduced by 20 per cent because of a shortfall in the Sears pension fund.  

« That’s why we wanted an investigation, » said Ken Eady, vice-president of the Sears Canada Retiree Group (SCRG), a volunteer organization representing retirees.

« We wanted to find out if there was money there that should have been ours. »

In March, the court appointed a litigation investigator to look into the dividend payments. 

According to court documents, both the monitor and the litigation investigator recommend proceeding with claims related to the 2013 payouts.

When Sears paid $753 million in dividends in 2010, the approval process « appears to have been robust, » the monitor says. The process included management presentations and meetings with outside lawyers to review the plan, according to court documents.

In 2013, on the other hand, « the board and management devoted significantly less time and analysis » to the process with « limited » correspondence.

FTI Consulting also noted that in 2010, Sears Canada had an operating profit of $196.3 million, but in 2013, it was operating at a loss of $187.8 million.

An undervalued transfer

Based on its findings, the monitor says it believes there’s a reasonable basis for the court to consider whether the 2013 dividend payments represent a « transfer at undervalue » under Canada’s Bankruptcy and Insolvency Act.

« Generally, transfer at undervalue would mean the company is giving something to somebody for less than what it’s worth, » said Toronto-based commercial litigation lawyer Tamara Ramsey.

« They’ve certainly concluded that there’s some evidentiary basis for an argument that the payment of the dividend … rendered the company insolvent, which in essence, is [an argument] the company couldn’t afford to pay the dividend and the shareholders or certain insiders were taking care of themselves. » 

Commercial litigation lawyer Tamara Ramsey says a ‘transfer at undervalue’ generally means a company is giving something to somebody for less than what it’s worth. (CBC)

Sears Canada didn’t file for bankruptcy protection until June 2017. It laid off 17,000 employees with no severance pay before closing its final stores in January.

But in court documents, the monitor argues that in 2013, the retailer was already on « a path to inevitable insolvency. »

The evidence listed includes the company’s « steadily declining financial performance » and its policy of « making significant distributions to shareholders without investing in the growth » of the business.

Sears Canada retiree Ron Husk, 73, had to return to work to make up for the shortfall in his pension payments. (Rhonda Thistle)

Sears Canada pensioner Ron Husk was happy to learn there may be court action involving the $509-million dividend payout.

« That could be a great thing for the pensioners, fantastic thing, » said Husk, who had to return to work as a greeter at Home Depot in Mount Pearl, N.L., to make up for the shortfall in his pension payments.

He says he’s holding out hope some of the dividend money will make its way back to Sears retirees.

« I gave 35 years of my life to Sears. I don’t want to be out working. I’m 73 years old. »

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‘Business as usual’ for Dorel Industries after terminating go-private deal

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MONTREAL — Dorel Industries Inc. says it will continue to pursue its business strategy going forward after terminating an agreement to go private after discussions with shareholders.

« Moving ahead. Business as usual, » a spokesman for the company said in an email on Monday.

A group led by Cerberus Capital Management had previously agreed to buy outstanding shares of Dorel for $16 apiece, except for shares owned by the family that controls the company’s multiple-voting shares.

But Dorel chief executive Martin Schwartz said the Montreal-based maker of car seats, strollers, bicycles and home furniture pulled the plug on a deal on the eve of Tuesday’s special meeting after reviewing votes from shareholders.

“Independent shareholders have clearly expressed their confidence in Dorel’s future and the greater potential for Dorel as a public entity, » he said in a news release.

Dorel’s board of directors, with Martin Schwartz, Alan Schwartz, Jeffrey Schwartz and Jeff Segel recused, unanimously approved the deal’s termination upon the recommendation of a special committee.

The transaction required approval by two-thirds of the votes cast, and more than 50 per cent of the votes cast by non-family shareholders.

Schwartz said enhancing shareholder value remains a top priority while it stays focused on growing its brands, which include Schwinn and Mongoose bikes, Safety 1st-brand car seats and DHP Furniture.

Dorel said the move to end the go-private deal was mutual, despite the funds’ increased purchase price offer earlier this year.

It said there is no break fee applicable in this case.

Montreal-based investment firm Letko, Brosseau & Associates Inc. and San Diego’s Brandes Investment Partners LP, which together control more than 19 per cent of Dorel’s outstanding class B subordinate shares voiced their opposition to the amended offer, which was increased from the initial Nov. 2 offer of $14.50 per share.

« We believe that several minority shareholders shared our opinion, » said Letko vice-president Stephane Lebrun, during a phone interview.

« We are confident of the long-term potential of the company and we have confidence in the managers in place.”

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Anglais

Pandemic funds helping Montreal businesses build for a better tomorrow

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Many entrepreneurs have had to tap into government loans during the pandemic, at first just to survive, but now some are using the money to better prepare their businesses for the post-COVID future.

One of those businesses is Del Friscos, a popular family restaurant in Dollard-des-Ormeaux that, like many Montreal-area restaurants, has had to adapt from a sit-down establishment to one that takes orders online for takeout or delivery.

“It was hard going from totally in-house seating,” said Del Friscos co-owner Terry Konstas. “We didn’t have an in-house delivery system, which we quickly added. There were so many of our employees that were laid off that wanted to work so we adapted to a delivery system and added platforms like Uber and DoorDash.”

Helping them through the transition were emergency grants and low-interest loans from the federal and provincial governments, some of which are directly administered by PME MTL, a non-profit business-development organization established to assist the island’s small and medium-sized businesses.

Konstas said he had never even heard of PME MTL until a customer told him about them and when he got in touch, he discovered there were many government programs available to help his business get through the downturn and build for the future. “They’ve been very helpful right from day one,” said Konstas.

“We used some of the funds to catch up on our suppliers and our rents, the part that wasn’t covered from the federal side, and we used some of it for our new virtual concepts,” he said, referring to a virtual kitchen model which the restaurant has since adopted.

The virtual kitchen lets them create completely different menu items from the casual American Italian dishes that Del Friscos is known for and market them under different restaurant brand names. Under the Prasinó Soup & Salad banner, they sell healthy Greek options and their Stallone’s Sub Shop brand offers hearty sandwiches, yet the food from both is created in the same Del Friscos kitchen.

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Anglais

Downtown Montreal office, retail vacancies continue to rise

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Some of downtown Montreal’s key economic indicators are heading in the wrong direction.

Office and retail vacancies in the city’s central core continued to climb in the fourth quarter of 2020, according to a quarterly report released Thursday by the Urban Development Institute of Quebec and the Montréal Centre-Ville merchants association. The report, whose first edition was published in October, aims to paint a socio-economic picture of the downtown area.

The survey also found office space available for sublet had increased during the fourth quarter, which may foreshadow even more vacancies when leases expire. On the residential front, condo sales fell as new listings soared — a sign that the downtown area may be losing some of its appeal to homeowners.

“It’s impossible not to be preoccupied by the rapid increase in office vacancies,” Jean-Marc Fournier, the former Quebec politician who now heads the UDI, said Thursday in an interview.

Still, with COVID-19 vaccinations set to accelerate in the coming months, “the economic picture is bound to improve,” he said. “People will start returning downtown. It’s much too early to say the office market is going to disappear.”

Public health measures implemented since the start of the pandemic almost a year ago — such as caps on office capacity — have deprived downtown Montreal of more than 500,000 workers and students. A mere 4,163 university and CEGEP students attended in-person classes in the second quarter, the most recent period for which figures are available. Border closures and travel restrictions have also brought tourism to a standstill, hurting hotels and thousands of local businesses.

Seventy per cent of downtown workers carried out their professional activities at home more than three days a week during the fourth quarter, the report said, citing an online survey of 1,000 Montreal-area residents conducted last month.

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