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Sears’ Bankruptcy; Court Approves Sale to Board Chair
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Alas, Sears, the iconic retailer that has outfitted families for 125 years, is going through bankruptcy, a federal legal procedure for debtors.  Bankruptcy sometimes involves selling most of the debtor’s assets, using the proceeds to pay the creditors, and possibly extinguishing the remaining debt.  For businesses, bankruptcy might also take the form of creditors agreeing to adjust the debt while the business remains in operation pursuant to a plan designed to increase the business’ bottom line. 


Sears’ bankruptcy proceedings began in October, 2018.  Not all interested parties are in agreement on the direction Sears’ bankruptcy should take. ESL, a hedge fund owned by the chairman of Sears’ board of directors, Eddie Lampert, sought to purchase the company.  The price negotiated by ESL and Sears’ board  was $5.2 billion.  Lampert’s  plan concerning the current 687 stores is to retain 400 of the most profitable.  The result of a sale to ESL would thus save 45,000 jobs. 


Lampert was Sears’ CEO from 2013 through October, 2018. He owns 31% of the outstanding stock, and ESL owns another 18.5%.   Under his leadership the company sold some of its brands including the well-known Craftsman tools.  The unsecured creditors (lenders without collateral) accuse Lempert of dismantling the company to the retailer’s great detriment.  Those creditors include vendors and landlords whose accounts with Sears are long overdue. 


Also shouldering debt from Sears are Pension Benefit Guaranty Corporation which is allegedly owed $1.7 billion, and St. Jude Children’s Research Hospital which treats kids with cancer.  The hospital  claims that it is owed more than $700,000 in charitable donations made by customers collected by  Kmart which is owned by Sears.


When a company is going through bankruptcy and selling property other than in the ordinary course of business, approval by a bankruptcy judge is required.[1]  Sears’ plan to sell the business to ESL required approval by a judge, and ESL sought that approval.  The unsecured creditors filed with the court objections  (formal disagreements) to the sale.  They also questioned the independence of the Board of Directors.   ESL responded that a majority of the board members are independent directors and, when negotiating the deal with ESL, they were all well advised by independent financial and legal advisors.


An outside/independent director is a board member who is not employed by or closely affiliated with the business.  They are expected to bring an independent perspective to the job. An inside director is one who is also an employee, officer, chief executive, major shareholder or otherwise similarly connected to the business. 


Regardless of whether a board member is an inside or outside director,  board members have a fiduciary duty to the company.  A person with a fiduciary duty owes three particular responsibilities to the organization – 1) act with great care, 2) be loyal and avoid conflicts of interest, and 3) ensure compliance with the organization’s stated purpose and mission, and applicable laws.  The fiduciary responsibility forbids a director from obtaining a personal benefit at the expense of the organization.


A hearing was held to determine whether the sale to ESL should be approved,  A Bankruptcy Court  judge ruled in favor of permitting the sale.   Likely  a consideration by the judge was saving the jobs of tens of thousands of Sears employees. 


The long term viability of the company remains in question.  Sears has not been profitable since 2010 and has endured 11 consecutive years of declining sales. It has proven unable to manage tough competition from Amazon, Target, and Walmart, among others.  At Sears’ peak, there were 4,000 stores.  Today, only 687 remain.  The bankruptcy was filed on October 15, 2019.



What factors would likely have influenced the bankruptcy judge’s decision to permit the sale of the company to ESL?



[1] Bankruptcy Code, Section 363.