EFiled: May 29 2015 05:10PM EDT

Transaction ID 57311891
Case No. 11081-

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JOHN SOLAK, on Behalf of Himself
and All Others Similarly Situated and
Derivatively on Behalf of SEARS
HOLDINGS CORPORATION,

)
)
)
) C.A. No.
)
Plaintiff,
)
v.
)
)
EDWARD S. LAMPERT, STEVEN )
T. MNUCHIN, THOMAS J. TISCH, )
ANN N. REESE, WILLIAM C.
)
KUNKLER, III, PAUL G.
)
DEPODESTA, CESAR L.
)
ALVAREZ, KUNAL S. KAMLANI, )
ESL INVESTMENTS, INC., and
)
SERITAGE GROWTH
)
PROPERTIES,
)
)
Defendants,
)
-and)
)
SEARS HOLDINGS
)
CORPORATION, a Delaware
)
corporation,
)
)
Nominal Defendant.
)
)
VERIFIED STOCKHOLDER CLASS ACTION
AND DERIVATIVE COMPLAINT
Plaintiff John Solak ("Plaintiff") in this Verified Stockholder Class Action

and Derivative Complaint, alleges the following on information and belief, except
as to the allegations specifically pertaining to Plaintiff which are based on personal
knowledge:

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NATURE AND SUMMARY OF THE ACTION

1.

Plaintiff brings this action as a stockholder of Sears Holdings

Corporation ("Sears" or the "Company") on behalf of himself and all other

similarly situated public stockholders of Sears (the "Class") as defined herein, and
derivatively on behalf of Sears.

Plaintiff seeks to prevent the Company's

Chairman, Chief Executive Officer ("CEO"), and controlling stockholder,

defendant Edward S. Lampert ("Lampert"),1 from siphoning off one of Sears' last
remaining valuable assets, its real estate portfolio, through an unfair process.
2.

In particular, Sears is selling its prime real estate assets to Seritage

Growth Properties ("Seritage"), a newly formed real estate investment trust

("REIT") (the "Proposed Transaction"), which defendant Lampert also controls. In
order to retain their investment in Sears' real estate, the Company's current
stockholders will have to buy into the Proposed Transaction or otherwise lose their
ownership interests.2 Unfortunately, for all of Sears' stockholders, the Company's
Board of Directors (the "Board") has refused to provide them with enough
information to adequately decide whether or not to invest in the Rights Offering.
Moreover, it appears that Defendant Seritage is paying an amount that is unfair to

Lampert controls Sears through his investment vehicle, defendant ESL

Investments, Inc. ("ESL").
2

As part of the Proposed Transaction, the Company's stockholders will receive the
right to purchase a share of Seritage (the "Rights Offering").
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Sears and it is readily apparent that the Board did not follow a fair process in
agreeing to the Proposed Transaction. Accordingly, Plaintiff brings a direct action
on behalf of all Sears stockholders against the Board for its failure to provide them
with full and fair disclosures while forcing stockholders to act and on behalf of
those Sears stockholders who are unable or unwilling to participate in the Rights
Offering. Plaintiff also brings this action derivatively on behalf of the Company to
prevent the loss of its valuable properties for an unfair amount as a result of an
unfair process.
3.

Defendant Lampert has controlled Sears since 2005. That year,

defendant Lampert combined Sears, Roebuck and Co. ("Sears Roebuck") with
Kmart Holding Corporation ("Kmart"), touted even at the time as a shrewd real
estate deal. Defendant Lampert's control of Sears has been a disaster for the
Company. Under defendant Lampert's stewardship, Sears has gone from a proud
but struggling retailer, with plenty of capital and time to effect a turnaround, to a
loss-making, cash-burning enterprise, growing ever nearer to insolvency. With
Defendant Lampert as Chairman, the Company has gone through four CEOs,
severely underinvested in its stores, experienced same-store sales declines for six
straight years, and, by 2012, saw annual losses near $1 billion and cash reserves
dwindle to their lowest levels ever.

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4.

In February 2013, as Sears became increasingly burdened with debt

and mounting losses, it appointed defendant Lampert CEO of the Company.

Needing liquidity to cover Sears' accelerating losses, defendant Lampert began
exploring ways to monetize the Company's remaining assets and deepen costcutting measures. In April 2014, Sears was forced to spin off Lands' End, Inc.
("Land's End"), its most profitable division, for about $500 million in proceeds.
Shortly thereafter, in November 2014, the Company also divested Sears Canada
Inc. ("Sears Canada"), raising another $380 million. To help cut costs, Sears
announced the planned closures of 235 stores.
5.

None of defendant Lampert's moves have arrested Sears' monumental

fall. Since defendant Lampert has assumed the CEO post, annual revenues have
fallen by an additional 20%, and proceeds from the Company's massive asset sales
have served only to fund annual losses that have increased by 80% to nearly $1.7
billion in 2014. The Company's capital position has been further strained by its
need to take on additional debt to cover operating losses. In 2014, Sears added
over $1 billion to its debt load, including $625 million in unsecured notes and a
$400 million loan from defendant Lampert's investment fund, defendant ESL. The
Company has since paid off half of its loan from defendant ESL, with the
remaining half secured by some of Sears' most valuable properties.

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6.

Faced with dwindling options to keep the failing retailer afloat,

defendant Lampert is now taking steps to protect his own investment, at the
expense of Sears and its outside stockholders. Defendant Lampert has structured
the Proposed Transaction to transfer the bulk of Sears' valuable real estate to an
entity he will control, defendant Seritage, while leaving Sears saddled with debt,
few valuable assets, and renting the space it formerly owned.
7.

In particular, the Proposed Transaction will result in the sale of 235 of

the Company's best properties, along with Sears' joint venture interests in an
additional thirty-one prime properties (the "JV Properties") to defendant Seritage.
Defendant Lampert, who will possess absolute control over defendant Seritage,
will make off with the Company's valuable real estate assets, while Sears will
receive in exchange a paltry cash payment of approximately $2.5 billion, along
with a new obligation to pay approximately $150 million per year in rent.
8.

Sears' non-controlling stockholders are therefore left with a stark

choice: to participate in the opaque Rights Offering and pay more to retain an
interest in assets they already own, or to not participate in the Rights Offering and
lose ownership of the Company's last remaining large, monetizable asset in the
unfair Proposed Transaction.

Unfortunately, the Board has failed to provide

stockholders with enough information to even make this decision. The Board has
refused to take a position on whether stockholders should participate in the Rights
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Offering. Worse, the Board has not received a fairness opinion and neither the
Registration Statement (as defined herein) nor any materials provided by the Board
contain any kind of financial analysis, property market value or rent appraisals,
projections, or fairness opinions, completely preventing Sears' stockholders from
knowing whether the Company is getting a fair deal as it sells its last remaining
valuable assets. Since they will lose their interests in Sears' most valuable interests
without participating in the Rights Offering, Sears' stockholders with sufficient
means are being effectively forced to buy into a transaction blindfolded. Those
without the means (or desire to pour even more money into the defendant Lampertcontrolled entity) are getting short-changed for Sears' best properties.
9.

In short, the Proposed Transaction is designed to unlawfully divest

Sears and its non-controlling stockholders of the Company's valuable real estate
assets pursuant to an unfair and non-transparent process for grossly inadequate
consideration.

To remedy defendants' breaches of fiduciary duties and other

misconduct, Plaintiff seeks injunctive relief preventing execution of the Proposed

Transaction, unless and until the Company adopts and implements a procedure or
process to obtain a transaction that provides the best possible terms for Sears and
its non-controlling stockholders.

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PARTIES
Plaintiff
10.

Plaintiff was a stockholder of Sears at the time of the wrongdoing

complained of, has continuously been a stockholder since that time, and is a
current Sears' stockholder.
Nominal Defendant
11.

Nominal defendant Sears is a Delaware corporation with principal

executive offices located at 3333 Beverly Road, Hoffman Estates, Illinois. Sears is
the parent company Kmart and Sears Roebuck. The Company operates a national
network of stores with 1,725 full-line and specialty retail stores in the United
States operating through Kmart and Sears Roebuck. Sears also operates a number
of websites under the sears.com and kmart.com banners. As of January 31, 2015,
the Company had approximately 196,000 employees in the United States and U.S.
territories.
Defendants
12.

Defendant Lampert is the CEO of Sears and has been since February

2013 and Chairman of the Board and a director and has been since March 2005.
Defendant Lampert was also Kmart's Chairman of the board and director from
May 2003 until Kmart's merger with Sears Roebuck in March 2005. Defendant
Lampert is the CEO and Chairman of the board of defendant ESL and has been
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since he founded defendant ESL in April 1988. Through defendant ESL and its
related entities, defendant Lampert owns 62,260,584 shares, or 53.2%, of Sears'
outstanding common stock.
13.

Defendant Steven T. Mnuchin ("Mnuchin") is a Sears director and has

been since March 2005. Defendant Mnuchin was also defendant ESL's Vice
Chairman in 2003 and has been a limited partner in defendant ESL. Defendant
Mnuchin was a director of Kmart from May 2003 until Kmart's merger with Sears
Roebuck in March 2005.
14.

Defendant Thomas J. Tisch ("Tisch") is a Sears director and has been

since March 2005. Defendant Tisch has also been a limited partner in defendant
ESL going back to 1992. Defendant Tisch was a director of Kmart from May 2003
until Kmart's merger with Sears Roebuck in March 2005. Defendant Tisch owns
4,533,972 shares, or 4.2%, of Sears' outstanding common stock.
15.

Defendant Ann N. Reese ("Reese") is a Sears director and has been

since March 2005. Defendant Reese was also a Kmart director from May 2003
until Kmart's merger with Sears Roebuck in March 2005.
16.

Defendant William C. Kunkler, III ("Kunkler") is a Sears director and

has been since September 2009.

17.

Defendant Paul G. DePodesta ("DePodesta") is a Sears director and

has been since December 2012.

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18.

Defendant Cesar L. Alvarez ("Alvarez") is a Sears director and has

been since December 2013. Defendant Alvarez is also a member of the board of
directors of Fairholme Funds, Inc., an affiliate of Fairholme Capital Management,
L.L.C. ("Fairholme"), a 24.7% stockholder of Sears.
19.

Defendant Kunal S. Kamlani ("Kamlani") is a Sears director and has

been since December 2014.

20.

Defendant ESL is a Delaware corporation with principal executive

offices located at 1170 Kane Concourse, Suite 200, Bay Harbor Islands, Florida.
Defendant ESL is a private investment management firm founded in April 1988
and operated by defendant Lampert. Defendant ESL and its related entities own
62,260,584 shares, or 53.2%, of Sears' outstanding common stock.
21.

Defendant Seritage is a Maryland REIT with principal executive

offices located at 3333 Beverly Road, Hoffman Estates, Illinois.

Defendant

Seritage will conduct its operations through Seritage Growth Properties, L.P
("Seritage Growth"), a Delaware limited partnership, and subsidiaries of Seritage
Growth (together with Seritage Growth, the "Operating Partnership").

Upon

completion of the Proposed Transaction, defendant Seritage will be a publicly

traded, self-administered, self-managed REIT primarily engaged in the real
property business with a portfolio consisting of 235 acquired properties and thirtyone JV Properties previously owned by Sears.
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22.

Collectively, the defendants identified in 12-19 are referred to

herein as the "Individual Defendants."

SUBSTANTIVE ALLEGATIONS
Background of Defendant Lampert's Control over Sears
23.

Defendant Lampert is a billionaire who has made a fortune through

his private investment fund, defendant ESL. Referred to as the next Warren
Buffett for his similar philosophy of investing in struggling companies that are
reeling from failed strategies or weak management, defendant Lampert had
enjoyed incredible average returns of 29% through the first fifteen years of
defendant ESL's existence.
24.

By 2002, defendant Lampert had Kmart in his crosshairs. Due to

concerns that the struggling retailer may file for bankruptcy, defendant ESL was
able to accumulate a significant stake in Kmart's debt at a significant discount.
Even after Kmart's January 2002 Chapter 11 bankruptcy filing, defendant ESL
continued to buy up the company's debt as the prices tumbled even further. When
Kmart emerged from bankruptcy in May 2003, debt holders were converted into
stockholders, and as a result, defendant ESL owned over 50% of the company. By
the time it resumed trading post-bankruptcy, defendant Lampert had acquired
control of Kmart, a retail leader with $23 billion in annual sales, $3 billion in cash,
and a hoard of valuable real estate, and installed himself as Chairman, all for less
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than $1 billion.
25.

Analysts expected defendant Lampert to simply milk Kmart for its

cash and keep operations running so he could extract top dollar for its real estate.
And while he did begin to monetize the real estateincluding a sale of sixty-eight
stores to Home Depot Inc. and Sears Roebuck for nearly $850 milliondefendant
Lampert also had early success in improving Kmart's profitability.

With the

consult of Gap Inc.'s former CEO and the leadership of a former PepsiCo Inc.
executive who defendant Lampert installed as Kmart's CEO, defendant Lampert
cut inventory, slashed costs, and stopped offering Kmart's traditional deep
discounts, allowing Kmart to earn profits even as same-store sales declined, and
see its stock price soar as a result.
26.

Kmart's rising stock would become a valuable resource for defendant

Lampert in making deals, as he could use it as capital to make acquisitions.

Defendant Lampert turned his sights towards Sears Roebuck. Defendant ESL was
already Sears Roebuck's largest stockholder with a 15% stake. In November 2004,
just eighteen months after Kmart's emergence from bankruptcy, the company
announced an $11.5 billion takeover of Sears Roebuck, financed in cash and Kmart
stock.

The deal would be the second largest retail merger in history.

The

combined company, Sears, would become the third largest retailer in the U.S. with
total annual sales of $55 billion and a massive real estate portfolio via its 3,500
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stores.
27.

The combined company would also be controlled by defendant

Lampert. In a November 18, 2004 Wall Street Journal article discussing the deal,
defendant Lampert projected that defendant ESL would emerge owning a
percentage of Sears "in the high-30s to mid-40s." That stake would quickly swell
to over 50%. And Sears, though retaining the target company's name, would be
financially and functionally dominated by defendant Lampert and his loyalists
brought over from Kmart. As described by The New York Times in an article dated
November 18, 2004:
Whenever the deal receives regulatory approval, Mr. Lampert is sure
to dominate the new company, with Kmart having seven board seats
and Kmart's newly minted chief executive, Aylwin B. Lewis, running
both retailers. Sears will name three directors, including its current
chief executive, Alan J. Lacy.
Though Kmart's team will control the finances, the Sears name is
expected to be front and center for consumers.
28.

While defendants Lampert and ESL's ownership of Sears' stock has

ebbed and flowed since the combination of Kmart and Sears Roebuck, defendant
Lampert has consolidated his control over the Company, its assets, and operations.3
These holdings provide defendant Lampert with absolute control over any matters
brought to a stockholder vote, as confirmed by Sears' Annual Report on Form 10-K
3

Defendant Lampert's ownership interests have fluctuated from a low of about

40% to a high of nearly 60% of the Company's stock. Currently, defendant
Lampert owns over 53% of Sears' stock.
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for the fiscal year ended January 31, 2015, filed with the U.S. Securities and
Exchange Commission ("SEC") on March 17, 2015, that states, in relevant part:
Affiliates of Edward S. Lampert, our Chairman and Chief Executive
Officer, collectively own approximately 49% of the outstanding
shares of our common stock. These affiliates are controlled, directly
or indirectly, by Mr. Lampert. Accordingly, these affiliates, and thus
Mr. Lampert, have substantial influence over many, if not all,
actions to be taken or approved by our stockholders, including the
election of directors and any transactions involving a change of
control.
29.

Hundreds of millions of dollars in Sears' debt is also held by

defendant Lampert, further tightening his control over the Company. Specifically,
according to the Company's Proxy Statement on Schedule 14A (the "Proxy") filed
with the SEC on March 17, 2015, defendants Lampert and ESL held over $900
million in total between short and long-term debt ($200 million of which has since
been paid back), approximately 30% of Sears' total debt. The Proxy detailed the
following debt obligations that Sears has to defendants Lampert and ESL, which
give defendants Lampert and ESL substantial leverage in potential discussions
over strategic alternatives and capital deployments:
Secured Short-Term Loan
In September 2014, the Company, through Sears, Sears Development
Co., and Kmart Corporation ("Borrowers"), entities wholly-owned
and controlled, directly or indirectly by the Company, entered into a
$400 million secured short-term loan (the "Loan") with JPP II, LLC
and JPP, LLC (together, the "Lender"), entities affiliated with ESL.
* * *

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Senior Secured Notes and Subsidiary Notes

At January 31, 2015, Mr. Lampert and ESL held an aggregate of $205
million of principal amount of the Company's 6 5/8% Senior Secured
Notes due 2018 and an aggregate of $3 million of principal amount of
unsecured notes issued by [Sears Roebuck Acceptance Corp.].
Senior Unsecured Notes and Warrants
At January 31, 2015, Mr. Lampert and ESL held an aggregate of $299
million of principal amount of the Company's 8% Senior Unsecured
Notes due 2019 and 10,530,633 warrants to purchase shares of Sears
Holdings' common stock.
30.

Defendant Lampert also controls any decision made by the Board of

Sears. As the Company's controlling stockholders, defendants Lampert and ESL

can simply vote to remove a director who disagrees with defendant Lampert on any
matter. That is unlikely to be necessary, however, as the Company's Board has
been stacked with defendant Lampert's loyalists since the combination of Kmart
and Sears Roebuck.

Defendant Lampert installed four of the eight current

members of the Board, including himself, defendants Mnuchin, Reese, and Tisch,
as Kmart directors in 2003. Further, defendants Mnuchin and Tisch have deepseated loyalties to defendant Lampert from their association with defendant ESL.
As a result, although the Board has the right to cancel the Proposed Transaction at
any time if it deems the Proposed Transaction unfair to Sears' stockholders, it will
not do so because it is under the control of defendant Lampert.
31.

The defendant Lampert-controlled Board has also repeatedly

abdicated its duties to oversee the Company and instead given defendant Lampert
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total control. For instance, the Board specifically delegated authority over the
Company's cash reserves to defendant Lampert.

Specifically, the Company

discloses in its Proxy:

Our Board has delegated authority to direct investment of our surplus
cash to Mr. Lampert, subject to various limitations that have been or
may be from time to time adopted by the Board of Directors and/or
the Finance Committee of the Board of Directors. Mr. Lampert is
Chairman of our Board of Directors and its Finance Committee.
32.

Further, the defendant Lampert-controlled Board has agreed to grant

him a renounced interest exception.

This agreement essentially concedes to

defendant Lampert the opportunity to pursue investments through and for the
benefit of defendant ESL, instead of Sears, except in narrow and specific
situations. The Proxy provides further detail:
Further, to clarify the expectations that the Board of Directors has
with respect to the investment of our surplus cash, the Board has
renounced, in accordance with Delaware law, any interest or
expectancy of the Company associated with any investment
opportunities in securities that may come to the attention of
Mr. Lampert or any employee, officer, director or advisor to ESL and
its affiliated investment entities (each, a "Covered Party") who also
serves as an officer or director of the Company other than
(a) investment opportunities that come to such Covered Party's
attention directly and exclusively in such Covered Party's capacity as
a director, officer or employee of the Company, (b) control
investments in companies in the mass merchandising, retailing,
commercial appliance distribution, product protection agreements,
residential and commercial product installation and repair services and
automotive repair and maintenance industries and (c) investment
opportunities in companies or assets with a significant role in our
retailing business, including investment in real estate currently leased
by the Company or in suppliers for which the Company is a
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substantial customer representing over 10% of such companies'

revenues, but excluding investments of ESL that were existing as of
May 23, 2005.
33.

Defendant Lampert therefore has control over any matter decided by

Sears' stockholders by virtue of his and defendant ESL's stock ownership; control
over any matter decided by the Board by virtue of its unwavering loyalty to him;
control over the Company's deployment of its cash by virtue of the authority
delegated by the Board to him; the ability to pursue valuable investment
opportunities in the interest of defendant ESL instead of Sears; and control over the
Company's day-to-day operations by virtue of his position as CEO.

Thus,

defendant Lampert has absolute control over Sears.

The Company's Prospects Diminish Under Defendant Lampert's Control
34.

Defendant Lampert has served as the Company's Chairman since the

combination of Kmart and Sears Roebuck in 2005.

Though four different

individuals served at the Company's CEO before he officially took the position in
2013, defendant Lampert has been effectively running Sears' day-to-day operations
the entire time. Over those ten years, defendant Lampert has utterly failed to make
promised investments and changes to help turn Sears around, and instead has
presided over one of the greatest destructions of stockholder value in recent
corporate history.

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35.

Presiding over the operations of the $55 billion Company from his

mansion in Florida, which the Company admits is his primary place of

employment, defendant Lampert was reputed to visit the Company's Illinois
headquarters only twice per year. Nonetheless, defendant Lampert embarked on an
ambitious but ill-fated plan to turn the Company around, with himself in command.
36.

Following his first two full years in charge of Searsyears in which

the Company's revenues declined slightly, but remained above $50 billion in each
of 2006 and 2007, and net income averaged over $1.1 billion per yeardefendant
Lampert instituted a new organizational model that splintered Sears into about
thirty separate businesses. Each business was run autonomously, with its own
leadership that reported to defendant Lampert, and even its own board of directors.
37.

In this hedge-fund-style model, the Company's separate businesses

were in effect competing for attention and resources from defendant Lampert, as
opposed to operating collaboratively. The model went so far as to require different
Sears businesses that wanted to cooperate to enter into formal agreements
governing the arrangements. This even included sales departments wanting to
employ the services of Sears' Information Technology or Human Resources, which
were also split into their own independent businesses.

Predictably, this

decentralized structure led to infighting, especially as available resources began to

diminish when the Company's profits turned to losses.
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38.

Internal chaos ensued, and competition for marketing resources best

illustrated the absurd results of the new organizational structure when the famous
Sears catalog advertised power tools next to apparel, and kids' toys on the cover of
the Mother's Day issuethe outcome of internal auctions for catalog space.
According to a July 11, 2013 article by Bloomberg, defendant Lampert's model has
been described by Gary Schettino, a former Sears Vice President, as
"dysfunctionality at the highest level, because there isn't a retail expert in charge."
Mary Ross Gilbert, a managing director at investment bank Imperial Capital,
echoed the sentiment, telling Bloomberg, "[t]he way it's being managed, it doesn't
work[.] They're going to continue to deteriorate."
39.

In addition to instituting a dysfunctional organizational model,

defendant Lampert also severely underinvested in Sears' stores, instead focusing on

technology that supports a tiny fraction of the Company's sales.

By 2012,

defendant Lampert's investment in Sears' stores had fallen to barely 25% of its
closest competitor, and less than 15% of Target Corporation, as illustrated in
Bloomberg's following graphic:

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40.

Meanwhile, the Company's profits began to turn to losses. In 2011,

after turning out meager profits in the first two full years under defendant
Lampert's new organizational model, Sears reported a net loss of over $3 billion.
From 2011 through the end of 2014, the Company has lost an average of nearly
$1.8 billion per year. In mid-2013, months after defendant Lampert formally took
over as Sears' CEO, cash reserves fell to a ten-year low; today, they stand at just
half that. Annual revenues under defendant Lampert's command have fallen 44%,
from over $55.6 billion down to $31.2 billion.

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41.

Sears has been forced to accumulate more debt to address its capital

shortages. Most recently, in 2014, Sears added over $1 billion to its debt load. In
addition to $625 million in long-term unsecured notes, the Company looked in
desperation to defendants Lampert and ESL for short-term funds. The result: a
self-serving $400 million loan from defendant Lampert's investment fund,
defendant ESL, secured by twenty-five of Sears' top properties that, by some
accounts, were actually worth as much as $500 million.
42.

In total, defendants Lampert and ESL own approximately 30% of

Sears' debt. The average annual interest rate on this debt is 7%, meaning Sears
pays defendant ESL about $60 million a year just in interest payments.

In

addition, some of the Sears notes defendant ESL own also came with warrants to
buy ten million shares of the Company's stock. These warrants are now about
$150 million in the money.
43.

To cover and stem the Company's massive and accelerating operating

losses, and to service its debt obligations, defendant Lampert has resorted to
shedding Sears' major assets, accumulating more debt in the Company's name, and
instituting drastic cost-cutting measures. After the April 2014 spin off of Lands'
End, its most profitable division, for about $500 million in proceeds, and the
November 2014 divestiture of Sears Canada to raise another $380 million, the
Company's last major asset is its real estate holdings.
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To help cut costs, in

December 2014, Sears also announced the planned closures of 235 stores. In the
face of an operating loss of nearly $1.7 billion in the most recent fiscal year,
however, and with the addition of $1 billion in new debt, the Company's prospects
as a going concern aren't optimistic.
Defendant Lampert Engineers the Proposed Transaction
44.

After ten years in command of Sears, defendant Lampert's leadership

has driven the Company to the point of losing an average of over $1.8 billion per
year and selling off assets at fire sale prices just to cover those losses. With few
valuable assets left, Sears has now entered into the Proposed Transaction to sell the
majority of its real estatethe Company's final large monetizable assetto
defendant Lampert-controlled defendant Seritage in a deal where stockholders are
not provided with even basic information on the fairness of the Proposed
Transaction and where the Company (and its stockholders, unless they agree to
turn over more of their money to defendant Lampert's control) will lose the real
estate assets in exchange for inadequate consideration.
45.

On April 1, 2015, Sears issued a press release announcing the

Proposed Transaction and explaining that defendant Seritage had filed a

Registration Statement on Form S-11 with the SEC disclosing further details about
the Proposed Transaction. The press release stated:
HOFFMAN ESTATES, Ill., April 1, 2015 Sears Holdings
Corporation (the "Company") (NASDAQ: SHLD) today announced
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that, in connection with its previously announced exploration of the

formation of a real estate investment trust ("REIT"), Seritage Growth
Properties ("Seritage"), a Maryland trust formed by the Company, has
filed a registration statement on Form S-11 (the "Registration
Statement") with the Securities and Exchange Commission (the
"SEC").
The Registration Statement provides for a rights offering by Seritage
intended to partially finance its purchase of approximately 254 of the
Company's properties, virtually all of which are operated as Sears and
Kmart stores. As of January 31, 2015, Sears Holdings owned or leased
1,725 Kmart and Sears stores combined. Proceeds to the Company of
this sale are expected to exceed $2.5 billion.
The Company would in turn enter into a master lease agreement,
pursuant to which it would lease the Sears and Kmart properties from
Seritage and continue to operate its retail stores in those locations. The
proceeds of the rights offering, together with debt and other financing
which Seritage would obtain, would be used by Seritage to purchase
the properties from the Company. The subscription rights would be
distributed pro rata to all stockholders of record of the Company and
entitle holders to purchase common shares of Seritage. The record
date, subscription price, subscription ratio (the number of rights
needed to acquire a share in Seritage) and other terms of the proposed
rights offering will be announced prior to the commencement of the
rights offering.
Edward S. Lampert, Chairman and Chief Executive Officer of the
Company and Chairman and Chief Executive Officer of ESL
Investments, Inc. ("ESL") and certain investment funds affiliated with
ESL, have advised the Company that they intend to exercise their pro
rata portion of the subscription rights in full, although they have not
entered into any agreement to do so. In addition, Fairholme Capital
Management, L.L.C. has advised the Company that it expects that its
clients will exercise substantially all of the rights they receive, subject
to the REIT ownership limitations imposed by the Company and
regulatory considerations.
The rights offering is currently anticipated to close by the end of the
second quarter of this year, and is subject to the approval of the Board
of Directors of Sears Holdings, market conditions and the satisfaction
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of certain other conditions. Sears Holdings may, at any time prior to

the closing of the REIT transaction, decide to abandon the transaction
or modify its terms.
46.

The Registration Statement on Form S-11/A, as amended, and filed

with the SEC on May 26, 2015 (the "Registration Statement"), provided some
further details on the properties and other interests that defendant Seritage will
acquire. Those other interests including Sears' valuable stake in the JV Properties,
which developed out of three separate property-based joint ventures into which the
Company recently entered to raise capital, while also maintaining an interest in the
underlying properties. As the Registration Statement discloses, in relevant part:
Following the Transaction, Seritage Growth will be a publicly traded,
self-administered, self-managed REIT primarily engaged in the real
property business through its investment in Operating Partnership.
Initially, our portfolio will consist of 235 properties (the "Acquired
Properties") that are owned (or, in one case, ground-leased) by Sears
Holdings Corporation (together with its subsidiaries, "Sears Holdings"
or "SHC"), as of the date of this prospectus. In addition, we will own
three 50% joint venture interests in an additional twelve, ten and nine
properties (collectively, the "JV Properties"), respectively, which joint
venture interests are owned by Sears Holdings as of the date of this
prospectus and will be sold to us in the Transaction. We will lease (or
sublease) a substantial majority of the space at all but eleven of the
Acquired Properties (such eleven properties, the "Third Party
Properties") back to Sears Holdings under a master lease agreement
(the "Master Lease"), with the remainder of such space leased to thirdparty tenants. The Third Party Properties, which do not currently
contain a Sears Holdings store, will not have any space leased to Sears
Holdings, and will instead be leased solely to third-party tenants. A
substantial majority of the space at the JV Properties is also leased to
Sears Holdings by GS Portfolio Holdings LLC (the "GGP JV"), a
joint venture between Sears Holdings and a subsidiary of General
Growth Properties, Inc. (together with its subsidiaries, "GGP"), SPS
- 23 -

Portfolio Holdings LLC (the "Simon JV"), a joint venture between

Sears Holdings and a subsidiary of Simon Property Group, Inc.
(together with its subsidiaries, "Simon"), or MS Portfolio LLC (the
"Macerich JV" and, together with the GGP JV and the Simon JV,
each, a "JV"), a joint venture between Sears Holdings and a subsidiary
of The Macerich Company (together with its subsidiaries,
"Macerich"), as applicable, in each case under a separate master lease
with each JV (the "JV Master Leases"). We will acquire Sears
Holdings' 50% interest in each of the JVs in the Transaction.
We expect to generate revenues primarily by leasing our properties to
tenants, including both Sears Holdings and third-party tenants, who
will operate retail stores (and potentially other uses) in the leased
premises, a business model common to many publicly traded REITs.
In addition to revenues generated under the Master Lease through rent
payments from Sears Holdings, we expect to generate revenue
through leases to third-party tenants under existing and future leases
for space at our properties, including the Acquired Properties. In
addition, we will have an interest in the JV Properties through our
50% interest in each JV.
47.

The result of the Proposed Transaction will see defendant Lampert

abscond with the Company's most valuable remaining assets, while Sears and its
stockholders will be left with inadequate consideration that will quickly be burned
by the Company's massive loss-making operations overseen by defendant Lampert.
Indeed, the Proposed Transaction will see Sears lose, and defendant Seritage gain,
235 of the Company's properties, many of which appear to be its most valuable,
and the Company's interests in the thirty-one JV Properties. Additionally, because
Sears retail stores will continue to operate out of the vast majority of the properties,
the Proposed Transaction will add $150 million per year in rent obligations to
defendant Seritage onto the Company's already crushing debt load.
- 24 -

Defendant Lampert Controls Both Sides of the Proposed Transaction

48.

Defendant Lampert is the controlling figure on both sides of the

Proposed Transaction, and once the Proposed Transaction is completed he will

control defendant Seritage in a similar manner and to an extent at least as great as
his control of Sears. Indeed, defendant Lampert has structured defendant Seritage
and the Proposed Transaction such that he will control every aspect of the voting,
decision-making, and operations of the REIT, while also receiving a massive share
of defendant Seritage's monetary distributions.
49.

The structure of defendant Seritage flies in the face of the intent with

which vehicles structured as REITs were legalized. REITs were designed to make
large-scale investments in real estate accessible to average investors. To achieve
this, certain limits applicable to REITs like defendant Seritage were adopted,
including a maximum of 50% of a REIT's common stock allowed to be held in
total by the REIT's five largest stockholders, and a traditional maximum of 9.6% of
a REIT's common stock allowed to be held by a single stockholder (a limit
defendant Seritage has adopted). Defendant Seritage's OP Unit and Class B Share
(both defined herein) structure enables defendants Lampert and ESL to flout both
of those regulations for their own benefit.
50.

Defendant Lampert is limited under the legal structure of this REIT to

9.6% ownership of defendant Seritage common stock, which would severely

- 25 -

diminish his control of defendant Seritage relative to his control of Sears. To skirt
that rule and retain this control, however, defendant Lampert has created two
additional layers of interests in defendant Seritage that are available only to him.
51.

First, the Operating Partnership will issue a special class of voting

shares exclusively to defendants Lampert and ESL (the "Class B Shares") that are
designed to allow them to maintain at least the same proportion of voting power
they currently enjoy at Sears. While the Class B Shares are "non-economic," they
will allow defendant Lampert to get around the 9.6% limit on any single
stockholder's interest in the REIT, giving him control over all voting matters at
defendant Seritage. In essence, instead of being subject to the 9.6% limit, the
voting power in defendant Seritage of defendants Lampert and ESL will be
equivalent to at least their current 53.2% stake in Sears, and potentially larger if
less than 100% of the shares available in the Rights Offering are exercised.
52.

Defendants Lampert and ESL will also be allowed to purchase units in

Seritage's Operating Partnership (the "OP Units") in connection with the Proposed
Transaction. Defendants Lampert and ESL will be issued 100% of the OP Units
available in the Rights Offering, and will control all of the OP Units not retained
by defendant Seritage, which will be the sole general partner of the Operating
Partnership. Because defendants Lampert and ESL will control defendant Seritage
with their Class B Shares and defendant Seritage common stock, and defendants
- 26 -

Seritage, Lampert, and ESL will be the only holders of OP Units, defendants
Lampert and ESL will thus control the Operating Partnership. As the Operating
Partnership will control all aspects of defendant Seritage's operations and strategic
decision-making, defendants Lampert and ESL will therefore totally control
defendant Seritage. As a result, the Operating Partnership, and the entirety of
defendant Seritage's operations and strategic decision-making, will be entirely
controlled by defendants Lampert and ESL.
53.

In addition to control of defendant Seritage, the OP Units are designed

to allow defendants Lampert and ESL to gain financial benefits through dividends
and distributions from defendant Seritage.

According to the Registration

Statement, defendant Seritage entered into an exchange agreement with defendant

ESL that will allow defendant ESL to purchase OP Units in exchange for
"subscription rights that, if exercised, would result in ESL receiving in excess of"
the 9.6% ownership limit of defendant Seritage common stock. The Registration
Statement also confirms that holders of OP Units are "entitled to receive
distributions" and that holders of OP Units will be allocated a pro-rata share of the
Operating Partnership's profits. As a result, instead of being subject to the 9.6%
limit, the financial stake in defendant Seritage of defendants Lampert and ESL is
expected to be equivalent to at least their current 53.2% stake in Sears, and
potentially larger if less than 100% of the shares available in the Rights Offering
- 27 -

are exercised.
54.

The Class B Shares in defendant Seritage, which will provide

defendant Lampert with voting control over defendant Seritage, are available only
to defendants Lampert and ESL. The OP Units, which confer control of the
Operating Partnership will allow for dividend and distribution payments above
what are normally allowed for the REIT's stockholders, are also available only to
defendants Lampert and ESL. Sears' current stockholders other than defendants
Lampert and ESL will not have any opportunity to participate in defendant
Seritage in the same manner as defendants Lampert and ESL.
55.

Defendant Seritage's Registration Statement confirms that the OP

Units will give defendant ESL (and therefore also defendant Lampert) substantial
control over certain transactions involving defendant Seritage or the Operating
Partnership:
Upon completion of this offering, ESL will own a substantial
percentage of the [OP] Units, which may be exchanged for cash or, at
the election of Seritage [], Seritage [] common shares, and which will
result in certain transactions involving Seritage [] or Operating
Partnership requiring the approval of ESL.
56.

In the Registration Statement, defendant Seritage admits further that

defendants Lampert and ESL will have significant control over defendant Seritage
and the Operating Partnership, in particular due to their significant ownership and
defendant Lampert's position on the Seritage Growth board of trustees.
- 28 -

The

Registration Statement also indicates that defendants Lampert's and ESL's

motivations may be different from those of defendant Seritage's common
stockholders due to defendant Lampert's control over both defendant Seritage and
Sears. According to defendant Seritage's Registration Statement:
In addition, Mr. Lampert, the Chairman of the Board and Chief
Executive Officer of Sears Holdings and Chairman and Chief
Executive Officer of ESL, will serve on the Seritage Growth Board of
Trustees. As a result, ESL and its affiliates will have substantial
influence over us and Sears Holdings. In any matter affecting us,
including our relationship with Sears Holdings, the interests of ESL
may differ from or conflict with the interests of our other
stockholders.
57.

In that statement, the Registration Statement confirms what is

evidenced by the structure of defendant Seritage and the Proposed Transaction:

that defendants Lampert and ESL will control defendant Seritage.

Upon

consummation of the Proposed Transaction, defendants Lampert and ESL will

control the Operating Partnership, and therefore control the operations and
strategic direction of defendant Seritage. Defendants Lampert and ESL will also
retain a majority of the financial benefits through the OP Units, and control over
any matter brought to a stockholder vote through the Class B Shares. And most
critically, defendants Lampert and ESL will control the valuable real estate assets
of Sears, which will have been unfairly divested from the ownership of Sears and
the Class.

- 29 -

Stockholders Lack Crucial Information About the Unfair Proposed

Transaction
58.

While Sears' stockholders are able to participate in the Rights Offering

to acquire a stake in defendant Seritage, the Rights Offering is tantamount to

paying more money to retain ownership in assets they already own now. Those
funds will enable defendant Lampert to gain outright control of Sears' valuable real
estate in exchange for paying an unfair amount to Sears that will simply cover the
Company's enormous operating losses and debt obligations for a short while
longer.

Meanwhile, stockholders who subscribe to the Rights Offering, in

exchange for paying themselves an inadequate amount for assets they already own,
will be relegated to a risky even smaller minority stake in another entity controlled
in every way by defendant Lampert.
59.

Defendants are coercing the Company's stockholders into making a

decision to pay out of pocket to maintain their current position in Sears' real estate
assets without any recommendation from the Company's Board. According to the
Registration Statement, the Board considered "the fair market value of the
Acquired Properties and the JV Interests purchased in the [Proposed] Transaction"
(though no such data has been provided to the Company's public stockholders).
Despite this apparent consideration, the Board has still refused to take a position on
the Proposed Transaction. As confirmed in the Registration Statement:

- 30 -

Neither Sears [] nor Seritage [], nor their respective boards, is making
any recommendation regarding the exercise of the subscription rights
or the purchase, retention or sale of Sears [] common stock or Seritage
[] common shares.
60.

As the Proposed Transaction envisions the sale of the Company's real

estate assets for approximately $2.5 billionmore than 50% of the total market
value of Sears' stockand forces Sears' stockholders to make a major decision
about their holdings (whether or not to buy into the Rights Offering), the Board's
silence is inexcusable.

Further, in a financial transaction of this magnitude,

stockholders expect that a prudent board of directors will engage outside advisors
and obtain an independent opinion as to the fairness of the transaction.
61.

A fairness opinion is typically ordered by the board of directors of a

company that is party to a transaction, and traditionally involves a total review of a

transaction from a financial point of view. While there are no official guidelines as
to when it is appropriate to obtain a fairness opinion, such an opinion is important
for a board of directors to provide assurances to minority stockholders that it is
operating in a prudent manner that is fair to all stockholders. This is particularly
true when the transaction in question involves self-dealing, as it does here.
62.

The Board's approval of the Proposed Transaction is particularly

egregious because its members do not even know the value of the properties that
they are forcing Sears to sell to defendant Seritage. The Registration Statement
merely states that the Company's proceeds in the Proposed Transaction will reflect
- 31 -

"a value, with respect to the Acquired Properties, determined by Sears [] with the
assistance of a third-party appraisal process, taking into account all the terms of the
Master Lease and other relevant factors." Thus, defendants Lampert and ESL,
through their control of Sears and defendant Seritage, will be able to determine the
price of the Proposed Transaction with some minor involvement of an appraiser.
And because there will be no independent fairness opinion, defendants Lampert
and ESL are free to price the Proposed Transaction at a level that will maximize
their benefit, to the detriment of Sears and the Class.
63.

The absence of a fairness opinion, the failure to value the properties

underlying the transaction, and the Board's reluctance to take a stance on the
Proposed Transaction raises serious questions about the Board's motives and the
propriety of the Proposed Transaction. Instead of providing their opinion as the
Board of Sears, or ordering independent, expert analysis on the complex Proposed
Transaction, the Board has taken the position that the Company's stockholders
should do their own analysis to decide whether to participate in the Proposed
Transaction. Indeed, in the Registration Statement, defendant Seritage states to the
Company's stockholders: "You should make your decision based on your
assessment of our business and financial condition, our prospects for the future, the
terms of the rights offering and the information contained in this prospectus."

- 32 -

64.

Such a suggestion with respect to the Proposed Transaction is absurd

on its face, given the complexity of the Proposed Transaction and the intricacy of
the necessary financial analysis required to make such an assessment. Worse,
defendants have failed to provide Sears' stockholders with anything beyond
minimal financial information to help make their decision.
65.

Indeed, the Company's stockholders do not have access to any

independent appraisal of the properties subject to the Proposed Transaction, any

financial analysis of the performance of the Sears outlets that will occupy those
properties, and projections for the future prospects of the properties, any data on
market rents, or any information on applicable capitalization rates.

Instead,

defendants are withholding this information, preventing the Company's

stockholders from knowing if Sears is getting a good deal in selling the last of its
valuable assets to defendants Lampert and ESL.
66.

Though it provides very little information to help Sears' stockholders

decide whether to participate in the Rights Offering, the Registration Statement

does highlight the stark choice Sears' stockholders are being forced to make.
Those who decide not to participate in the Rights Offering will unfairly be divested
of their stake in the Company's best real estate assets.

As the Registration

Statement discloses on page 19:

If you do not exercise your subscription rights to purchase Seritage []
common shares, following the [Proposed] Transaction you will no
- 33 -

longer retain an ownership interest in the assets and liabilities

transferred to [the Operating Partnership], as the common stock of
Sears [] that you hold will no longer reflect the activities, assets or
liabilities transferred to [the Operating Partnership].
67.

Those Sears stockholders who do elect to participate in the Rights

Offering, on the other hand, will be forced to take on additional investment risk to
simply retain a small stake in Sears' real estate. As the Registration Statement
discloses on page 16: "Stockholders who exercise subscription rights will incur
investment risk on new money invested."
68.

The Proposed Transaction is an obvious effort by defendant Lampert

to transfer Sears' last large monetizable asset, in exchange for grossly inadequate
compensation, to defendant Seritage, where it will be unencumbered by the
liabilities and losses that have mounted at Sears in a decade under defendant
Lampert's control. Defendant Lampert, who controls both Sears and defendant
Seritage and therefore stands on both sides of the Proposed Transaction, has not,
and cannot, demonstrate that the Proposed Transaction is entirely fair to Sears and
the Class.
The Proposed Transaction Will Severely Damage Sears and Its Stockholders
69.

Defendants cannot demonstrate that the Proposed Transaction is

entirely fair because of the failures in the process described above, including the
lack of a fairness opinion and current valuation of the properties that are part of the
Proposed Transaction. What is known is that without its best assets, Sears will
- 34 -

have little hope of survival and still be burning through cash.

70.

The Proposed Transaction will unfairly divest Sears and its

stockholders of 235 of the Company's most valuable stores and thirty-one JV

Properties, which are also some of Sears' best.

As analysts at Credit Suisse

explained, the REIT would have to include Sears' "best performing stores" in order
to be viable, as the stores defendant Seritage will receive must have enough free
cash flow to cover the additional $150 million in total annual rent for which Sears
will now be on the hook. This is counter-productive to any opportunity Sears has
to turn around its retail operations, as the Company's best chance is through its top
performing stores, which have now been saddled with an additional $150 million
in annual obligations.
71.

The Registration Statement also describes certain "recapture rights"

that skew the Proposed Transaction in favor of defendant Seritage. These rights
are also detrimental to Sears' top performing stores, and actually provide the REIT
with an option to terminate the Company's leases and recapture the square footage
to lease out to other tenants. Defendant Seritage can exercise these rights for up to
50% of the square footage in up to fifty Sears stores per year. In exchange for
recapturing the space, defendant Seritage has to pay Sears certain costs and
expenses, which mean it will only exercise the rights on the most valuable
properties. For Sears, giving up half of the retail space in the most valuable and
- 35 -

likely profitable properties would severely hamper any turnaround efforts.

72.

Further, defendant Seritage has 100% recapture rights in twenty-one

specific locations, which do not count against the fifty property per year limit.
While these properties have not been specifically identified, it stands to reason that
they include some of Sears' most profitable. Defendant Seritage is responsible for
lease termination payments to Sears if it recaptures properties under this provision,
so it will only recapture the most valuable and Sears' most profitable locations.
73.

In addition, the Registration Statement admits that numerous

agreements related to the Proposed Transaction may have terms that would not
have existed had defendants Lampert and ESL not been on both sides of the
negotiating table:
The terms of our agreements with Sears [] have been and will be
established by Sears [] with the intention of producing sustainable and
fair terms consistent with the respective business plans of both Sears
[] and Seritage [] following the Transaction. Because these
agreements will be negotiated in the context of the Transaction, they
necessarily will involve negotiations between affiliated entities.
Accordingly, the terms of these agreements may have different terms
than would have resulted from negotiations with one or more
unrelated third parties.
74.

Deals like the Proposed Transaction are typically known as sale-

leaseback transactions, and are often employed by property owning corporations

who want to monetize their real estate and invest the proceeds in the underlying
business. In Sears' case, however, those proceeds are simply destined to cover the
- 36 -

Company's operating losses, which grew to over $1.6 billion in 2014, and adding
an additional $150 million in rent obligations, may only cover Sears for another
year.
75.

Additionally, commenting on the sale-leaseback structure of the

Proposed Transaction, analysts at Evercore ISI reported that they "struggled to find
historical examples of sale-leasebacks benefitting the retailer over the long-run." If
defendant Lampert insists on entering the Company into a sale-leaseback
transaction, he should at least distribute the proceeds to Sears' stockholders, rather
than burn through the cash to cover another year of the Company's losses.
Analysts from J.P. Morgan sum it up well: "Ultimately, the liquidity provided by
the REIT capital raise cannot address the underlying poor performance of [the]
retail business."
76.

Analysts have also projected that the Proposed Transaction will leave

Sears without any future options to monetize its remaining real estate assets in a
meaningful way.

In essence, the real estate assets subject to the Proposed

Transaction are Sears and its stockholders' last opportunity to salvage some value
from the Company's assets. As analysts from Evercore ISI explained:
The income and population density around the average [Sears]
locations in the REIT is materially higher than the company average
these stores have HH density 26% higher and income which is 10%
higher. This is likely an indication that the best stores were included
in the REIT, not the 'average' store which would possibly lead to a
REIT version 2.0 at some point.
- 37 -

77.

Indeed, if the Proposed Transaction is consummated, Sears and the

Class will not only lose possession of the Company's most valuable real estate for
an unfair price, they will lose their last, best chance to salvage some value from
those assets. Indeed, as analyst Matt McGinley from Evercore ISI told Bloomberg
in an article on April 1, 2015: "This is the last big thing that they can do[.] It
basically takes the assets out of the real estate and separates them from the liability
that is Sears."
78.

The "liability that is Sears" includes several billions of dollars in

short- and long-term debt obligations, a substantial portion of which is owned by

defendant ESL. As most recently reported, defendant ESL owned over $700
million of the Company's debt, including Sears' most current obligation, the
remaining $200 million of the short-term loan that the Company secured with
twenty-five of its prime properties. This means that of the new cash raised by
Sears in the Proposed Transaction, $200 million will flow back to defendant
ESL, and defendant Lampert, almost immediately. In total, the portion of Sears'
$2.5 billion cash influx that could be reclaimed by defendant Lampert through
debts the Company owes defendant ESL could reach nearly 30%.
79.

Sears without its real estate assets is viewed as a major liability in

U.S. government circles as well.

Following announcement of the Proposed

Transaction, the Pension Benefit Guarantee Corporation ("PBGC"), which insures

- 38 -

pension programs, has expressed concerns about the solvency of the Company's
already underfunded pension. As analysts from Morgan Stanley reported:
As the government's guarantor of corporate pensions, the PBGC has a
potential economic interest in any transaction by a company sponsor
that risks a plan's ongoing solvency. The PBGC has limited, but
powerful, authority to seek a court-imposed involuntary termination
of the plan when long-run losses to the agency are expected. In such
event, the PBGC has an immediate joint and several claim against the
company in an amount equal to the asset-obligation funding gap. The
PBGC has a history of wielding this authority to seek funding
concessions prior to significant transactions.
Morgan Stanley believes the PBGC may force Sears to make a substantial
contribution to its pension in order to move forward with the Proposed
Transaction, which would exacerbate the Company's dire financial situation and
further harm Sears and its stockholders.
80.

The Proposed Transaction is a financially and structurally unfair deal

that, if consummated, would transfer the Company's last remaining large,

monetizable asset to a REIT controlled by defendants Lampert and ESL.

In

exchange, Sears and its stockholders would receive a severely inadequate cash
payment that the defendant Lampert-controlled Company may use to cover
operating losses and debt obligations for another year or so, before stockholders
are left holding the bag in an insolvency widely viewed as inevitable if the
Proposed Transaction occurs.

- 39 -

DERIVATIVE AND DEMAND FUTILITY ALLEGATIONS

81.

Plaintiff brings the Third and Fourth Causes of Action derivatively in

the right and for the benefit of Sears to redress injuries suffered, and to be suffered,
by Sears as a direct result of breaches of fiduciary duty, as well as the aiding and
abetting thereof, by the Individual Defendants and defendant Seritage. Sears is
named as a nominal defendant solely in a derivative capacity.
82.

Plaintiff will adequately and fairly represent the interests of Sears in

enforcing and prosecuting its rights.

83.

Plaintiff was a stockholder of Sears at the time of the wrongdoing

complained of, has continuously been a stockholder since that time, and is a
current Sears stockholder.
84.

The current Board of Sears consists of the following eight individuals:

defendants Alvarez, DePodesta, Kamlani, Kunkler, Lampert, Mnuchin, Reese, and

Tisch. Plaintiff has not made any demand on the present Board to institute this
action because such a demand would be a futile, wasteful, and useless act, as set
forth below.
Defendant Lampert Dominates and Controls the Company and Board
85.

It is highly unlikely that the Board will pursue an action against

defendant Lampert, who faces a substantial likelihood of liability here. Defendant

Lampert has concentrated the control of the Company in his hands. He created
- 40 -

Sears in its current form, and is the Chairman and CEO of the Company. Further,
as Sears discloses in its financial filings, defendant Lampert and his firm,
defendant ESL, beneficially own of approximately 53% of the Company's
outstanding shares. Accordingly, defendant Lampert can vote out any director that
opposes him. Indeed, the Company disclosed in its Annual Report on Form 10-K
filed with the SEC on March 17, 2015, that defendants Lampert and ESL "have
substantial influence over many, if not all, actions to be taken or approved by our
stockholders, including the election of directors and any transactions involving a
change of control."
86.

As CEO, defendant Lampert has control over the day-to-day

operations of Sears.

Beyond that, further demonstrating defendant Lampert's

control of the Board, the Board has granted him full authority over the deployment
of the Company's cash reserves. The Board has also entered into the renounced
interest agreement with defendant Lampert, which enables him to pursue valuable
investments on behalf of himself and defendant ESL, and not for the benefit of
Sears, with only a few exceptions.
87.

Defendant Lampert has assured that the Board would not question his

decision by stacking it with individuals that have a long history of working loyally
with him. In particular, defendants Mnuchin and Tisch have long had personal and
business affiliations with defendant Lampert, as well as with one-another, that
- 41 -

underlie their loyalty to each other and to defendant Lampert.

88.

Defendant Mnuchin has shared a long-term friendship with defendant

Lampert.

After living together as roommates at Yale University, defendants

Mnuchin and Lampert went to work at Goldman Sachs together. The year after
defendant Mnuchin decided to leave Goldman Sachs, in 2003, defendant Lampert
brought him over to work at defendant ESL as Vice-Chairman of defendant
Lampert's investment firm, where defendant Mnuchin was also an investor. That
same year, defendant Lampert chose defendant Mnuchin to join him on the board
of Kmart; and then again in 2005 when Kmart merged with Sears Roebuck,
defendant Lampert brought along the loyal defendant Mnuchin to join the Board of
Sears, where he continues to serve now ten years later.
89.

Defendant Tisch has also shared a long-term relationship with

defendant Lampert.

Defendant Tisch became a client and limited partner of

defendant ESL in 1992. Defendant Tisch and his family became some of the
largest investors in defendant ESL and were enormously enriched by their
investments with defendant Lampert. Defendants Tisch and Lampert have also
engaged in business of a more personal nature, such as when defendant Tisch sold
a Greenwich, Connecticut, property to defendant Lampert in 1993.
90.

Defendant Tisch has made no secret of his admiration of and loyalty

to defendant Lampert, stating in a November 21, 2004 Bloomberg article, that

- 42 -

"Eddie [Lampert] is one of the extraordinary investors of our age, if not the most
extraordinary," and "[b]ased on the way he thinks about investments, I trust Eddie
[Lampert]." To reward his loyalist, defendant Lampert chose defendant Tisch to
join him on the board of Kmart in 2003. When defendant Lampert merged Kmart
with Sears Roebuck, he brought along the loyal defendant Tisch to join the Board
of Sears. A decade later, defendant Tisch remained a Sears director.
91.

Defendant Reese, like defendants Mnuchin and Tisch, has been a

long-time loyal member of the defendant Lampert-controlled boards. Defendant

Reese was also appointed to the board of Kmart when it emerged from bankruptcy
in 2003, and when Kmart combined with Sears Roebuck to form Sears in 2005,
defendant Reese was brought along by defendant Lampert to serve on the
Company's Board.
92.

Defendants Mnuchin, Tisch, and Reese have all served on the Board

of Sears and its predecessor for over twelve years, a tenure that respected corporate
governance advisor Institutional Shareholder Services, Inc. ("ISS") defines as
"excessive." ISS, in fact, opines in its Governance Quick Score 2.0, published
January 2014, that anything beyond nine years should be considered excessive,
because "tenure of more than nine years is considered to potentially compromise a
director's independence."

Excessive tenure is even more problematic for

companies like Sears where the long-tenured directors have served under the
- 43 -

constant leadership of a well-known and dominating CEO, such as defendant

Lampert. According to ISS, "directors who have sat on the board in conjunction
with the same management team may reasonably be expected to support that
management team's decisions more willingly."
93.

While it can be argued that excessive tenures have value in the

directors' knowledge of the business, that rationale is not applicable here.

Defendant Lampert's total control over the Company's direction and operations
completely nullify a need for directors who are deeply knowledgeable in Sears'
business. Given the absolute control over Sears that defendants Mnuchin, Tisch,
and Reese have ceded to defendant Lampert, it is apparent that ISS's concerns on
board tenure are indeed applicable to the service of defendants Mnuchin, Tisch,
and Reese. Accordingly, defendants Mnuchin, Tisch, and Reese's long tenure on
the Board further support that they are not independent of defendant Lampert.
94.

Simply put, defendant Lampert has absolute control overs Sears and

the Board. He possesses control over any matter decided by Sears' stockholders by
virtue of his and defendant ESL's stock ownership, and control over any matter
decided by the Board by virtue of its unwavering loyalty to him. Thus, the Board
will not take any action that is contrary to the interests of defendants Lampert or
ESL.

- 44 -

The Board Faces a Substantial Likelihood of Liability for Entering into the
Unfair Proposed Transaction
95.

As explained herein, the members of the Board disloyally placed

defendant Lampert's interests ahead of the interests of the Company. Further, the
members of the Board have abdicated their duties and placed defendant Lampert in
complete control of the Company. Finally, the members of the Board knowingly
undertook an inadequate process in agreeing to the Proposed Transaction. As a
result, the Board breached its duty of loyalty and therefore faces a substantial
likelihood of liability, excusing demand.
The Decision to Enter into the Proposed Transaction Is Not a Protected
Business Decision
96.

In addition to acting disloyally, the Board failed to consider all

reasonably available information in agreeing to the Proposed Transaction. In

addition to not receiving a fairness opinion of the actual Proposed Transaction, the
Board did not receive any valuations of the property being included in the
Proposed Transaction, such as an appraisal. According, the Board's failure to
consider all reasonably available information is a breach of its members fiduciary
duty of care, at a minimum. Because the members of the Board breached their
duty of care in entering into the Proposed Transaction, it does not receive the
benefit of the business judgment rule and demand is excused.

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CLASS ACTION ALLEGATIONS

97.

Plaintiff brings the First and Second Causes of Action on behalf of

himself and the Class who have been or will be harmed by the conduct described
herein. Excluded from the Class are the defendants and any individual or entity
affiliated with any defendant.
98.

This action, as it applies to the First and Second Causes of Action, is

properly maintainable as a class action.

99.

The Class is so numerous that joinder of all members is impracticable.

According to the Company's SEC filings, there were more than 106 million shares
of Sears common stock outstanding as of March 9, 2015.
100. There are questions of law and fact which are common to the Class
and which predominate over questions affecting any individual Class member.
The common questions include, inter alia, the following:
(a)

whether the Individual Defendants and defendant ESL have

breached their fiduciary duties of undivided loyalty, independence, or due care

with respect to Plaintiff and the other members of the Class in connection with the
Proposed Transaction;
(b)

whether the Individual Defendants and defendant ESL are

engaging in self-dealing in connection with the Proposed Transaction;

(c)

whether the Proposed Transaction is entirely fair to Plaintiff

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and the Class;

(d)

whether the Individual Defendants and defendant ESL have

breached any of their other fiduciary duties owed to Plaintiff and the other
members of the Class in connection with the Proposed Transaction, including the
duties of good faith, diligence, and fair dealing;
(e)

whether the Individual Defendants disclosed all material

information when asking Plaintiff and members of the Class to act;

(f)

whether defendant Seritage aided and abetted the Individual

Defendants' breaches of fiduciary duties; and

(g)

whether Plaintiff and the other members of the Class would

suffer irreparable injury were the transactions complained of herein consummated.

101. Plaintiff's claims are typical of the claims of the other members of the
Class and Plaintiff does not have any interests adverse to the Class.
102. Plaintiff has retained competent counsel experienced in litigation of
this nature and will fairly and adequately represent and protect the interests of the
Class.
103. The prosecution of separate actions on behalf of the First and Second
Causes of Action by individual members of the Class would create a risk of
inconsistent or varying adjudications with respect to individual members of the
Class which would establish incompatible standards of conduct for the party
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opposing the Class.

104. Plaintiff anticipates that there will be no difficulty in the management

of this litigation. A class action for the First and Second Causes of Action is
superior to other available methods for the fair and efficient adjudication of this
controversy.
105. Defendants have acted on grounds generally applicable to the Class
with respect to the matters complained of in the First and Second Causes of Action,
thereby making appropriate the relief sought herein with respect to the Class as a
whole.
FIRST CAUSE OF ACTION
(Class Claim Against the Individual Defendants and
Defendant ESL for Breach of Fiduciary Duty)
106. Plaintiff incorporates by reference and realleges each and every
allegation contained above, as though fully set forth herein, except for the
allegations related solely to the derivative claims.
107. The Individual Defendants, as directors of Sears, and defendant ESL,
as controlling stockholder of the Company, owe Plaintiff and the Class fiduciary
duties of care, loyalty, and good faith. The Individual Defendants and defendant
ESL have violated these duties, and have acted to put their own interests ahead of
the interests of Plaintiff and the Class.
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108. By the acts, transactions, and course of conduct alleged herein,

defendants, individually and acting as a part of a common plan, are attempting to
unfairly deprive Plaintiff and the other members of the Class of the true value of
Sears' real estate assets that will be sold in the Proposed Transaction.
109. The Individual Defendants and defendant ESL have violated their
fiduciary duties to Plaintiff and the Class by entering Sears into a Proposed
Transaction that is not entirely fair.
110. As demonstrated by the allegations above, the Individual Defendants
and defendant ESL failed to exercise the care required and breached their duty of
loyalty owed to Plaintiff and the Class because, among other reasons:
(a)

they agreed to sell the Company's most valuable real estate

assets in a Proposed Transaction that is not entirely fair;

(b)

they failed to disclosure all material information; and

(c)

they ignored or did not protect against the numerous conflicts

of interests resulting from the Individual Defendants' and defendant ESL's own
financial stakes in the Proposed Transaction.
111. Because the Individual Defendants and defendant ESL control the
business and corporate affairs of Sears, and have access to private corporate
information concerning Sears' assets, business, and future prospects, there exists an
imbalance and disparity of knowledge and economic power between them and
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Plaintiff and the Class that makes it inherently unfair for them to agree to the
Proposed Transaction wherein they will reap disproportionate benefits to the
exclusion of reaching an agreement that is entirely fair.
112. By reason of the foregoing acts, practices, and course of conduct, the
Individual Defendants and defendant ESL have failed to exercise ordinary care and
diligence in the exercise of their fiduciary duties toward Plaintiff and the other
members of the Class.
113. The Individual Defendants and defendant ESL are engaging in selfdealing, are not acting in good faith toward Plaintiff and the other members of the
Class, and have breached and are breaching their fiduciary duties to the Class.
114. As a result of the Individual Defendants' and defendant ESL's
unlawful actions, Plaintiff and the other members of the Class will be irreparably
harmed in that they will not receive their fair portion of the value of Sears' real
estate assets that will be sold in the Proposed Transaction. Unless the Proposed
Transaction is enjoined by the Court, the Individual Defendants and defendant ESL
will continue to breach their fiduciary duties owed to Plaintiff and the members of
the Class, and may consummate the Proposed Transaction, all to the irreparable
harm of the members of the Class.
115. Plaintiff and the Class have no adequate remedy at law. Only through
the exercise of this Court's equitable powers can Plaintiff and the Class be fully
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protected from the immediate and irreparable injury that defendants' actions
threaten to inflict.
SECOND CAUSE OF ACTION
(Class Claim Against Defendant Seritage for Aiding and Abetting
Breaches of Fiduciary Duty)
116. Plaintiff incorporates by reference and realleges each and every
allegation contained above, as though fully set forth herein, except for the
allegations related solely to the derivative claims.
117. Defendant Seritage knowingly assisted the Individual Defendants' and
defendant ESL's breaches of fiduciary duties against Plaintiff and the Class in
connection with the Proposed Transaction, which, without such aid, would not
have occurred.

In connection with discussions regarding the Proposed

Transaction, Sears provided, and defendant Seritage obtained, sensitive, non-public

information concerning Sears' real estate portfolio and, thus, had unfair advantages
that are enabling defendant Seritage to acquire the Company's real estate assets at
an unfair and inadequate price.
118. As a result of this conduct, Plaintiff and the other members of the
Class have been and will be damaged in that they have been and will be prevented
from obtaining a fair value for Sears' real estate assets that will be sold in the
Proposed Transaction.
119. As a result, Plaintiff and the Class members are being irreparably
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harmed.
120. Plaintiff and the Class have no adequate remedy at law.
THIRD CAUSE OF ACTION
(Derivative Claim Against All Individual Defendants
and Defendant ESL for Breaches of Fiduciary Duty)
121. Plaintiff incorporates by reference and realleges each and every
allegation contained above, as though fully set forth herein, except for the
allegations related solely to the class claims.
122. The Individual Defendants, as directors of Sears, and defendant ESL,
as controlling stockholder of the Company, owe Sears fiduciary duties of care and
loyalty. The Individual Defendants and defendant ESL, aided and abetted by
defendant Seritage, have violated these duties, and have acted to put their own
interests ahead of the interests of the Company.
123. By the acts, transactions, and course of conduct alleged herein,
defendants, individually and acting as a part of a common plan, are attempting to
unfairly deprive Sears of the true value of the Company's real estate assets that will
be sold in the Proposed Transaction.
124. The Individual Defendants and defendant ESL have violated their
fiduciary duties to Sears by entering Sears into a Proposed Transaction that is not
entirely fair. Defendant Seritage has aided and abetted the Individual Defendants'
and defendant ESL's breaches of duty to Sears.
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125. As demonstrated by the allegations above, the Individual Defendants

and defendant ESL failed to exercise the care required and breached their duty of
loyalty owed to Sears because, among other reasons:
(a)

they agreed to sell the Company's most valuable real estate

assets in a Proposed Transaction that is not entirely fair; and

(b)

they ignored or did not protect against the numerous conflicts

of interests resulting from the Individual Defendants' and defendant ESL's own
financial stakes in the Proposed Transaction.
126. By reason of the foregoing acts, practices, and course of conduct, the
Individual Defendants and defendant ESL have failed to exercise ordinary care and
diligence in the exercise of their fiduciary duties toward Sears.
127. The Individual Defendants and defendant ESL are engaging in selfdealing and are not acting in good faith toward Sears.
128. As a result of the Individual Defendants' and defendant ESL's
unlawful actions, the Company will be irreparably harmed in that it will not
receive its fair portion of the value of its real estate assets that will be sold in the
Proposed Transaction. Unless the Proposed Transaction is enjoined by the Court,
the Individual Defendants and defendant ESL will continue to breach their
fiduciary duties owed to Sears and may consummate the Proposed Transaction, all
to the irreparable harm of the Company.
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129. The Company has no adequate remedy at law. Only through the
exercise of this Court's equitable powers can Sears be fully protected from the
immediate and irreparable injury that defendants' actions threaten to inflict.
FOURTH CAUSE OF ACTION
(Derivative Claim Against Defendant Seritage for Aiding and Abetting
Breaches of Fiduciary Duty)
130. Plaintiff incorporates by reference and realleges each and every
allegation contained above, as though fully set forth herein, except for the
allegations related solely to the derivative claims.
131. The Individual Defendants, aided and abetted by defendant Seritage,
have violated their fiduciary duties of care, loyalty, good faith, and independence
owed to the Company and its public stockholders and have acted to put their
personal interests ahead of the interests of the Company.
132. Sears provided, and defendant Seritage obtained, sensitive, non-public
information concerning Sears' real estate portfolio and, thus, had unfair advantages
that are enabling defendant Seritage to acquire the Company's real estate assets at
an unfair and inadequate price.

Defendant Seritage aided and abetted the

Individual Defendants' breaches of fiduciary duties owed to the Company and its
stockholders.
133. As a result of defendants' unlawful actions, the Company will be
irreparably harmed in that it will not receive its fair portion of the value of its real
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estate assets that will be sold in the Proposed Transaction. Unless the Proposed
Transaction is enjoined by the Court, the Individual Defendants and defendant ESL
will continue to breach their fiduciary duties owed to Sears and may consummate
the Proposed Transaction, all to the irreparable harm of the Company.
134. The Company has no adequate remedy at law. Only through the
exercise of this Court's equitable powers can Sears be fully protected from the
immediate and irreparable injury that defendants' actions threaten to inflict.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff demands injunctive relief, in his favor and in favor
of the Class and the Company and against defendants as follows:
A.

Declaring that this action, as it applies to the First and Second Causes

of Action, is properly maintainable as a class action and, as it applies to the Third

and Fourth Causes of Action, is properly maintainable as a derivative action;
B.

Rescinding, to the extent already implemented, the Proposed

Transaction;
C.

Enjoining defendants, their agents, counsel, employees, and all

persons acting in concert with them from consummating the Proposed Transaction,
unless and until defendants adopt a transaction to sell the Company's real estate
assets that is entirely fair after disclosing all material information;

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D.

Awarding Plaintiff the costs and disbursements of this action,

including reasonable attorneys' and experts' fees; and

E.

Granting such other and further equitable relief as this Court may

deem just and proper.

Dated: May 29, 2015

ANDREWS & SPRINGER LLC

/s/ Peter B. Andrews
Peter B. Andrews (#4623)
Craig J. Springer (#5529)
3801 Kennett Pike
Building C, Suite 305
Wilmington, DE 19807
Telephone: (302) 504-4957
Facsimile: (302) 397-2681
Attorneys for Plaintiff

Of Counsel:
ROBBINS ARROYO LLP
BRIAN J. ROBBINS
STEPHEN J. ODDO
EDWARD B. GERARD
JUSTIN D. RIEGER
600 B Street, Suite 1900
San Diego, CA 92101
(619) 525-3990

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