IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`CONSOLIDATED
`C.A. No. 2019-0798-JTL
`Public Version filed on May 30, 2023
`
`IN RE SEARS HOMETOWN AND
`OUTLET STORES, INC. STOCKHOLDERS
`LITIGATION
`
`CO-LEAD PLAINTIFFS’ OPENING AND
`ANSWERING POST-TRIAL BRIEF
`
`Of Counsel:
`
`David Schwartz
`John Vielandi
`LABATON SUCHAROW LLP
`140 Broadway
`New York, NY 10005
`(212) 907-0700
`
`Ned Weinberger (Bar No. 5256)
`Mark Richardson (Bar No. 6575)
`Michael C. Wagner (Bar No. 6955)
`Jiahui (Rose) Wang (Bar No. 7127)
`LABATON SUCHAROW LLP
`222 Delaware Avenue, Suite 1510
`Wilmington, DE 19801
`(302) 573-2540
`
`Co-Lead Counsel for Co-Lead Plaintiffs
`Carl L. Stine
`Adam J. Blander
`WOLF POPPER LLP
`845 Third Avenue
`New York, NY 10022
`(212) 759-4600
`
`Peter B. Andrews (Bar No. 4623)
`Craig J. Springer (Bar No. 5529)
`David M. Sborz (Bar No. 6203)
`Christopher P. Quinn (Bar No. 5823)
`ANDREWS & SPRINGER LLC
`4001 Kennett Pike, Suite 250
`Wilmington, DE 19807
`(302) 504-4957
`
`Executive Committee for
`Co-Lead Plaintiffs
`
`Donald J. Enright
`Elizabeth K. Tripodi
`LEVI & KORSINSKY, LLP
`1101 30th Street, N.W., Suite 115
`Washington, D.C. 20007
`(202) 524-4290
`
`Dated: May 19, 2023
`
`Samuel L. Closic (Bar No. 5468)
`Seth T. Ford (Bar No. 7051)
`Robert B. Lackey (Bar No. 6843)
`PRICKETT, JONES & ELLIOTT, P.A.
`1310 King Street
`Wilmington, DE 19801
`(302) 888-6500
`
`Co-Lead Counsel for Co-Lead Plaintiffs
`
`EFiled: May 30 2023 03:10PM EDT
`Transaction ID 70106635
`Case No. 2019-0798-JTL
`
`

`

`TABLE OF CONTENTS
`TABLE OF AUTHORITIES....................................................................................iv
`TABLE OF DEFINITIONS ......................................................................................v
`INTRODUCTION.....................................................................................................1
`FACTS ......................................................................................................................3
`I.
`SEARS AND SEARS HOLDINGS................................................................3
`II.
`SHOS...............................................................................................................3
`III.
`SHOS’S BOARD OF DIRECTORS AND SPECIAL COMMITTEE ...........6
`IV.
`SHOS’S MANAGEMENT .............................................................................9
`V.
`SHOS PREPARES THE HOMETOWN LIQUIDATION PLAN
`AFTER THE SEARS BANKRUPTCY........................................................10
`LAMPERT REPEATEDLY SEEKS AN ESL-FUNDED
`MANAGEMENT BUYOUT ........................................................................12
`VII. TRANSFORM ACQUIRES SEARS HOLDINGS FROM
`BANKRUPTCY AND NEW CONCERNS ARISE AT SHOS....................14
`VIII. LAMPERT, DONNING “TWO HATS,” CONSIDERS
`HOMETOWN LIQUIDATION PLAN ........................................................19
`LAMPERT’S LOWBALL OFFER...............................................................21
`ANALYSIS OF LAMPERT’S OFFER CONFIRMS A HOMETOWN
`LIQUIDATION IS THE SUPERIOR ALTERNATIVE ..............................22
`THE BOARD REJECTS LAMPERT’S OFFER, LAMPERT
`FLEXES CONTROL, AND THE BOARD COUNTER-PROPOSES
`FAIR TERMS ...............................................................................................23
`XII. HOMETOWN’S DETERIORATION IMPERILS SHOS............................25
`XIII. LAMPERT’S APRIL 12, 2019 BOARD PRESENTATION AND
`PROPOSALS ................................................................................................26
`
`IX.
`X.
`
`VI.
`
`XI.
`
`

`

`XIV. THE BOARD REMAINS STEADFAST .....................................................28
`XV. THE BOARD PREPARES TO APPROVE LIQUIDATION.......................29
`XVI. LAMPERT FIRES TWO COMMITTEE MEMBERS AND
`AMENDS THE BYLAWS ...........................................................................30
`A.
`The Bylaw Amendment ......................................................................31
`B.
`Removal of Phelan and Robbins.........................................................33
`XVII. LAMPERT’S BYLAW AMENDMENT KILLS THE HOMETOWN
`LIQUIDATION, DISARMS THE BOARD, AND SENDS SHOS
`TOWARD BANKRUPTCY .........................................................................34
`XVIII. A DEAL INEVITABLE, SHOS DEVELOPS GROUND-UP
`STANDALONE OUTLET PROJECTIONS ................................................37
`XIX. THE COMPANY FEELS LAMPERT’S TIGHTENING SQUEEZE..........38
`XX. THE MERGER AND OUTLET GO-SHOP.................................................41
`XXI. SHOS SELLS OUTLET TO FRANCHISE GROUP, THE
`TRANSACTION CLOSES, AND HOMETOWN GOES
`BANKRUPT .................................................................................................43
`ARGUMENT...........................................................................................................46
`I.
`LAMPERT BREACHED HIS DUTY OF LOYALTY ................................46
`A.
`The Bylaw Amendment Was Inequitable and Disloyal......................47
`B.
`The Transaction Was Not Entirely Fair..............................................50
`1.
`The Transaction Resulted from Unfair Dealing .......................51
`2.
`Lampert Did Not Pay a Fair Price ............................................59
`3.
`Beach Demonstrated the Transaction Price Was Unfair ..........60
`4.
`McMahon Confirmed the Transaction Price was Unfair..........71
`LAMPERT’S AFFILIATES ARE LIABLE FOR AIDING AND
`ABETTING...................................................................................................97
`ii
`
`II.
`
`
`
`

`

`III.
`IV.
`
`PLAINTIFFS ARE ENTITLED TO DAMAGES ........................................98
`THE $11.9 MILLION “EXPENSE REIMBURSEMENT” SHOULD
`BE DISGORGED..........................................................................................99
`INTEREST AND COSTS...........................................................................100
`V.
`CONCLUSION .....................................................................................................101
`
`iii
`
`
`
`

`

`TABLE OF AUTHORITIES
`
`Page(s)
`
`Cases
`Agranoff v. Miller,
`791 A.2d 880 (Del. Ch. 2001) ................................................................75, 81, 83
`Andaloro v. PFPC Worldwide,
`2005 WL 2045640 (Del. Ch. Aug. 19, 2005).....................................................65
`In re Appraisal of Dell Inc.,
`2016 WL 3186538 (Del. Ch. May 31, 2016), aff’d in part, rev’d in
`part sub nom. Dell, Inc. v. Magnetar Glob. Event Driven Master
`Fund Ltd, 177 A.3d 1 (Del. 2017)................................................................68, 69
`In re Appraisal of Jarden Corp.,
`2019 WL 3244085 (Del. Ch. July 19, 2019), aff’d sub nom by Fir
`Tree Value Master Fund, LP v. Jarden Corp., 236 A.3d 313 (Del.
`2020)...................................................................................................................66
`In re Appraisal of SWS Grp., Inc.,
`2017 WL 2334852 (Del. Ch. May 30, 2017) .....................................................87
`Blasius Industries, Inc. v. Atlas Corp.,
`27 27 564 A.2d 651 (Del. Ch. 1988) ..................................................................49
`Cede & Co. v. JRC Acq. Corp.,
`2004 WL 286963 (Del. Ch. Feb. 10, 2004)........................................................75
`Cede & Co. v. Technicolor, Inc.,
`542 A.2d 1182 (Del. 1988).................................................................................98
`Cinerama, Inc. v. Technicolor, Inc.,
`663 A.2d 1134 (Del. Ch. 1994), aff’d, 663 A.2d 1156 (Del. 1995) ...................60
`Crescent/Mach I P’ship, L.P. v. Turner,
`2007 WL 1342263 (Del. Ch. May 2, 2007) .......................................................78
`In re Cysive, Inc. S’holders Litig.,
`836 A.2d 531 (Del. Ch. 2003) ............................................................................54
`
`iv
`
`
`
`

`

`Doft & Co. v. Travelocity.com Inc.,
`2004 WL 1152338 (Del. Ch. May 20, 2004.................................................61, 86
`In re Emerging Commc’ns, Inc. S’holders Litig.,
`2004 WL 1305745 (Del. Ch. May 3, 2004) .......................................................98
`In re First Bos., Inc. S’holders Litig.,
`1990 WL 78836 (Del. Ch. June 7, 1990) .....................................................52, 79
`Flood v. Synutra Int’l, Inc.,
`195 A.3d 754 (Del. 2018)...................................................................................51
`FrontFour Cap. Grp. LLC v. Taube,
`2019 WL 1313408 (Del. Ch. Mar. 11, 2019) .....................................................57
`Gesoff v. IIC Indus. Inc.,
`902 A.2d 1130 (Del. Ch. 2006) ..........................................................................52
`Gholl v. eMachines, Inc.,
`2004 WL 2847865 (Del. Ch. Nov. 4, 2004), aff’d, 875 A.2d 632
`(Del. 2005)..........................................................................................................70
`Glob. GT LP v. Golden Telecom, Inc.,
`993 A.2d 497 (Del. Ch. 2010), aff’d, 11 A.3d 214 (Del. 2010) ..................passim
`Guth v. Loft, Inc.,
`5 A.2d 503 (Del. 1939).......................................................................................46
`Hollinger Inc. v. Hollinger Int’l, Inc.,
`858 A.2d 342 (Del. Ch. 2004), appeal refused, 871 A.2d 1128
`(Del. 2004)..............................................................................................48, 49, 50
`Hollinger Int’l, Inc. v. Black,
`844 A.2d 1022 (Del. Ch. 2004), aff’d, Black v. Hollinger Int’l, Inc.,
`872 A.2d 559 (Del. 2005) (per curiam)........................................................48, 50
`IQ Hldgs., Inc. v. Am. Com. Lines Inc.,
`2013 WL 4056207 (Del. Ch. Mar. 18, 2013) .....................................................76
`Ivanhoe P’rs v. Newmont Mining Corp.,
`535 A.2d 1334 (Del. 1987).................................................................................46
`
`v
`
`

`

`Kahn v. Lynch Commc’n Sys., Inc.,
`638 A.2d 1110 (Del. 1994)...........................................................................52, 59
`Lane v. Cancer Treatment Ctrs. of Am.,
`2004 WL 1752847 (Del. Ch. July 30, 2004) ......................................................66
`Merion Cap., L.P. v. 3M Cogent, Inc.,
`2013 WL 3793896 (Del. Ch. July 8, 2013) ......................................63, 64, 71, 79
`Meyers v. Quiz-DIA LLC,
`2018 WL 1363307 (Del. Ch. Mar. 16, 2018) .....................................................56
`In re Orchard Enters., Inc.,
`2012 WL 2923305 (Del. Ch. July 18, 2012), aff’d by Orchard
`Enters., Inc. v. Merlin P’rs LP, 2013 WL 1282001 (Del. Mar. 28,
`2013).................................................................................................60, 72, 73, 76
`In re PLX Tech. Inc. S’holders Litig.,
`2018 WL 5018535 (Del. Ch. Oct. 16, 2018)......................................................76
`Reis v. Hazelett Strip-Casting Corp.,
`28 A.3d 442 (Del. Ch. 2011) ..................................................................59, 60, 99
`In re Rural Metro Corp. S’holders Litig.,
`88 A.3d 54 (Del. Ch. 2014) ..........................................................................52, 97
`S. Muoio & Co. LLC v. Hallmark Ent. Invs. Co.,
`2011 WL 863007 (Del. Ch. Mar. 9, 2011), aff’d, 35 A.3d 419 (Del.
`2011).............................................................................................................75, 86
`In re S. Peru Copper Corp. S’holder Deriv. Litig.,
`52 A.3d 761 (Del. Ch. 2011), aff’d, Ams. Mining v. Theriault, 51
`A.3d 1213 (Del. 2012)..................................................................................51, 54
`Schnell v. Chris–Craft Indus., Inc.,
`285 A.2d 437 (Del. 1971)...................................................................................47
`In re Sears Hometown and Outlet Stores, Inc. S’holder Litig.,
`C.A. No. 2019-0798-JTL..............................................................................50, 77
`Steiner v. Meyerson,
`1995 WL 441999 (Del. Ch. July 19, 1995) ........................................................47
`vi
`
`
`
`

`

`Summa Corp. v. Trans World Airlines, Inc.,
`540 A.2d 403 (Del. 1988).................................................................................100
`Thorpe v. CERBCO, Inc.,
`676 A.2d 436 (Del. 1996).............................................................................98, 99
`
`United Food and Com. Workers Union and Participating Food Indus.
`Emp’rs Tri-State Pension Fund v. Zuckerberg,
`262 A.3d 1034 (Del. 2021).................................................................................48
`Valeant Pharms. Int’l v. Jerney,
`921 A.2d 732 (Del. Ch. 2007) ..........................................................................100
`In re W. Nat. Corp. S’holders Litig.,
`2000 WL 710192 (Del. Ch. May 22, 2000) .......................................................74
`Weinstein Enters. Inc. v. Orloff,
`870 A.2d 499 (Del. 2005)...................................................................................46
`Statutes
`Del. Ct. Ch. R. 54(d)..............................................................................................104
`8 Del. C. § 109.........................................................................................................47
`8 Del. C. §141(e) ..............................................................................................passim
`11 U.S.C. 303(b)(1) .................................................................................................58
`Other Authorities
`2 Jesse A. Finkelstein & John D. Hendershot, Appraisal Rights in
`Mergers & Consolidations, 38-5th C.P.S. (BNA)..............................................78
`Peter Hunt, Structuring Mergers & Acquisitions: A Guide to Creating
`Shareholder Value (5th ed., Wolters Kluwer 2011)...........................................66
`Shannon Pratt, Valuing a Business: The Analysis and Appraisal of
`Closely Held Companies (5th ed., McGraw Hill 2008) ..............................passim
`
`vii
`
`
`
`

`

`TABLE OF DEFINITIONS
`
`“Board”
`
`SHOS Board of Directors
`
`“Bylaw Amendment”
`
`SHOS Bylaw Amendment dated April 15, 2019
`
`“CIM”
`
`Confidential Information Memorandum
`
`“CIM Projections”
`
`Outlet projections in CIM
`
`“Committee”
`
`SHOS Special Board Committee tasked to deal
`with Lampert
`
`“CPI”
`
`“Cyrus”
`
`“ERP”
`
`“ESL”
`
`“ESL Partners”
`
`“FY”
`
`“Hometown”
`
`“KCD Products”
`
`Consumer Price Index
`
`Cyrus Capital Partners L.P.
`
`Equity Risk Premium
`
`ESL Investments, Inc.
`
`ESL Partners, L.P.
`
`Fiscal Year or Fiscal Years
`
`SHOS’s Sears Hometown segment
`
`Sears subbrands Kenmore, Craftsman, and
`DieHard products
`
`“Liberty Tax”
`
`Liberty Tax, Inc.
`
`“Minimum Condition”
`
`First $97.5 million of Outlet go-shop proceeds
`
`“NOLs”
`
`“Outlet”
`
`“Plan Projections”
`
`Net operating loss tax carryforwards
`
`SHOS’s Sears Outlet segment
`
`Revised 2019 Operating & Capital Plan dated
`February 20, 2019
`
`viii
`
`
`
`

`

`“Pre-ESL Bylaw
`Amendment Projections”
`
`“RLF”
`
`“Sears Holdings”
`
`“Sears Bankruptcy”
`
`“Separation”
`
`“Seritage”
`
`Outlet projections based on Plan Projections
`
`Richards, Layton & Finger, P.A.
`
`Sears Holdings Corporation
`
`Sears Holdings Chapter 11 bankruptcy filed
`October 2018
`
`2012 Spin-off of SHOS from Sears Holdings
`
`Seritage Growth Properties
`
`“SHOS” or the “Company”
`
`Sears Hometown and Outlet Stores, Inc.
`
`“Stockholder Entities”
`
`ESL, ESL Partners, and RBS Partners, L.P.
`
`“Transaction”
`
`“Transform”
`
`“WAAC”
`
`SHOS and Transform merger consummated
`October 23, 2019
`
`Defendant Transform Holdco, LLC
`
`Weighted Average Cost of Capital
`
`ix
`
`

`

`INTRODUCTION
`Trial proved Lampert tied the Board’s proverbial hands behind its back so he
`
`could acquire the Company on terms he dictated.
`
`After months of planning, SHOS directors determined the Company’s best
`
`option was to liquidate Hometown. Liquidation proceeds would pay down over
`
`$100 million in debt, allowing the Company to focus its energy and resources on its
`
`profitable Outlet business. The Company’s management, directors, advisors, and
`
`lenders believed the liquidation plan was achievable, value-enhancing, and would
`
`enable the leaner Company to continue as a going-concern with bright prospects.
`
`Lampert had different ideas. Lampert wanted the Company to help execute a
`
`business strategy at Transform. The liquidation plan would have crippled that
`
`strategy. He spent months unsuccessfully goading SHOS management to propose a
`
`buyout he would finance. He failed to talk the directors out of the liquidation plan
`
`and could not reach negotiated buyout terms. On April 15, 2019, Lampert acted by
`
`written consent, enacting a Bylaw Amendment making the Board’s liquidation plan
`
`impossible, removing from the Board a majority of the Committee established to
`
`deal with Lampert and choosing their replacements. Then, Lampert forced through
`
`the Transaction on his terms, unfairly cashing out the public, minority stockholder
`
`Class. The directors had no choice, but bankruptcy, to fulfill Lampert’s wishes.
`
`

`

`Lampert invented a justification for blocking the Board’s plans: he was
`
`protecting the Company from substantial liability from independent dealers he says
`
`he saw as the inevitable consequence of the liquidation plan. Yet, the trial record
`
`showed Lampert never articulated the risk of liability from dealers in 2019 as a
`
`reason not to pursue liquidation; rather, Lampert expressed ostensible concern with
`
`putting the dealers out-of-business and wanted to keep Hometown stores open.
`
`There is no evidence Lampert even thought in 2019 that SHOS faced any substantial
`
`risk of legal action from dealers; his concern was dealers closing Hometown stores.
`
`The prospect of a prompt and complete Hometown liquidation threatened Lampert’s
`
`strategy at Transform.
`
`Trial showed Lampert wielded control over SHOS to eliminate that threat,
`
`regardless of the severe consequences to the Company and its minority stockholders.
`
`Lampert wrested the Company away from management and Board and forced the
`
`Transaction upon the Company’s minority stockholders at a grossly unfair price.
`
`The extreme facts proven at trial warrant an award of substantial damages to the
`
`Class. Plaintiffs’ responsible estimate of those damages is $70.2 million.1 Plaintiffs
`
`and the Class are also entitled to pre- and post-judgment interest and costs.
`
`1 Based on an award of $6.56 per share to 10,321,048 non-dissenting shares and
`$9.77 per share to 258,308 dissenting shares in the Class.
`2
`
`
`
`

`

`I.
`
`FACTS
`SEARS AND SEARS HOLDINGS
`In 2005, Lampert orchestrated a merger of Kmart Corporation with Sears,
`
`Roebuck and Co., forming Sears Holdings.2 He became Sears Holdings’ Chairman
`
`and, in 2013, CEO.3 In 2015, Sears Holdings spun off over 200 of its properties into
`
`a new REIT, Seritage; Lampert was Chairman of Seritage until 2022, when Seritage
`
`announced plans to wind-down.4
`
`In October 2018, Sears Holdings filed the Sears Bankruptcy.5 Lampert
`
`remained Chairman.6 In February 2019, Lampert-controlled Transform bought
`
`Sears Holdings from bankruptcy.
`
`II.
`
`SHOS
`In 2012, Sears Holdings spun-off SHOS. Lampert, through ESL and
`
`affiliates,7 obtained a majority of SHOS’ common stock, approximately 54%, or
`
`2 JX0930.0009.
`3 Lampert_18:11-14; Deposition Testimony is cited as “Witness_page:line.” Trial
`testimony is cited as “TT_Witness_page:line.” Defendants’ Opening Brief is
`“DOB.”
`4 TT_Lampert_203-4; JX0951.
`5 JX0116.0005.
`6 Id.
`7 Lampert, ESL, RBS Partners L.P. and ESL Partners together held a majority of
`SHOS’s stock. PTO ¶¶ 10-16. Lampert was SHOS’ “parent.” JX0483.0020.
`
`3
`
`
`
`

`

`12,434,389 of the 23,465,072 fully diluted shares outstanding as of October 23,
`
`2019.8 SHOS sold retail home appliances, lawn and garden equipment, tools, and
`
`hardware at stores nationwide and on its websites.9 Lampert, as Sears Holding’s
`
`Chairman, recommended persons to serve as SHOS directors after the Separation,
`
`including his old friend, Linden.10
`
`SHOS primarily operated two business segments: Hometown and Outlet.11
`
`As of February 2019, the Company or its independent dealers operated 677 stores in
`
`49 states, Puerto Rico, and Bermuda.12 549 were Hometown stores; 128 were Outlet
`
`stores.13
`
`Hometown stores typically spanned 10,000 to 12,000 square feet, smaller than
`
`typical Sears stores.14 Hometown carried appliances and lawn and garden tools, with
`
`“a lot of dependency on the [Sears] subbrands, Kenmore [and] Craftsman[.]”15
`
`Lampert was Transform’s majority stockholder. TT_Lampert_171:19-174:2.
`Transform assigned its rights under the Transaction merger agreement to its
`subsidiary, Hometown Midco, LLC, before consummation. PTO at ¶ 15.
`8 PTO ¶ 138.
`9 PTO ¶ 31.
`10 Linden signed a settlement agreement pending Court approval.
`11 PTO ¶ 33.
`12 Id.
`13 PTO ¶¶ 34; 38.
`14 Powell_50:13-51:1.
`15 Longino_52:19-20.
`
`4
`
`
`
`

`

`SHOS owned the Hometown inventory and paid sales commissions to the
`
`independent dealers operating the physical Hometown stores.16
`
`Outlet primarily sold scratch-and-dent and refurbished appliances.17 Outlet
`
`purchased its products from major manufacturers and retailers.18 It also sold tools,
`
`lawn and garden products, furniture, mattresses, and sporting goods.19 Outlet had
`
`no nationwide competitors in 2019 and had the only repair and distribution network
`
`capable of testing and repairing every product it sold.20 Unlike Hometown, which
`
`relied on Sears Holdings (later, Transform) for inventory, by 2019 Outlet sourced
`
`over 80% of its products from manufacturers other than Sears Holdings.21
`
`16 Powell_50:13-51:6.
`17 Powell_36:5-21.
`18 Id.
`19 Id.
`20 Powell_48:1-20.
`21 JX0557.0018.
`
`5
`
`
`
`

`

`SHOS also operated eight Buddy’s Home Furnishing Store rent-to-own
`
`franchises.22
`
`Hometown struggled after the Separation, and SHOS liquidated and closed
`
`Hometown stores. By October 2018, SHOS had liquidated more than half of its
`
`original 1,117 stores.23
`
`By the third quarter of SHOS’ FY2018, Outlet was profitable and had become
`
`the “main driver of consolidated value.”24 Hometown, however, remained
`
`stubbornly unprofitable. Through the start of FY2019, SHOS had accumulated $281
`
`million in NOLs.25
`
`III.
`
`SHOS’S BOARD OF DIRECTORS AND SPECIAL COMMITTEE
`Until April 15, 2019, the Board comprised seven members: Linden, CEO
`
`Powell, CFO Bird, Longino, Gooch, Robbins, and Chairman Phelan.
`
`Linden invested in ESL Partners and is Lampert’s 40-year friend.26 She
`
`worked with Lampert and his Yale roommate, Steven Mnuchin, in the 1980s.27
`
`Lampert called Mnuchin on Linden’s behalf to help Linden’s daughter get a job with
`
`22 PTO ¶ 38; Powell_35:15-36:4.
`23 PTO ¶ 44.
`24 JX0122.0009.
`25 JX0265.0007.
`26 JX0081.0003; Linden_32:21-22; JX0020.0001; Lampert_15:12-16.
`27 Linden_9-10.
`
`6
`
`
`
`

`

`the Trump administration.28 She also was chairman of Lampert-controlled Lands’
`
`End.29 Gooch had long been COO/CFO of Lands’ End, receiving more than $1
`
`million in average annual compensation. Powell and Bird were long-serving
`
`employees of Sears entities and had held various senior management positions at
`
`SHOS since the Separation, as well as on the Board.30 Phelan joined the Board in
`
`October 2015 and served as Chairman between June 1, 2017 and his firing on April
`
`15, 2019.31 He worked for Sears, Roebuck and Co. and Sears Holdings between
`
`1992 and 2013, including as CFO and Senior Vice President, Finance of Sears
`
`Holdings.32
`
`Robbins and Longino were members of the Committee, formed in 2016 and
`
`broadly empowered to act with respect to Lampert and his entities. Neither had
`
`“prior relationships whatsoever with Mr. Lampert or his affiliated entities.” 33
`
`28 Linden_41-42; TT_Lampert_226:12-17.
`29 PTO ¶ 17.
`30 Longino_146:5-147:7.
`31 PTO ¶ 22.
`32 Id.
`33 O’Halloran_27:14-15; TT_O’Halloran_332:12-17.
`7
`
`
`
`

`

`Robbins, a corporate, securities and real-estate lawyer with 20-years’
`
`experience, joined the Board in 2016.34 He also served as Chairman of Bally
`
`Technologies’ board for 17 years.35
`
`Longino was a private investor in several start-up tech companies before
`
`joining the Board in 2016.36 He understands franchisees and indirect and direct
`
`distribution from his 13 years at Compaq Computer Corporation.37 “[Longino] was
`
`incredibly diligent, very committed, very thoughtful, very serious and fulfilled
`
`completely his role as a board director.”38
`
`The Committee retained financial advisor PJ Solomon,39 a “very good
`
`advisor…. I think they gave the special committee their honest and unvarnished
`
`views, and I think they had good judgment.”40
`
`The Board broadly delegated to the Committee the “exclusive power and
`
`authority” to deal with and investigate any matter involving ESL or Sears
`
`34 JX0426.0014.
`35 Id.
`36 Id.
`37 Longino_11:21-12:14.
`38 Linden_14:2-5.
`39 JX0064.
`40 O’Halloran_35:4-11; see also TT_O’Halloran_334:24-335:3.
`8
`
`
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`Holdings.41 The Board, further, disabled itself from approving an ESL/Holdings
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`matter without the Committee’s endorsement42
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`IV.
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`SHOS’S MANAGEMENT
`SHOS’s management team had decades of experience and understood the
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`business, “consistently received positive feedback from the Board,”43 and was
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`“extremely detail oriented.”44
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`CEO Powell joined Sears Holdings in 2003,45 holding several positions,
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`including leadership roles at Hometown Stores and Outlet Stores, when both were
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`divisions of Sears Holdings.46 Powell was SHOS’s Senior Vice President and COO
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`until July 2015, when he became a director, CEO, and President of the Company.47
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`Powell was “[v]ery organized, very strategic in his thinking, excellent in dealing
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`with operational issues and, you know, highly engaged with his management
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`team.”48
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`41 JX0323.0004.
`42 Id.
`43 Powell_8:23-9:13.
`44 Longino_23:9-20.
`45 PTO ¶ 23.
`46 Id.
`47 Id.
`48 Bird_19:8-11.
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`CFO Bird served as ESL’s CFO from 1991 to 2002.49 Bird was on the Sears
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`Canada board from May 2006 to September 2013.50 From the Separation until the
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`Transaction’s consummation, Bird was a SHOS director, serving as Chairman from
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`July 2015 to June 2017. He was interim CFO from June 1, 2017 to August 15, 2017,
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`when he became SVP and CFO.51 Bird was an “exceptional CFO” with a “deep
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`understanding of the business.”52 Powell and Bird gained substantial experience
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`since 2013 closing and liquidating Hometown stores.53
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`V.
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`SHOS PREPARES THE HOMETOWN LIQUIDATION PLAN
`AFTER THE SEARS BANKRUPTCY
`On October 15, 2018, Sears Holdings and several subsidiaries filed petitions
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`for Chapter 11 bankruptcy, exacerbating the industry headwinds and inventory
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`shortages plaguing Hometown.54 Hometown took “an immediate and pronounced
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`turn for the significant” worse.55
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`49 JX0815.0020.
`50 PTO ¶ 24.
`51 Id.
`52 Powell_22:20-25.
`53 PTO ¶¶ 44-45.
`54 JX0157.0009.
`see also Powell_58:2-14; TT_Lampert_23:21-24;
`55 Powell_51:11-52:8;
`TT_O’Halloran_378:17-24.
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`SHOS responded by planning to liquidate Hometown and continue operating
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`Outlet. SHOS management “constantly update[ed] [the Board] on the performance
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`of [the] Hometown business, because we all knew that that was the issue that was
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`putting the company at risk.”56 The Sears Bankruptcy also caused the Company’s
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`temporary loss of its ability to sell protection agreements, “a very profitable line of
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`business.”57 “[T]hat was a significant financial loss, as well as revenue loss for
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`[SHOS] dealers.”58
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`The Sears Bankruptcy and potential prospect of a transaction with Lampert
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`prompted the Board to re-affirm the Committee’s mandate on October 22, 2018.59
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`The Board added Phelan to the Committee, enhancing its capabilities.60 Phelan was
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`“[e]ngaged, focused, a good director.”61 Lampert had never questioned Phelan’s
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`director abilities.62
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`56 Powell_58:11-14.
`57 Powell_53:4-25; Phelan_61:19-23.
`58 Powell_53:12-18.
`59 PTO ¶ 59.
`60 Longino_68:16-19.
`61 O’Halloran_29:5; see also Powell_30:5-31:25; Bird_18:22-19:1; Linden_23:21-
`24:5; Robbins_11:13-24; Longino_21:4-20.
`62 Lampert_50:10-13.
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`On December 12, 2018, the SHOS Board met, and for the Company’s routine
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`annual planning process, Powell presented management’s 2019 Operating & Capital
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`Plan with financial projections for FY 2019, 2020, and 2021.63 Management also
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`presented a detailed plan for liquidating Hometown.64 SHOS’s lenders insisted
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`management retain AlixPartners to test and review the Company’s business and
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`liquidation plans, which only increased management’s confidence.65
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`SHOS’s lenders also retained Tiger Group to conduct a liquidation analysis
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`of SHOS’s inventory to inform lending decisions. Yet, that analysis was an “equity
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`bid”; lenders expected Tiger Group to purchase the inventory and resell it at a
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`profit.66
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`VI. LAMPERT REPEATEDLY SEEKS AN ESL-FUNDED
`MANAGEMENT BUYOUT
`Weeks after the Sears Bankruptcy filing, Lampert orchestrated his acquisition
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`of SHOS. Around November 1, 2018, Lampert directed his attorneys to tell SHOS’s
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`general counsel, Charles Hansen, that Lampert “would be looking for Will [Powell]
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`to help develop a proposal to present to ESL, and for which ESL would be expected
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`63 PTO ¶ 63.
`64 See JX0257.
`65 Powell_81:24-82:3; JX0179; TT_O’Halloran_336:8-11.
`66 JX1017; JX1021; TT_Fredericks_856:8-858:11.
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`to provide financing” and “wanted permission to speak directly with Will on
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`formulating a proposal.”67
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`The Committee advised Lampert
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`through counsel
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`to direct any
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`communications regarding a potential transaction to Robbins.68 The Committee also
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`told Powell he should devote no further time on a potential take-private until
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`Lampert expressed a serious intention to evaluate and pursue a deal.69
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`Lampert commenced direct conversations with Bird and Powell on the subject
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`before receiving Committee approval.70 Powell reported these conversations to the
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`Committee on November 9, 2018.71
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`Powell told the Committee on January 30, 2019, that Lampert had again
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`contacted Powell.72
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` Both Robbins and Longino believed Lampert acted
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`inappropriately.73
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`67 JX0139.0005.
`68 TT_O’Halloran_341:22-343:24.
`69 Robbins_24:13-20; O’Halloran_25:13-26:5; Longino_72:10-19;
`TT_O’Halloran_341:4-15; 374:4-8.
`70 JX0139.0004.
`71 PTO ¶ 60; O’Halloran_21:3-8.
`72 JX0314.0012; TT_O’Halloran_379:8-21.
`73 Phelan_60:1-11; Longino_76:14-77:15.
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`VII. TRANSFORM ACQUIRES SEARS HOLDINGS FROM
`BANKRUPTCY AND NEW CONCERNS ARISE AT SHOS
`On February 11, 2019, Transform, with financing from Cyrus, acquired most
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`of Sears Holdings’ operating assets from bankruptcy.74 Hometown continued to
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`deteriorate.
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`Several agreements Sears Holdings assigned to Transform or its subsidiaries
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`in connection with Transform’s acquisition of Sears Holdings’ assets (including the
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`Sears stores) from bankruptcy in February 2019 further limited Hometown’s
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`operations and performance.75 These agreements essentially relegated Hometown
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`to selling KCG goods, the distribution of which Lampert controlled.76 The
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`Company further relied on Transform for warehousing and other logistics services,
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`primarily for Hometown.77
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`The SHOS-Transform agreements made SHOS “more profitable [to Lampert]
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`than it was for us for SHO[S].”78 Transform’s revenue from the agreements led
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`Powell to feel “the Hometown segment was a valuable business to [Transform] and
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`it had greater value for [Transform] than it currently had for us as a business that
`
`74 JX0472.0007.
`75 JX0196.0005.
`76 JX0196.0009-0010.
`77 JX0196.0011; TT_Lampert_180:21-181:6.
`78 Bird_47:11-13.
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`was losing money.”79 In FY2018, 80 SHOS paid Sears Holdings, under the SHOS-
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`Transform agreements, $689,599,000 for sales and occupancy costs and
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`$40,027,000 for services and administrative expenses.81 Lampert would have lost
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`these revenues if Hometown was liquidated.82
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`The Board met on February 20.83 Given Hometown’s continued deterioration
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`and developments in the Sears Bankruptcy, Powell presented a Revised 2019
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`Operating & Capital Plan, including revised financial projections for FYs 2019
`
`through 2021.84 “[T]he Board expressed unanimous support for the plan.”85
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`SHOS’s lenders also supported the plan and were working with the Company to
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`avoid a going-concern qualification.86
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`On March 1, Powell requested an emergency Board meeting to discuss new
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`issues negatively affecting Hometown.87 That day, PJ Solomon reported, “[t]hing[s]
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`79 Powell_107:20-108:5.
`80 SHOS’s Fiscal Years “end on the Saturday closest to January 31.” JX0472.0044.
`FY 2018 ended February 2, 2019.
`81 PTO ¶ 42.
`82 Lampert_240:18-241:8.
`83 JX0214.
`84 Id.; JX0213.
`85 JX0214.0001.
`86 Powell_70, 85-90; Bird_34:18-25; JX0900; TT_O’Halloran_440:13-441:1.
`87 JX0218.
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`are not going as well wit