Sears Deal Merely Lines Firm Pockets, Court Says

     CHICAGO (CN) – A derivative lawsuit against the board of Sears Holdings “serves no goal other than to move money from the corporate treasury to the attorneys’ coffers,” the 7th Circuit ruled in a scathing opinion.
     Two investors, Robert Booth Trust and Ronald Gross, had claimed that Sears violated antitrust law because two of its directors also serve on the boards of competing companies.
     When Sears merged with Kmart in 2005, its board of directors took on William Crowley, who also served on the board of AntoNation and AutoZone, and Ann Reese, who had a simultaneous board membership with Jones Apparel Group.
     U.S. District Judge Ronald Guzman had refused to dismiss the case, despite Sears’ claim that Delaware usually allows investors to sue derivatively only if the board cannot make a disinterested decision after a demand for action.
     Sears then proposed a settlement that included the resignation of one of the two contested directors and a payment of up to $925,000 to the plaintiffs’ lawyers.
     The case went to the federal appeals court after another Sears investor Theodore Frank challenged the settlement offer and moved to intervene in the case.
     Frank claimed that the settlement would cost the company a significant amount of cash, plus a director whom shareholders re-elected in 2009. And since one allegedly questionable director would still remain, the settlement also did not eliminate the risk of another identical suit.
     Guzman refused to let Frank intervene, however, after determining that Booth Trust and Gross adequately represent his interests.
     Writing for a three-judge panel, Chief Judge Frank Easterbrook noted that “Frank’s position is entirely incompatible with the stance taken by Booth Trust and Gross.”
     “A district judge ought not try to insulate his decisions from appellate review by preventing a person from acquiring a status essential to that review,” he added.
     The federal appeals court concluded Wednesday that cooperation with a competitor should, in fact, benefit the investors.
     Neither the Department of Justice nor the Federal Trade Commission has taken any action against Sears, it added.
     “The problem is not only that perpetrators of antitrust offenses lack standing to complain about their own misconduct (which inures to their profit), but also that, when such people do invoke the antitrust laws, likely they have other objectives in view,” Easterbrook wrote.
     Though Easterbrook did not specify what motivating factor he had in mind, he noted that “antitrust suits are notoriously costly.”
     The decision notes that Sears might have offered the settlement after it “concluded that it was better to jettison one director and pay up to $925,000 in legal fees to opposing counsel than to dig in its heels and pay its own lawyers more than $1 million to defend an antitrust suit.”
     Booth Trust and Gross had argued that investors could still gain from the suit because the removal of directors will eliminate the chance of antitrust litigation by the United States. But Easterbrook said no such suit has been brought by the federal government in over 30 years. Instead, the government usually provides corporations with notice of the conflict and allows them to address the problem internally.
     “The only goal of this suit appears to be fees for the plaintiffs’ lawyers,” Easterbrook wrote. “It is impossible to see how the investors could gain from it – and therefore impossible to see how Sears’s directors could be said to violate their fiduciary duty by declining to pursue it.”
     “It is an abuse of the legal system to cram unnecessary litigation down the throats of firms whose directors serve on multiple boards, and then use the high costs of antitrust suits to extort settlements (including underserved attorneys’ fees) from the targets,” he added.
     By the time the case reached the 7th Circuit, Crowley no longer belonged to the Sears board and Reese had left the board of Jones Apparel.
     “Usually serving on multiple boards demonstrates breadth of experience, which promotes competent and profitable management. If the Antitrust Division or the FTC sees a problem, there will be time enough to work it out. Derivative litigation in the teeth of the demand requirement and the antitrust-inquiry doctrine is not the way to handle this subject,” Easterbrook wrote.
     Frank, the intervening investor, used to clerk for Easterbrook and now runs the nonprofit Center for Class Action Fairness.

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