Sears Holdings fails in bid to privatize Sears Canada

In a rare victory for minority shareholders in Canada, on November 14, 2006 Sears Holdings Corporation effectively conceded defeat in its hotly contested attempt to privatize its Canadian subsidiary, Sears Canada Inc. U.S. based Sears Holdings originally announced its intention to make a bid to acquire the 46% publicly held shares of Sears Canada on December 5, 2005 for $16.86 per share. A Special Committee of independent directors of Sears Canada received a valuation and inadequacy opinion from Genuity Capital Markets to the effect that the fair market value of the shares was in the range of $19.00 to $22.25 per share and that the offer made by Sears Holdings was inadequate, from a financial point of view, to minority shareholders. The Special Committee and the voting members of the board of directors unanimously recommended that shareholders reject the bid. Faced with an unsuccessful bid, Sears Holdings subsequently increased its offer price to $18.00 per share, which effectively valued Sears Canada at $2.7 billion. In light of the increased price, the Special Committee determined not to make a further recommendation with respect to the bid. However, the members of the Special Committee notified Sears Canada that they were not prepared to stand for re-election to the board of directors. A group of minority shareholders of Sears Canada led by Pershing Square Capital Management, L.P. filed a complaint with the OSC requesting that it investigate certain matters related to the offer, including whether the shares held by certain institutional shareholders that had entered into support agreements in favour of the bid could be voted as part of the minority in connection with the required "majority of the minority" approval for a going private transaction of Sears Canada. The Ontario Securities Commission heard the complaint on July 5 and 6, 2006 and found that the bid violated the Ontario Securities Act. Accordingly, the OSC issued an order cease-trading the bid until such time as certain disclosure in the take-over bid circular was amended. Significantly, the OSC held that the shares subject to the support agreements could not be voted in connection with the required "majority of the minority" approval on the basis that the shareholders that had entered into such agreements were receiving collateral benefits. Sears Holdings appealed the OSC decision to the Ontario Divisional Court and sought leave to appeal its loss in that court to the Ontario Court of Appeal. While Sears Holdings was waiting to hear if leave to appeal would be granted, it brought an application to before the OSC for a stay in the cease trade order in order to allow a special meeting of the shareholders of Sears Canada to be called. The purpose of that meeting was to consider a going private transaction pursuant to which Sears Holdings would acquire all of the issued and outstanding shares of Sears Canada it did not already own. Sears Holdings had committed in certain of the support agreements to cause such a shareholder meeting to be held before November 15, 2006 and argued that, if the OSC did not permit the meeting to be held in accordance with the contractual obligations, the OSC would be prejudicing the rights of Sears Holdings in the event an appeal was granted. The OSC granted the requested stay on October 23, 2006, and Sears Holdings requisitioned a Sears Canada shareholder meeting to consider the going private transaction. The new independent directors of Sears Canada, who had replaced the original Special Committee, determined not to make a further recommendation with respect to the going private transaction. The Sears Canada shareholder meeting was scheduled for November 14, 2006. Immediately prior to the meeting, the Ontario Court of Appeal advised Sears Holdings that it would not grant leave to appeal. As a result, the shares subject to the support agreements dealt with by the OSC could not be counted in determining whether the requisite "majority of the minority" approval had been obtained and the going private transaction was defeated at the meeting. Jon Levin and Sean Stevens (corporate) and Gerry Ranking (litigation) of Fasken Martineau acted for the original Special Committee as well as the new independent directors of Sears Canada.