Sears Shortcomings Highlight Regulatory Deficiencies

The Canadian Press conducted a survey recently of journalists, nearly 47% of whom voted the closure and controversies of Sears Canada as the 2017 Business News Story of the Year.

The public interest in the story was fuelled in no small part by its iconic status, but also the $270-million pension deficit that is unlikely to be fully serviced in light of other outstanding debts. As Michael Powell, incoming president of the Canadian Federation of Pensioners points out, it really shouldn’t be so significant,

Sears should not be the Canadian Press 2017 Business News Story of the Year because Sears is not unique. Nortel, Wabush Mines, Indalex, Grant Forest products, and many others came before Sears. All left pensioners with reduced pensions and created hardships that put taxpayers on the hook for increases in government social services costs.

Sears stands out because they were far more effective at paying owners billions and executives millions while leaving an underfunded pension behind. Worse still, Sears provides a great roadmap for other companies to follow. Unless the federal government takes action, it is only a matter of time until the next Sears.

Make no mistake. What these companies have done is legal. Companies are focused on maximizing financial returns to the benefit of owners, it is their fiduciary responsibility. No one should be surprised, then, that companies take full advantage of existing legislation to meet their goals.

Although American-style shareholder primacy was firmly rejected by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders, shareholders can certainly be one of the stakeholder interests considered. This decision relied substantially on its previous holding in Peoples Department Stores Inc. (Trustee of) v. Wise, where the Court emphasized how Canadian corporate law differed from other jurisdictions,

48 The Canadian legal landscape with respect to stakeholders is unique. Creditors are only one set of stakeholders, but their interests are protected in a number of ways. Some are specific, as in the case of amalgamation: s. 185 of the CBCA. Others cover a broad range of situations. The oppression remedy of s. 241(2)(c) of the CBCA and the similar provisions of provincial legislation regarding corporations grant the broadest rights to creditors of any common law jurisdiction: see D. Thomson, “Directors, Creditors and Insolvency: A Fiduciary Duty or a Duty Not to Oppress?” (2000), 58 U.T. Fac. L. Rev. 31, at p. 48. One commentator describes the oppression remedy as “the broadest, most comprehensive and most open-ended shareholder remedy in the common law world”: S. M. Beck, “Minority Shareholders’ Rights in the 1980s”, in Corporate Law in the 80s (1982), 311, at p. 312. While Beck was concerned with shareholder remedies, his observation applies equally to those of creditors.

Like malls all over North America, Sears attempted to revamp its services over the year to try to save itself, but brought a motion to approve a liquidation sales process on July 18, 2017, and filed for creditor protection under the Companies’ Creditors Arrangement Act (CCCA) on June 22, 2017.

The liquidation process would have the effect of closing 54 stores, immediately terminating 2,500 employees without any severance pay. An estimated 16,921 members were enrolled in the defined benefit component of the Sears Pension Plan, 13,121 of whom were retired.

In a motion filed at the Ontario Superior Court of Justice – Commercial List on August 11, 2017, the lawyer for Retirees of Sears Canada cited s. 57(4) of the Pension Benefits Act (PBA) and s. 30(7) of the Personal Property Security Act (PPSA) to create a deemed trust priority in favour of the beneficiaries of the pension plan over other assets of the employer,

16. The PBA/PPSA deemed trust priority is critically important for the Sears Canada Plan beneficiaries in the circumstances of Sears Canada’s CCAA proceedings and future competing claims of other creditors.

Powell points to another solution,

In 2008, the Conservative government enacted the Wage Earners Protection Program, which granted super-priority status to current year normal pension contributions, joining other super-priority obligations including wages and commissions earned and not paid. This was excellent legislation; it just didn’t go far enough.

Pensions are deferred wages, money earned but not paid. They should be protected in full.

The Canadian Federation of Pensioners, CARP and many others believe the best solution at this time is to extend super-priority status to the entire pension. The two private members bills introduced are built on this concept.

Super-priority moves pensioners from near the back of the line to near the front. It keeps the financial responsibility for the pension commitment where it belongs, with the commercial interests of the company. Not the taxpayer.

Although no legislation has been announced that would provide these types of protections, and the pensions have been overshadowed by other concerns. The proposed plan to spend millions on retention bonuses for top-level executives has been accompanied by public outrage over reports that sales prices during liquidation sales may have been intentionally inflated before being placed on sale,

Allegations, amongst others, are that the price of certain merchandise was marked up prior to promoting 20 per cent to 50 per cent savings.

The Canadian Competition Bureau is currently investigating, and has placed misleading representations and deceptive marketing practices as one of its priorities for years now. The Competition Act states under s. 74.01 that a “representation to the public concerning the price at which a product or like products have been” can constitute a reviewable activity.

The Bureau has reached numerous settlement consisting of millions of dollars in administrative penalties over the years for companies that have allegedly been involved in misleading sales claims involving ordinary selling price (“OSP”) representations. The first contested proceeding under this Act in 2005 in Commissioner of Competition v. Sears Canada Inc., where Sears had exaggerated the savings available to consumers through advertised discounts for tires. The Competition Tribunal stated,

[3] The Commissioner states that Sears did not offer the tires at its regular prices in good faith because Sears had no expectation that it would sell a substantial volume of the tires at its regular prices, and because Sears’ regular prices for the tires were not comparable to, and were much higher than, the regular prices for comparable tires offered by Sears competitors. The Commissioner says that the regular prices were set by Sears at inflated levels with the ulterior motive of attracting customers and generating sales by creating the impression that, when promoted as being “on sale”, the tires represented a greater value than was really the case.

Sears’ constitutional challenge to s. 74 of the Act was also dismissed in 2005. Although the Tribunal conceded that the section infringed Sears’ s. 2(b) Charter rights, this was a reasonable limit that was demonstrably justified in a free and democratic society,

[124] … the negative effects of the restrictions which result from subsection 74.01(3) of the Act are not great. The speech that is restricted is commercial speech that is materially false or misleading…

[126] I therefore conclude that the negative effects of the restriction on commercial speech are outweighed by the benefits that ensue from sanctioning deceptive OSP representations.

In 2015, the Competition Bureau also launched another ongoing investigation against Sears into deceptive marketing practices for mattresses.

Sybille Sachs and Edwin Ruli state in “Stakeholders Matter: A New Paradigm for Strategy in Society,”

The overall basic assumption to our understanding of the stakeholder paradigm is that in a knowledge-based, networked society the purpose of the firm is mutual economic and social value creation with and for stakeholders. The starting point for the understanding of the purpose of the firm is therefore the corporation as an economic and simultaneous social institution interacting with abroad cast of stakeholders.

…organizations (e.g. corporations, non-governmental organizations, etc.), unlike living organizations do not have a right to exist and survive per se. Their justification is tho make a useful contribution to the needs of society through their coordinated activities…

These stakeholder organizations receive or maintain their right to exist by fulfilling the purpose of these human beings. Corporations and their stakeholders have consequently to keep in mind that their purpose is to serve society.

This isn’t just the realm of academics. Walmart’s senior vice president, chief sustainability office, Kathleen McLaughlin was quoted earlier this year stating, “Business exists to serve society,” describing how the company’s mission has transformed how the company operates.

There’s not much that will raise the public ire entering into the holiday season than a fake sale. Political will to examine whether existing regulatory schemes are properly serving societal interest is a necessary prerequisite to regulatory reform.

Yet another finding by the Competition Bureau over more recent liquidation sales this year may allow the top story of 2017 to spurn additional legislative change that many consumers, employees, pensioners, and members of the public are waiting for in the years to come.