Sears Holdings Corp. (fka SHLDQ)

[justthefactsmam]

Dragon,

You ask, will shldq shares be exchanged for shares of holdco?

That’s what I still cannot say for certain. The reasons for my uncertainty are outlined below.

For me, the first issue is whether or not transform holdco will be able to utilize the nols and tax credits, noting that most of the tax credit are foreign and amount to around $900 million.

While there are still a number of board posters who feel the nols and tax credits are still with shc and its shareholders (holders of shldq stock), that is not what the purchase agreement or judge drain’s order say. Below are sections of the purchase agreement. Since this is an either/or situation until a tax opinion and probably an IRS private letter ruling is obtained, I’m citing from section 9.2 of the asset purchase agreement assuming the nols not only stay with transform holdco but can be used by transform holdco as it operates the “new sears” under transform holdco.

Section 9.2 Tax-Related Undertakings and Characterization of the Transaction.

(1) Buyer shall provide to Sellers detailed instructions as to steps to take (or not take) in order to secure and preserve the qualification of any of the transactions set forth in this Agreement as a Tax Reorganization (except if and to the extent Buyer determines otherwise, in accordance with Section 2.12(b), in respect of a given transaction or a particular Seller) and to achieve the Tax Result, including, without limitation … (ii) the merger of any of Sellers’ Subsidiaries with another Sellers’ Subsidiaries after the approval of the Bankruptcy Plan and on or before the Closing Date or conversion of any of Sellers’ Subsidiaries into limited liability companies with effect after the approval of the Bankruptcy Plan and on or before the Closing Date, (iii) the filing of any Tax elections to treat any such Subsidiaries as disregarded entities for U.S. federal income tax purposes with effect after the approval of the Bankruptcy Plan and on or before the Closing Date or otherwise taking such action to establish that such Subsidiaries have liquidated for tax purposes after the approval of the Bankruptcy Plan and on or before the Closing Date, (iv) implementation of the Distribution Requirement in a manner that is consistent with section 507 of the Bankruptcy Code, (v) satisfaction of the ownership requirements set forth in section 382(l)(5)(A)(ii) of the Code, and (vi) any other instructions that in the reasonable opinion of tax counsel for Buyer are necessary or desirable to ensure the qualification of the Tax Reorganization and the achievement of the Tax Result … , and Sellers shall follow such instructions; provided that … Sellers agree to cooperate with Buyer in order that, for federal income Tax purposes, the transactions effected pursuant to this Agreement, together with the distributions made by, and liquidation of, Sellers pursuant to the Bankruptcy Plan, are treated as one or more plans of reorganization under section 368 of the Code and as qualifying as one or more reorganizations under section 368(a)(1)(G) of the Code …

(b) Sellers agree that (i) Buyer will suffer irreparable damage and harm in the event that any Seller does not comply with Section 9.2(a) or any instructions properly given by Buyer thereunder and that, although monetary damages may be available for such a breach, monetary damages would be an inadequate remedy therefor and (ii) Buyer shall be entitled to an injunction or injunctions against any non-compliance with, and to seek specific performance of, the agreements and covenants set forth in Section 9.2(a) and any instructions properly given by Buyer thereunder.

What this section of the apa says to me is that transform holdco is going to do everything in its power to make sure the transactions contemplated in the apa qualify for nol tax treatment favorable to transform holdco. Part of the “everything” would be to direct sears holdings corporation to merge or combine subsidiaries if the tax advisors to transform holdco determine this is what needs to be done to permit transform holdco to maximize the nols. It also includes the possibility of converting subsidiaries into limited liability corporations.

HOWEVER, THERE IS NO PLACE IN THE AGREEMENT WHICH SAYS THAT TRANSFORM HOLDCO WILL BE MERGING WITH SHC OR WITH SHLDQ. AND THERE IS NO PLACE IN THE AGREEMENT WHICH SAYS THAT TRANSFORM HOLDCO WILL BE ACQUIRING THE EQUITY INTERESTS OF SHC (WHICH MEANS ACQUIRING SHLDQ STOCK).

The only two mentions of acquiring stock are related to the sparrow properties and to a possible transaction associated with the foreign tax credits which I will address below.

First the sparrow properties:

s) all equity interests of SRC O.P. LLC owned by SRC Sparrow 2 LLC as Seller; provided, that if either (i) SRC Sparrow 2 LLC has filed a petition for relief commencing a case under chapter 11 of the Bankruptcy Code for the purpose of selling such equity interests in SRC O.P. LLC, and Buyer or its Affiliate has purchased such equity interests pursuant to a chapter 11 plan of reorganization or a sale of assets pursuant to section 363(m) of the Bankruptcy Code or (ii) Buyer shall have acquired the Sparrow Properties pursuant to foreclosure, then Buyer shall be deemed to have purchased the equity interests in SRC O.P. LLC described in this subsection (s);

Second is the discussion related to the foreign tax credits:
Section 2.13 Foreign Assets.

If, at any time prior to the date that is sixty (60) days after the Closing Date, Buyer determines (in its sole discretion) and notifies the Seller that it is necessary or desirable to acquire all of the equity interests in any Foreign Subsidiary in lieu of the acquisition of assets and assumption of liabilities contemplated by the first sentence of this Section 2.13(a), then the Sellers shall use reasonable best efforts to transfer such equity interests, which equity interests shall be deemed to be Acquired Foreign Assets.

IT’S IMPORTANT TO NOTE IN THE SECTION ABOVE THAT TRANSFORM HOLDCO RECOGNIZES THE NEED TO POSSIBLY CONVERT THE PURCHASE OF FOREIGN ASSETS FROM AN ASSET PURCHASE TO AN ACQUISITON OF ALL OF THE EQUITY INTERESTS.

ALTHOUGH MANY BOARD POSTER HAVE STATED THEIR OPINION THIS IS WHAT WILL HAPPEN TO SHLDQ STOCK, THERE IS NO PLACE I CAN FIND IN ANY OF THE AGREEMENTS WHERE THIS IS EVEN CONTEMPLATED. THERE IS NO LANGUAGE WHICH STATES THAT TRANSFORM HOLDCO MIGHT NEED TO CONVERT ITS ASSET PURCHASE OF SUBSTANTIALLY ALL OF THE ASSETS OF SHC INTO AN ACQUISITION OF ALL OF THE EQUITY INTERESTS OF SHC (I.E. PURCHASING ALL OF THE SHLDQ STOCK)

THERE IS NO STATED CORRELATION BETWEEN CONVERTING ANY SHC SUBSIDIARIES INTO LLC’S OR MERGING ANY SUBSIDIARIES WITH TRANSFORM HOLDCO SUBSEQUENTLY MERGING WITH SHC/SHLDQ.

IF ANYONE KNOWS OF ANY SUCH LANGUAGE IN THE AGREEMENTS, PLEASE POST IT.

The link below is to the first amendment to the apa. Pull it up and do a search for “in lieu” and you will get the language about converting foreign assets purchase to stock purchase.

https://www.sec.gov/Archives/edgar/data/1310067/000119312519041193/d704657dex21.htm

Additionally, if you look at section 2.1 of the apa, it describes what is included in the Purchase and Sale of the Acquired Assets. The shldq equity was not included. In fact, if you look at the next section of the asset purchase agreement under section 2.2 you will see what assets were specifically excluded.
Section 2.2 Excluded Assets. Nothing contained herein shall be deemed to sell, transfer, assign, convey or deliver, or cause to be sold, transferred, assigned, conveyed or delivered, any right, title or interest of Sellers in, to or under the Excluded Assets. “Excluded Assets” shall mean:

(l) except as otherwise expressly included as Acquired Assets, all shares of capital stock or other equity interests of any Seller or Subsidiary of the Seller or securities convertible into or exchangeable or exercisable for shares of capital stock or other equity interests of any Seller, Subsidiary of the Seller or any other Person;

https://www.sec.gov/Archives/edgar/data/923727/000119312519012110/d687440dex9986.htm

the link above is to the sec filing referencing what I have posted. And, as you can clearly see in (l) above, ALL SHARES OF CAPITAL STOCK AND OTHER EQUITY INTERESTES OF ANY SELLER OR SUBSIDIARY OF THE SELLER OR SECURITIES CONVERTIBLE INTO OR EXCHANGEABLE OR EXERCISABLE FOR SHARES OR CAPITAL STOCK OR OTHER EQUITY INTERESTS OF ANY SELLER, SUBSIDIARY OF THE SELLER OR ANY OTHER PERSON ARE SPECIFICALLY EXCLUDED.

So, with the specific exception of the equity of the sparrow properties and the possible switch from an asset purchase of the foreign assets to an acquisition of the equity of those foreign assets, there is absolutely no mention in the agreements of transform holdco exchanging shldq stock for transform holdco stock.

Furthermore, there is an interesting section of the apa which describes the Distribution Requirements:

“Distribution Requirement” shall mean the requirement that each Seller … (iii) shall dissolve no later than the end of the third taxable year ending after the Closing Date, and (iv) during the period between the Closing Date and its dissolution, shall limit its activities to those which are merely for the purpose of liquidating its assets (which may include maintaining a going operation for the preservation of value, pending distribution or sale), winding up its affairs, resolving and paying its debts, and distributing any remaining assets (which may include a distribution to a non-corporate liquidating vehicle).

Although there was a post yesterday of a “forward looking statement” it was outdated. That statement indicated shc was still trading on the Nasdaq. The most recent “forward looking statement” is pasted below from the most recent 8k.

Notice the comment:

“uncertainty associated with evaluating and completing any strategic or financial alternative as well as the Company’s ability to implement and realize any anticipated benefits associated with any alternative that may be pursued, including the asset sales and wind down of operations;”

So, not only does the apa seem to require shc/shldq to dissolve no later than the end of the third taxable year ending after the Closing Date, that concept of shc/shldq liquidating seems to be supported in the “wind down of operations” comment in the most recent “forward looking statement”.

Forward-Looking Statements

This Form 8-K may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this filing that address activities, events or developments that the Company expects, believes, targets or anticipates will or may occur in the future are forward-looking statements. The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result of certain risks and other factors, which could include the following: risks and uncertainties relating to the Chapter 11 Cases, including but not limited to, the Company’s ability to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 Cases, the Company’s ability to confirm an acceptable plan of reorganization, the effects of the Chapter 11 Cases on the Company and on the interests of various constituents, Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general, the length of time the Company will operate under the Chapter 11 Cases, risks associated with third-party motions in the Chapter 11 Cases, the potential adverse effects of the Chapter 11 Cases on the Company’s liquidity or results of operations and increased legal and other professional costs necessary to execute the Company’s reorganization; the conditions to which the Company’s debtor-in-possession financing is subject and the risk that these conditions may not be satisfied for various reasons, including for reasons outside of the Company’s control; the impact of and ability to successfully implement store closures; the Company’s ability to consummate sales of assets and the terms and conditions of any such sales; uncertainty associated with evaluating and completing any strategic or financial alternative as well as the Company’s ability to implement and realize any anticipated benefits associated with any alternative that may be pursued, including the asset sales and wind down of operations; the consequences of the acceleration of our debt obligations; trading price and volatility of the Company’s common stock and the risks related to the Company’s delisting from Nasdaq and trading on the OTC Pink Market; as well as other risk factors set forth in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. The Company therefore cautions readers against relying on these forward-looking statements. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and, except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.