Proposed Exemptions From Certain Prohibited Transaction Restrictions, 29695-29718 [2016-11115]
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Vol. 81
Thursday,
No. 92
May 12, 2016
Part III
Department of Labor
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Employee Benefits Security Administration
Proposed Exemptions From Certain Prohibited Transaction Restrictions;
Notice
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Federal Register / Vol. 81, No. 92 / Thursday, May 12, 2016 / Notices
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
Proposed Exemptions From Certain
Prohibited Transaction Restrictions
Employee Benefits Security
Administration, Labor.
ACTION: Notice of proposed exemptions.
AGENCY:
This document contains
notices of pendency before the
Department of Labor (the Department) of
proposed exemptions from certain of the
prohibited transaction restrictions of the
Employee Retirement Income Security
Act of 1974 (ERISA or the Act) and/or
the Internal Revenue Code of 1986 (the
Code). This notice includes the
following proposed exemptions: D–
11825, ABARTA, Inc. Pension Plan; D–
11846 and D–11847, Sears Holdings
401(k) Savings Plan (the Savings Plan)
and the Sears Holdings Puerto Rico
Savings Plan (the PR Plan); D–11851
and D–11852, Sears Holdings 401(k)
Savings Plan (the Savings Plan) and the
Sears Holdings Puerto Rico Savings Plan
(the PR Plan); and D–11871 and D–
11872, Sears Holdings 401(k) Savings
Plan (the Savings Plan) and the Sears
Holdings Puerto Rico Savings Plan (the
PR Plan).
DATES: All interested persons are invited
to submit written comments or requests
for a hearing on the pending
exemptions, unless otherwise stated in
the Notice of Proposed Exemption,
within 45 days from the date of
publication of this Federal Register
Notice.
ADDRESSES: Comments and requests for
a hearing should state: (1) The name,
address, and telephone number of the
person making the comment or request,
and (2) the nature of the person’s
interest in the exemption and the
manner in which the person would be
adversely affected by the exemption. A
request for a hearing must also state the
issues to be addressed and include a
general description of the evidence to be
presented at the hearing. All written
comments and requests for a hearing (at
least three copies) should be sent to the
Employee Benefits Security
Administration (EBSA), Office of
Exemption Determinations, Room N–
5700, U.S. Department of Labor, 200
Constitution Avenue NW., Washington,
DC 20210. Attention: Application No.__,
stated in each Notice of Proposed
Exemption. Interested persons are also
invited to submit comments and/or
hearing requests to EBSA via email or
FAX. Any such comments or requests
should be sent either by email to:
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SUMMARY:
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moffitt.betty@dol.gov, or by FAX to
(202) 219–0204 by the end of the
scheduled comment period. The
applications for exemption and the
comments received will be available for
public inspection in the Public
Documents Room of the Employee
Benefits Security Administration, U.S.
Department of Labor, Room N–1515,
200 Constitution Avenue NW.,
Washington, DC 20210.
Warning: All comments will be made
available to the public. Do not include
any personally identifiable information
(such as Social Security number, name,
address, or other contact information) or
confidential business information that
you do not want publicly disclosed. All
comments may be posted on the Internet
and can be retrieved by most Internet
search engines.
SUPPLEMENTARY INFORMATION:
Notice to Interested Persons
Notice of the proposed exemptions
will be provided to all interested
persons in the manner agreed upon by
the applicant and the Department
within 15 days of the date of publication
in the Federal Register. Such notice
shall include a copy of the notice of
proposed exemption as published in the
Federal Register and shall inform
interested persons of their right to
comment and to request a hearing
(where appropriate).
The proposed exemptions were
requested in applications filed pursuant
to section 408(a) of the Act and/or
section 4975(c)(2) of the Code, and in
accordance with procedures set forth in
29 CFR part 2570, Subpart B (76 FR
66637, 66644, October 27, 2011).1
Effective December 31, 1978, section
102 of Reorganization Plan No. 4 of
1978, 5 U.S.C. App. 1 (1996), transferred
the authority of the Secretary of the
Treasury to issue exemptions of the type
requested to the Secretary of Labor.
Therefore, these notices of proposed
exemption are issued solely by the
Department.
The applications contain
representations with regard to the
proposed exemptions which are
summarized below. Interested persons
are referred to the applications on file
with the Department for a complete
statement of the facts and
representations.
1 The Department has considered exemption
applications received prior to December 27, 2011
under the exemption procedures set forth in 29 CFR
Part 2570, Subpart B (55 FR 32836, 32847, August
10, 1990).
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ABARTA, Inc. Pension Plan (the Plan
or the Applicant), Located in
Pittsburgh, PA
[Application No. D–11825]
Proposed Exemption
The Department is considering
granting an exemption under the
authority of section 408(a) of the Act (or
ERISA) and section 4975(c)(2) of the
Code, and in accordance with the
procedures set forth in 29 CFR part
2570, subpart B (76 FR 46637, 66644,
October 27, 2011).2
Section I. Covered Transactions
If the exemption is granted, provided
that the conditions and the definitions
set forth below are satisfied, the
restrictions of sections 406(a)(1)(A),
406(a)(1)(B), 406(a)(1)(D), 406(a)(1)(E),
406(a)(2), 406(b)(1), 406(b)(2), and
407(a) of the Act, and the sanctions
resulting from the application of section
4975 of the Code, by reason of section
4975(c)(1)(A), (B), (D) and (E) of the
Code, shall not apply to the following
proposed transactions (the Covered
Transactions):
(a) The in-kind contribution by
ABARTA Inc. (ABARTA) to the Plan
(the Contribution) of ABARTA’s 100%
ownership interests (the LLC Interests)
in two special purpose entities:
Delabarta Pennsylvania Real Estate, LLC
(Delabarta Pennsylvania LLC); and
Delabarta New York Real Estate, LLC
(Delabarta New York LLC) (together, the
LLCs): Each of which owns, as its only
asset, a parcel of improved real property
(a Property);
(b) Following the Contribution: (1) the
Plan’s leasing of the Property owned
100% by the Delabarta Pennsylvania
LLC to an ABARTA subsidiary, CocaCola Bottling Company of Lehigh
Valley, Inc. (Coca-Cola Lehigh Valley),
and a one-time renewal of that lease;
and (2) the Plan’s leasing of the Property
owned 100% by the Delabarta New York
LLC to another ABARTA subsidiary,
Coca-Cola Bottling Company of Buffalo,
Inc. (Coca-Cola Buffalo), and a one-time
renewal of that lease. Hereinafter, these
two leases are referred to as the Leases,
and the two renewals of those Leases are
referred to as the Lease Renewals;
(c) The guarantees by Coca-Cola
Buffalo and Coca-Cola Lehigh Valley
(the Tenants) to the Plan in connection
with a make whole obligation (the Make
Whole Obligation), and any payments to
the Plan in fulfillment of that obligation;
2 For purposes of this proposed exemption,
references to specific provisions of Title I of the
Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
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(d) Each Tenant’s indemnification of
the Plan (the Indemnification) in
connection with a Leases and a Lease
Renewal; and
(e)(1) The Plan’s granting of a right of
first offer (the Right of First Offer) to
each Tenant, whereby the Tenant may
purchase a Property or LLC interest
from the Plan; and (2) a sale by the Plan
of a Property or LLC Interest to a Tenant
in connection with a Tenant’s exercise
of that Right of First Offer.
Section II. Conditions Regarding the InKind Contribution Described in Section
I(A)
(a) The Independent Fiduciary, as
defined in Section X(c) of this proposed
exemption, negotiates the terms and
conditions of the Contribution, and
approves the Contribution as being in
the interest of the Plan;
(b) The LLC Interests are contributed
to the Plan at their current fair market
value, as determined by the
Independent Fiduciary, following the
Independent Fiduciary’s review of an
appraisal report (the Appraisal Report)
prepared by the Independent Appraiser,
as defined in Section X(d) of this
proposed exemption;
(c) On the date of the Contribution,
the aggregate contributed value of the
LLC Interests is no less than the current
fair market value of the Properties
underlying the LLC Interests, as verified
by the Independent Fiduciary;
(d) On the date of the Contribution,
ABARTA contributes to the Plan a cash
amount that is no less than $500,000;
(e) Immediately following the
Contribution, the aggregate fair market
value of employer real property and
employer securities held by the Plan
represents less than 20% of the Plan’s
assets;
(f) As long as the Properties and/or
LLC interests are owned by the Plan, the
Properties are not altered in any way
that: (1) Diminishes the fair market
value or remaining useful life of the
Property; (2) affects the structure or
systems of any building existing on the
Property; or (3) affects an expansion of
any building existing on the Property,
without the prior written approval of
the Independent Fiduciary; and
(g) Following the Contribution, the
Plan does not transfer a portion of its
ownership interests in the LLCs or in
the Properties to a party in interest to
the Plan.
Section III. Conditions Regarding the
Plan’s Leasing of the Properties to the
Tenants Described in Section I(B)
(a) The Independent Fiduciary
negotiates the terms and conditions of
the each Lease and Lease Renewal, and
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approves the Plan’s entering into each
Lease and Lease Renewal, as being in
the interest of, and protective of, the
Plan;
(b) Each Lease and Lease Renewal
remains, at all times, a bondable triple
net lease, such that all costs attributable
to a Property (including, among other
things, taxes, insurance, utilities, and
non-capital maintenance, repair, and
capital improvements) are the
responsibility of the Tenant, until the
earlier of: (1) The date on which the
Property or LLC Interest is first
transferred to any person or entity that
is not wholly-owned by the Plan; (2) the
date on which the Plan sells a
controlling interest in the LLC to an
entity that is not wholly-owned by the
Plan; or (3) the date the Lease or Lease
Renewal terminates by operation of law;
(c) Any amendment to a Lease or
Lease Renewal must be negotiated and
approved by the Independent Fiduciary;
however, in no event may any
amendment be inconsistent with the
terms of this exemption, if granted; and
(d) For each Lease Renewal, all
provisions of the Lease on which the
Lease Renewal is based, with the
exception of the specific rent amount
and any escalator provision, remain in
effect.
Section IV. The Make Whole Obligation
Described in Section I(C)
(a) After the Contribution, as of the
earlier of: (1) The date of a sale by the
Plan of a Property (or an LLC Interest)
(a Sale Date); or (2) the date that is five
years from the date of the Contribution
(hereinafter, a First Calculation Date), if
(A)(i) the proceeds received from the
fair market value sale of a Property (or
LLC interest), in the case of a sale, or (ii)
the current fair market value of the
Property (or the LLC interest) as of the
First Calculation Date, in the case in
which there has not been a sale, plus (B)
any income generated by the Property
during that period, less (C) any expenses
attributable to the Property (or the LLC
Interest) paid by the Plan during that
period, is less than (D) the fair market
value of such Property (or the LLC
Interest) at the time of the Contribution,
plus (E) an amount equal to a 5%
percent rate of return on such
Contributed Value during that period,
compounded annually; then the Tenant
must contribute an amount of cash to
the Plan equal to any such difference,
within 60 days of the Sale Date or First
Calculation Date;
(b) If the Plan continues to hold a
Property or LLC Interest during all or a
portion of any of the three consecutive
five year periods that follow the First
Calculation Date (each, a Lookback
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Period), with respect to any of these
three Lookback Periods, as of the earlier
of: (1) A Sale Date; or (2) a date that is
five years from the first day of the
Lookback Period (a Subsequent
Calculation Date), if (A)(i) the proceeds
received from the fair market value sale
of a Property (or LLC interest), in the
case of a sale, or (ii) the current fair
market value of the LLC interest as of
the applicable Subsequent Calculation
Date, in the case in which there has not
been a sale, plus (B) any income
generated by the Property during that
period, (C) less any expenses paid by
the Plan during that period regarding
the LLC interest or Property, is less than
(D) the fair market value of such LLC
Interest as of the first day of the
applicable Lookback Period, plus (E) an
amount equal to a 5% percent rate of
return on such Contributed Value
during that period, compounded
annually; then the Tenant must
contribute to the Plan an amount of cash
equal to any such difference, within 60
days of the Sale Date or Subsequent
Calculation Date; and
(c) The Plan receives the full amount
that the Plan may be due under the
Make Whole Obligation within 60 days
of the applicable Sale Date, Calculation
Date, or Subsequent Calculation Date, as
verified by the Independent Fiduciary.
Section VI. Tenants’ Indemnification of
the Plan Described In Section I(d)
(a) In connection with each Lease and
Lease Renewal, and as set forth in
writing therein, the Tenant indemnifies,
defends upon request, and holds the
Plan harmless from any, and against all,
losses, penalties and court costs related
to: (1) The Tenant’s use, repair,
management, lease, sublease,
maintenance or operation of a Property,
(2) any violation of any applicable
environmental laws, the Americans
with Disabilities Act (the ADA), and
other health and/or safety laws; and (3)
any default by the Tenant under the
Lease or Lease Renewal; and
(b) Any amount owed the Plan in
connection with a Tenant’s
indemnification of the Plan, as
described in the preceding paragraph, is
negotiated and approved by the
Independent Fiduciary, and paid to the
Plan within the timeframe set forth by
the Independent Fiduciary.
Section VII. The Right of First Offer and
the Sale by the Plan of a Property or an
LLC Interest Described in Section I(E)
(a) During the term of the Lease and
any Lease Renewal, the Independent
Fiduciary is solely responsible for
determining whether, when, and under
what terms the Plan may prudently sell
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one or both of: (1) The LLCs; or (2) the
Properties;
(b) During the term of the Lease and
any Lease Renewal, the Independent
Fiduciary must approve any sale by the
Plan of one or both of: (1) The
Properties; or (2) the LLC Interests, as
being in the interest of, and protective
of, the Plan;
(c) The Independent Fiduciary may
not implement the Right of First Offer
unless the Independent Fiduciary has
first negotiated the terms and conditions
of a proposed sale of an LLC Interest (or
a Property) to a party that is unrelated
to ABARTA or any of its affiliates (the
Unrelated Proposed Sale);
(d) Any sale of an LLC Interest or
Property to ABARTA or any of its
affiliates (hereinafter, ABARTA)
pursuant to the Right of First Offer,
must equal the greater of: (1) The price
negotiated by the Independent
Fiduciary, as between the Plan and the
party that is unrelated to ABARTA; or
(2) the current fair market value of the
Property, as determined by the
Independent Appraiser; and
(e) If ABARTA does not purchase the
Property or LLC Interest under the same
terms as the terms associated with the
Unrelated Proposed Sale, the Plan may
sell the Property or LLC Interest to the
unrelated third party within 360 days
without triggering a new Right of First
Offer.
Section VIII. The Independent Fiduciary
(a) The Independent Fiduciary
represents the interests of the Plan for
all purposes with respect to the Covered
Transactions;
(b) The Independent Fiduciary must:
(1) Review, negotiate and approve the
terms and conditions of each Covered
Transaction;
(2) Review and approve the terms of
the transfer agreement (the Transfer
Agreement) that evidences the
Contribution;
(3) Monitor and enforce the Plan’s
rights and interests with respect to the
Properties;
(4) Monitor ABARTA’s compliance
with the terms of this exemption,
including all obligations set forth under
the Leases; and
(5) Take all steps that are necessary
and proper to protect the Plan in the
event of any non-compliance by
ABARTA.
Section IX. General Conditions
(a) The Plan does not pay any real
estate fees, commissions, costs or other
expenses in connection with the
proposed transactions, including any
fees that are currently charged, or any
fees which accrue in the future; and
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(b) The terms and conditions of the
proposed transactions are no less
favorable to the Plan than those
obtainable under similar circumstances
when negotiated at arm’s-length with
unrelated third parties.
Section X. Definitions
(a) The term ABARTA means
ABARTA, Inc., and any of its affiliates.
(b) The term ‘‘affiliate’’ means: (1)
Any person directly or indirectly
through one or more intermediaries,
controlling, controlled by, or under
common control with the person; (2)
any officer, director, employee, relative,
or partner in any such person; or (3) any
corporation or partnership of which
such person is an officer, director,
partner, or employee.
For the purposes of clause (a)(1)
above, the term ‘‘control’’ means the
power to exercise a controlling
influence over the management or
policies of a person other than an
individual.
(c) The term ‘‘Independent Fiduciary’’
means Evercore Trust Company
(Evercore), or another fiduciary of the
Plan who: (1) Is independent of or
unrelated to ABARTA and the Tenants,
and has the appropriate training,
experience, and facilities to act on
behalf of the Plan regarding the Covered
Transactions in accordance with the
fiduciary duties and responsibilities
prescribed by the Act (including, if
necessary, the responsibility to seek the
counsel of knowledgeable advisors to
assist in its compliance with the Act);
and (2) if relevant, succeeds Evercore in
its capacity as Independent Fiduciary to
the Plan in connection with the Covered
Transactions. The Independent
Fiduciary will not be deemed to be
independent of and unrelated to
ABARTA and the Tenants if: (1) Such
Independent Fiduciary directly or
indirectly controls, is controlled by or is
under common control, with ABARTA
or the Tenants; (2) such Independent
Fiduciary directly or indirectly receives
any compensation or other
consideration in connection with any
transaction described in this exemption
other than for acting as Independent
Fiduciary in connection with the
transactions described herein, provided
that the amount or payment of such
compensation is not contingent upon, or
in any way affected by, the Independent
Fiduciary’s ultimate decision; and (3)
the annual gross revenue received by
the Independent Fiduciary, during any
year of its engagement, from ABARTA
and the Tenants, exceeds 2% of the
Independent Fiduciary’s annual gross
revenue from all sources (for federal
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income tax purposes) for is prior tax
year.
(d) The term ‘‘Independent
Appraiser’’ means an individual or
entity meeting the definition of a
‘‘Qualified Independent Appraiser’’
under Department Regulation 25 CFR
2570.31(i) retained to determine, on
behalf of the Plan, the fair market value
of the Properties as of the date of the
Contribution.
Summary of Facts and Representations 3
The Parties
1. ABARTA, which was founded in
1933 by Rolland Adams, currently
maintains its headquarters in Pittsburgh,
Pennsylvania. ABARTA is privatelyowned and operates in the oil and gas,
soft-drink bottling, and frozen food
industries. Within its soft-drink bottling
division, ABARTA owns and operates
four Coca-Cola bottling companies, two
of which are Coca-Cola Buffalo and
Coca-Cola Lehigh Valley. As of March
31, 2015, ABARTA held assets totaling
$238,824,000 and liabilities totaling
$182,748,000.
Coca-Cola Lehigh Valley, which was
purchased by ABARTA in 1963, owns
the exclusive franchise rights in
perpetuity to distribute products of the
Coca-Cola Company throughout
Lancaster, Northampton, and Lehigh
counties, in Pennsylvania, and part of
Warren County, in New Jersey. CocaCola Lehigh Valley has generated $3
million in average annual Earnings
Before Interest, Tax, Depreciation, and
Amortization (EBITDA) since 2010.
Coca-Cola Buffalo, which was
purchased by ABARTA in 1980, owns
the exclusive franchise rights in
perpetuity to distribute products of the
Coca-Cola Company throughout eight
counties in and around Buffalo, New
York. Coca-Cola Buffalo has generated
$2.5 million in average annual EBITDA
since 2010.
2. The Plan, which was adopted by
ABARTA on January 1, 1981, is a
noncontributory, defined benefit
pension plan which covers
approximately 4,000 non-union
employees of ABARTA. As of January 1,
2015, the Plan had 1,265 participants.
As of July 31, 2015, the Plan held assets
totaling $36,737,158. The Plan
Administrator is a Committee, the
members of which are designated by
ABARTA’s Board of Directors.
Contributions required to fund the Plan
are remitted to and held under the
ABARTA, Inc. Defined Benefit Master
3 The Summary of Facts and Representations is
based on the Applicant’s representations and does
not reflect the views of the Department, unless
indicated otherwise.
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Trust (the Master Trust), the custodian
of which is Fidelity Management Trust
Company (Fidelity). In addition to
ABARTA, seven other companies,
including Coca-Cola Lehigh Valley and
Coca-Cola Buffalo, participate in the
Master Trust.
The Plan’s trustees are John F. Blitzer
III, Katherine W. Fedor, and William F.
Holtz (the Trustees). Each of the
Trustees serves concurrently as an
officer of ABARTA: Mr. Blitzer, as
Director, President and CEO; Ms. Fedor,
as Secretary; and Mr. Holtz as Vice
President, Treasurer, and Secretary. In
addition, two Trustees, Mr. Holtz and
Ms. Fedor, serve as officers for the LLCs,
but, if this exemption is granted, they
will not receive compensation from the
Plan as officers of the LLCs following
the Contribution.
The Trustees have delegated
investment management discretion over
Plan assets to Fidelity, subject to a
written investment policy approved by
the Trustees which specifies ranges for
asset allocations (the Investment Policy
Statement). The Investment Policy
Statement expressly permits the in-kind
contribution of employer real property
to the Plan.
The LLCs
3. ABARTA is the sole member and
100% owner of both Delabarta New
York LLC and Delabarta Pennsylvania
LLC. The Applicant represents that the
LLCs do not have any employees and
there are no significant costs associated
with ownership, other than a nominal
annual administrative filing fee required
by the State of New York, which
ABARTA will continue to pay following
the Contribution.
Each LLC owns, as its only asset, a
parcel of unencumbered real property,
as well as certain buildings situated on
each. The sole asset of Delabarta Lehigh
Valley LLC consists of unencumbered
title to approximately 10.615 acres of
land and one improvement thereon,
located at 2150 Industrial Drive
Bethlehem, Pennsylvania (the
Pennsylvania Property). Coca-Cola
Lehigh Valley purchased the
Pennsylvania Property as a vacant
parcel of land in 1980 and subsequently
constructed a 116,751-square foot
warehouse/distribution facility on the
Property in 1981. Currently, the
Pennsylvania Property is 100%
occupied by Coca-Cola Lehigh Valley.
The sole asset of Delabarta New York
LLC consists of unencumbered title to
approximately 9.21 acres of land and
two improvements thereon, located at
150 and 200 Milens Road in the Town
of Tonawanda, New York (the New York
Property). Coca-Cola Buffalo purchased
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the New York Property in 1959 and
subsequently constructed the two
warehouse facilities in 1960 and 1967.
Currently, the New York Property is
100% occupied by Coca-Cola Buffalo.
Hereinafter, Coca-Cola Lehigh Valley
and Coca-Cola Buffalo are referred to as
the Tenants.
The Contribution
4. ABARTA has requested an
administrative exemption from the
Department in order to contribute the
LLC Interests to the Plan. To evidence
the Contribution, ABARTA and the Plan
will enter into a written transfer
agreement (the Transfer Agreement),
which will govern the terms upon
which the LLC Interests will be
contributed to and held by the Plan.
As will be stated in the Transfer
Agreement, the Independent Fiduciary
must act on behalf of the Plan in
connection with the Contribution, and
must negotiate and approve the terms
upon which the Plan will accept the
LLC Interests. As also stated in the
Transfer Agreement, the value of the
Properties will be determined by the
Independent Fiduciary based upon an
appraisal of the Properties performed by
the Independent Appraiser, as of the
date of the Contribution.
The Plan will not pay any
commissions, costs or other expenses in
connection with the Contribution,
including any fees that are currently
charged, or any fees which are charged
in the future, by the Independent
Appraiser or the Independent Fiduciary.
5. In addition to the Contribution and
in connection therewith, ABARTA will
make a one-time, cash contribution of
$500,000 to the Plan. Taken together
with the appraised fair market value of
the Properties underlying the LLC
Interests (see Representations 18 and
19), the estimated aggregate value of the
Contribution amounts to $6,900,000,
and is in excess of ABARTA’s 2015
minimum funding obligation under
section 302 of the Act.
The Leases
6. The Plan, through the LLCs, will
enter into bondable, triple-net leases
(the Leases) of the Properties with each
Tenant. Each Lease will be substantially
identical in all respects, other than the
name of the Tenant, the name of the
LLC Landlord,4 and the rent amount to
be paid. Each Lease will also have an
initial term of 10 years with the
respective Tenant.
The bondable, triple-net lease
structure will ensure that all operating
4 References to the Plan as the Landlord under the
Leases are meant to include the LLCs which hold
title to the Properties.
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costs related to the Properties, including
taxes, insurance, utilities, and noncapital maintenance, repair, and capital
improvements will be the responsibility
of the Tenants. Additionally, the triplenet lease structure ensures that the rent
payable by the Tenants to the Plan will
remain payable under all circumstances,
with the exception of a partial
condemnation of the underlying
Properties.
The Leases will remain bondable until
the earlier of: (a) The date on which
Property or LLC Interest is first
transferred to any person or entity that
is not wholly owned by the Plan; (b) the
date on which the Plan sells a
controlling interest in the applicable
LLC to an entity that is not wholly
owned by the Plan; or (c) the date the
Lease or Lease Renewal terminates by
operation of law.
With regard to alterations to the
Properties by the Tenants, the Tenants
must secure consent from the
Independent Fiduciary prior to affecting
any alteration which would: (a)
Diminish the fair market value or
remaining useful life of the Properties;
(b) affect the structure or systems of any
building existing on the Properties, or
(c) effect an expansion of any building
existing on the Properties.
Further, any amendment to a Lease or
Lease Renewal must be negotiated and
approved by the Independent Fiduciary.
However, in no event may an
amendment be inconsistent with the
terms of this exemption, if granted.
Finally, each Lease or Lease Renewal
prohibits the Plan from transferring a
fractional part of its LLC Interests to
ABARTA or a Tenant.
7. Under the Pennsylvania Property
Lease, Coca-Cola Lehigh Valley will pay
the Plan a base rental amount of
$379,441, due in equal monthly
installments of $31,620. In addition, on
the first day of each Lease Year from
and after the second Lease Year, the
base rental amount under the
Pennsylvania Property Lease will be
increased by an amount equal to the
product of the Base Rent then in effect
multiplied by a 2.0% escalator
adjustment.5 In effect, the Plan will
receive an annualized 9.44% rate of
return under such Lease.
Under the New York Property Lease,
Coca-Cola Buffalo will pay the Plan a
base rental amount of $348,563, due in
equal monthly installments of $29,047.
5 The annual escalator under the Pennsylvania
Property Lease is based upon a market rent analysis
performed by the Independent Appraiser. The
Independent Fiduciary has confirmed that the
rental rate under the Pennsylvania Property Lease
is consistent with the fair market rental value in the
Erie, Pennsylvania market.
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The New York Property Lease does not
provide for annual rent escalations from
and after the second lease year.6
However, it is anticipated that this
Lease will generate a 13.94% annual
rate of return to the Plan.
8. Over the initial 10 year term of the
Leases, the Plan will receive aggregate
rental income totaling $7,640,403.05
($4,154,773.05 in aggregate income
under the Pennsylvania Lease and
$3,485,630.00 in aggregate income
under the New York Lease).
The Applicant represents that the
rental rates under the Leases represent
fair market value, as (a) they were
agreed upon following arm’s length
negotiations between the Independent
Fiduciary and the Tenants, and (b) are
supported by a market rent analysis
performed by the Independent
Appraiser.
The Lease Renewals
9. With respect to each Lease, the
Tenant has the right to renew the term
of the Lease for an additional Renewal
Term of ten years by giving the Plan
written notice (the Renewal Notice) not
later than the last day of the ninth Lease
year. During such time, the Plan will be
represented by the Independent
Fiduciary. Within 90 days of its receipt
of the Tenant’s Renewal Notice, the
Independent Fiduciary will provide
such Tenant with the Independent
Fiduciary’s determination of the fair
market annual base rent, and the
escalation factor which it desires to be
applicable during the Renewal Term.
The Independent Fiduciary and the
Tenant will then have thirty days to
agree upon a base rent amount and
escalation factor for the purposes of the
Renewal Term.7 In no event, however,
will the Independent Fiduciary be
under any obligation to agree to a base
rent for the first year of the Renewal
Term which is less than the annual base
rent in effect during the Lease Year
immediately preceding the
commencement of the Renewal Term.
The Make Whole Obligation
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10. The Lease Agreements and any
Lease Renewal Agreement will include
6 The absence of an annual rent escalator under
the New York Property Lease is based upon the
Independent Appraiser’s conclusion that rent
escalators are not prevalent in commercial leases in
the New York Property’s market. The Independent
Fiduciary has confirmed that the rental rate under
the New York Property Lease is consistent with the
fair market rental value in the Buffalo, New York
market.
7 In the event the Plan and Tenant are unable to
agree upon a base rent amount and escalation
factor, each will appoint an independent appraiser
to determine a fair market base rent amount and
escalation factor.
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a Make Whole Obligation, whereby each
Tenant will ensure that the Plan
receives at least a five percent
annualized rate of return in connection
with the Plan’s ownership of the LLC
Interests. After the Contribution, as of
the earlier of: (i) A Sale Date; or (2) a
First Calculation Date, if (A)(i) the
proceeds received from the fair market
value sale of a Property (or LLC
interest), in the case of a sale, or (ii) the
current fair market value of the Property
(or the LLC interest) as of the First
Calculation Date, in the case in which
there has not been a sale, plus (B) any
income generated by the Property
during that period, less (C) any expenses
attributable to the Property (or the LLC
Interest) paid by the Plan during that
period, is less than (D) the fair market
value of such Property (or the LLC
Interest) at the time of the Contribution,
plus (E) an amount equal to a 5%
percent rate of return on such
Contributed Value during that period,
compounded annually; then the Tenant
must contribute an amount of cash to
the Plan equal to any such difference,
within 60 days of the Sale Date or First
Calculation Date;
Additionally, if the Plan continues to
hold a Property or LLC Interest during
all or a portion of the three consecutive
five year Lookback Periods that follow
the First Calculation Date, with respect
to any of these Lookback Periods, as of
the earlier of: (1) A Sale Date; or (2) a
Subsequent Calculation Date, if (A)(i)
the proceeds received from the fair
market value sale of a Property (or LLC
interest), in the case of a sale, or (ii) the
current fair market value of the LLC
interest as of the applicable Subsequent
Calculation Date, in the case in which
there has not been a sale, plus (B) any
income generated by the Property
during that period, (C) less any expenses
paid by the Plan during that period
regarding the LLC interest or Property,
is less than (D) the fair market value of
such LLC Interest as of the first day of
the applicable Lookback Period, plus (E)
an amount equal to a 5% percent rate
of return on such Contributed Value
during that period, compounded
annually; then the Tenant must
contribute to the Plan an amount of cash
equal to any such difference, within 60
days of the Sale Date or Subsequent
Calculation Date; and
The Make Whole Obligation will
remain in effect for up to twenty years,
which is the maximum term of this
proposed exemption, if granted, unless
the Properties or LLC Interests are sold
before then. The Independent Fiduciary
will represent the interests of the Plan
with respect to the Make Whole
Obligation, and will ensure that the Plan
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receives any amount due under the
Make Whole Obligation, within 60 days
of the date that triggers the payment of
such amount.
The Indemnification
11. The Lease Agreements provide
that each Tenant reimburse the Plan,
and indemnify, defend upon request,
and hold harmless the Plan from any,
and against all losses, penalties and
court costs related to: (a) The Tenant’s
use, repair, management, lease,
sublease, maintenance or operation of a
Property; (b) any violation of any
applicable environmental laws, the
ADA, and other health and/or safety
laws; and (c) any default by a Tenant
under the Lease. Any reimbursement
paid to the Plan by a Tenant in
connection with the Tenant’s
Indemnification, will be negotiated and
approved by the Independent Fiduciary.
The Right of First Offer
12. The Lease Agreements provide a
Right of First Offer to the Tenants,
which states that, in the event that the
Plan desires to sell either a Property or
an LLC Interest during the initial tenyear Lease term or during any Lease
Renewal period, the Plan must first offer
such Property or LLC Interest to the
Tenant at terms the Plan intends to offer
such Property or LLC Interest to an
unrelated third party (the Unrelated
Proposed Sale). Any sale of an LLC
Interest or Property to ABARTA
pursuant to the Right of First Offer must
equal the greater of: (a) The price
negotiated by the Independent
Fiduciary, as between the Plan and the
party that is unrelated to ABARTA; or
(b) the current fair market value of the
Property, as determined by the
Independent Appraiser, as described
herein in Representations 16–19.
If ABARTA does not purchase the
Property or LLC Interest under the same
terms as the terms associated with the
Unrelated Proposed Sale, the Plan may
sell the Property or LLC Interest to the
unrelated third party within 360 days
without triggering a new Right of First
Offer.
During the term of the Lease and any
Lease Renewal, the Independent
Fiduciary is solely responsible for: (a)
determining whether, when, and under
what terms the Plan may prudently sell
one or both of: (i) The LLC Interests; or
(ii) the Properties; and (b) approving any
such sale as being in the interest of, and
protective of, the Plan. In addition, the
Independent Fiduciary may not
implement the Right of First Offer
unless the Independent Fiduciary has
first negotiated the terms and conditions
of an Unrelated Proposed Sale.
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Legal Analysis
13. The Act prohibits a wide range of
transactions involving a plan. In this
regard, section 406(a)(1)(A) of the Act
provides that a fiduciary with respect to
a plan shall not cause a plan to engage
in a transaction if the fiduciary knows
or should know that such transaction
constitutes a direct or indirect sale or
exchange, or leasing, of any property
between a plan and a party in interest.
Section 406(a)(1)(B) of the Act states
that a fiduciary with respect to a plan
shall not cause a plan to engage in a
transaction if the fiduciary knows or has
reason to know that such transaction
constitutes a direct or indirect extension
of credit between a plan and a party in
interest. Section 406(a)(1)(D) of the Act
provides that a fiduciary with respect to
a plan shall not cause a plan to engage
in a transaction if the fiduciary knows
or should know that such transaction
constitutes a direct or indirect transfer
to, or use by or for the benefit of, a party
in interest, of any assets of the plan.
Section 406(b)(1) of the Act prohibits a
fiduciary from dealing with the assets of
the plan in such fiduciary’s own interest
or for such fiduciary’s personal account.
Section 406(b)(2) of the Act prohibits a
fiduciary from acting in such fiduciary’s
individual or other capacity in any
transaction involving the plan on behalf
of a party (or from representing a party)
whose interests are adverse to the
interests of the Plan, or the interests of
the Plan participants and beneficiaries.
14. The term ‘‘party in interest’’ is
defined in section 3(14)(A) and (C) of
the Act to include a fiduciary with
respect to a plan, and an employer, any
of whose employees are covered by such
Plan. In addition, section 3(14)(G) of the
Act defines the term ‘‘party in interest’’
to include any corporation of which
50% or more of the combined voting
power of all classes of stock entitled to
vote or the total value of shares of all
classes of stock of such corporation is
owned directly or indirectly, or held by
such employer. As fiduciaries to the
Plan, the Trustees are parties in interest
with respect to the Plan pursuant to
section 3(14)(A) of the Act. ABARTA, as
an employer whose employees are
covered by the Plan, and the Tenants, as
wholly-owned subsidiaries of ABARTA,
are parties in interest with respect to the
Plan pursuant to section 3(14)(C) and
(G) of the Act, respectively.
If this proposed exemption is granted,
the Contribution, the Leases and the
Lease Renewals would violate section
406(a)(1)(A), 406(b)(1) and (b)(2) of the
Act. The Right of First Offer would
violate section 406(a)(1)(A), 406(b)(1)
and (b)(2) of the Act. A sale back of a
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Property or LLC interest by the Plan to
ABARTA pursuant to the Right of First
Offer would violate section 406(a)(1)(A)
and (D) of the Act, as well as section
406(b)(1) and (b)(2) of the Act. In
addition, the Indemnification and the
Make Whole Obligation would violate
section 406(a)(1)(C) of the Act, and
section 406(b)(1) and (b)(2) of the Act.
15. In addition to the prohibited
transaction provisions described above,
sections 406(a)(1)(E) and 406(a)(2) of the
Act prohibit a plan from acquiring or
holding employer real property in
violation of section 407(a) of the Act.8
Section 407(a) of the Act provides that
a plan may not acquire or hold
employer real property unless such
property is ‘‘qualifying employer real
property.’’ Section 407(d)(2) of the Act
defines the term ‘‘employer real
property’’ as real property that is leased
to an employer or to an affiliate of such
employer. Section 407(d)(4) of the Act
defines the term ‘‘qualifying employer
real property’’ to mean parcels of
employer real property: (a) If a
substantial number of the parcels are
dispersed geographically; (b) if each
parcel of real property and the
improvements thereon are suitable (or
adaptable without excessive cost) for
more than one use; and (c) if the
acquisition and retention of such
property complies with the provisions
of sections 406 and 407 of the Act.
Section 407(a)(2) of the Act further
prohibits a plan from acquiring or
holding qualifying employer real
property where ‘‘immediately after such
acquisition the aggregate fair market
value of employer securities and
employer real property held by the plan
exceeds 10% of the fair market value of
the assets of the plan.’’
Given that: the acquisition and
retention of the Properties by the Plan
would not comply with the provisions
of section 406 and 407 of the Act; and
fair market values of the Properties
immediately after acquisition would
constitute approximately 18.7% of the
fair market value of the Plan’s assets, the
Plan’s acquisition and holding of the
Properties would violate sections
406(a)(1)(E), 406(a)(2), and 407(a) of the
Act.
29701
The Qualified Independent Appraiser
16. The Independent Fiduciary has
retained CBRE, Inc. (CBRE) to render an
opinion as to the fair market value of the
Properties. CBRE is a real estate
appraisal firm that provides real estate
financial advisory services and employs
personnel with extensive experience
providing valuation and appraisal
services for real estate classified as
warehouse/distribution.
Thomas H. Myers, Jr. and John B.
Rush of CBRE’s Valuation and Advisory
Services prepared the appraisal report
for the Pennsylvania Property (the
Pennsylvania Property Appraisal
Report) in November, 2014, and will
update that report for purposes of this
exemption, if granted. Mr. Myers is a
Certified General Real Estate Appraiser
in Pennsylvania and New Jersey, and an
Affiliate Member of the Appraisal
Institute (MAI). Mr. Myers has 43 years
of relevant real estate experience, with
a primary focus on major industrial
properties. Mr. Rush is a Certified
General Real Estate Appraiser in
Delaware, New Jersey, and
Pennsylvania, and has over 39 years of
relevant real estate experience,
including experience that encompasses
a wide variety of property types
including office, retail, and industrial.
Mr. Rush also holds an MAI designation
from the Appraisal Institute and a CRE
designation from the Counselors of Real
Estate.
Robert J. DiFalco and Joseph V.
Ferranti of CBRE’s Valuation and
Advisory Services prepared an appraisal
report for the New York Property (the
New York Appraisal Report) in
November, 2014, and will update that
report for purposes of this exemption, if
granted. Mr. DiFalco is a Certified
General Real Estate Appraiser in New
York, New Jersey, and Connecticut and
an MAI.
17. As represented by CBRE, each
Appraisal Report is self-contained and
intended to comply with the reporting
requirements set forth under Standards
Rule 2–2(a) of USPAP. Additionally,
CBRE represents that the intended use
of the Appraisal Report is to assist the
Independent Fiduciary appointed to
oversee the proposed transactions to
comply with its responsibilities under
the Act in connection with the proposed
transactions. Finally, CBRE represents
that its fee for appraisal services
provided in connection with the
proposed transactions represents less
than 0.5% of its annual revenues in
2014 and 2015, which are the years it
has provided such services.
8 According to the Applicant, the LLC Interests
are pass-through entities, owning 100% of the
underlying Properties. Therefore, the Applicant
asserts that the LLC Interests are not considered
securities, or for that matter, ‘‘employer securities’’
or ‘‘qualifying employer securities’’ under section
407(d)(1)or section 407(d)(5) of the Act.
Pennsylvania Property Appraisal Report
18. In the Pennsylvania Property
Appraisal Report, CBRE describes the
Pennsylvania Property as a 10.615 acre
parcel of land improved by a 116,751
square foot warehouse/distribution
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facility. CBRE notes that the Property is
located in the Lehigh Valley region, an
area with a relatively diverse economic
base which protects the region from the
effects of wide swings in the economy.
CBRE also notes that the Pennsylvania
Property lies in Bethlehem, which is the
most populous city in the Lehigh
Valley, and that the long-term trends of
the region should exert positive
influences on the Property’s value.
CBRE states that modern warehouse/
distribution facilities, like the
Pennsylvania Property, are a desirable
commodity in the current marketplace.
As explained by CBRE, this desirability
is due to the general versatility of such
facilities and a heightened demand for
just-in-time delivery of products. CBRE
also emphasizes that warehouse/
distribution facilities are generally
perceived to be a relatively stable asset
class.
Pursuant to analysis based upon the
Sales Comparison Approach and
Income Capitalization Approach, CBRE
concluded that the fair market value of
the Pennsylvania Property was
$4,400,000 as of November 7, 2014, in
an appraisal report dated November 10,
2014. In addition, within its Income
Capitalization analysis of the
Pennsylvania Property, CBRE completed
a market rent analysis and estimated
that a base rental amount of $3.25 per
square foot, or $379,441 per year was
appropriate for the space.
New York Property Appraisal Report
19. In the New York Property
Appraisal Report, CBRE describes the
New York Property as a 9.05 acre parcel
of land improved by two adjacent
warehouse buildings which cover a
combined 107,250 square feet of space.
CBRE notes that the structures are in
average overall condition and that there
are no known factors that impact their
marketability. CBRE determined that the
New York Property’s location in the
Town of Tonawanda in Erie County,
New York is suitable for the Property’s
current industrial use. In the Appraisal
Report, CBRE notes that the New York
Property’s location places it in a stable
industrial market, within an extensive
transportation network near the United
States-Canada border.
Pursuant to analysis based upon the
Sales Comparison Approach and the
Income Capitalization Approach, CBRE
concluded that the fair market value of
the New York Property was $2,500,000,
as of November 3, 2014, in an Appraisal
Report dated November 4, 2014. In
addition, within its Income
Capitalization analysis of the New York
Property, CBRE completed a market rent
analysis and estimated that a base rental
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amount of $3.25 per square foot on a
triple-net basis, or $348,563 per year
was appropriate for the space, as of
November 4, 2014.
The Qualified Independent Fiduciary
20. For the purposes of the Covered
Transactions, the Trustees have retained
Evercore Trust Company (Evercore) to
serve as the Independent Fiduciary for
the Plan. Evercore represents that it has
provided independent fiduciary services
to employee benefit plans since 1987,
and that it has extensive experience in
making and evaluating investment
decisions and with transactions
implicating the prohibited transaction
provisions of the Act. Evercore also
represents that it has significant
experience with the management and
disposition of Plan assets and
transactions involving real estate.
In its Engagement Letter, Evercore
represents that it is independent of and
unrelated to ABARTA, and that it does
not directly or indirectly control, is not
controlled by, and is not under common
control with ABARTA. Evercore also
represents that it will not directly or
indirectly receive any compensation or
other consideration for its own account
in connection with the Covered
Transactions, except for fees received in
connection with its duties as
Independent Fiduciary. Further,
Evercore represents that its annual
compensation received as Independent
Fiduciary has been less than 0.5% of its
annual revenues in each of the years it
has been working on this engagement.
Evercore states that it will perform the
following duties as Independent
Fiduciary of the Plan: (a) Determine
whether the Covered Transactions are in
the interest of the Plan and its
participants and beneficiaries; (b)
negotiate the terms and conditions of
the Covered Transactions on behalf of
the Plan, including the Transfer
Agreements, the Leases, the Lease
Renewals, the Make Whole Obligation,
the Indemnification, and the Right of
First Offer thereunder, and other
documents which Evercore, together
with its legal counsel, deems necessary
and in the Plan’s interest to proceed
with the proposed transactions; (c)
determine whether and on what terms
the Plan should agree to the Covered
Transactions; (d) determine whether the
Plan will enter into the Covered
Transactions; (e) determine, together
with the Independent Appraiser, the fair
market value of the Properties to be
contributed to the Plan, as well as the
fair market rental values of the
Properties under the Leases; and (e)
prepare a written report for submission
to the Department in connection with
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the exemption, if it determines that the
Covered Transactions are in the interest
of the Plan.
Evercore will continue to serve as
Independent Fiduciary to the Plan
following the Contribution of the LLC
Interests to the Plan. In this regard,
Evercore will: (a) Review, negotiate, and
approve the terms and conditions of
such Covered Transactions; (b) ensure,
for purposes of the Contribution, that
the Appraisal Reports of the Properties
are consistent with sound principles of
valuation, and that the LLC interests are
valued at fair market value as of the date
of the Contribution, as determined by
the the Independent Appraiser; (c)
review and examine all aspects of the
Properties and the LLC Interests under
the provisions of the Transfer
Agreement, and have the right to
terminate such agreement on behalf of
the Plan by providing appropriate
written notice to ABARTA; (d) monitor
and enforce the Plan’s rights and
interests with respect to the Properties
under the terms of the Leases, the Lease
Renewals, the Make Whole Obligation,
the Indemnification, and the Right of
First Offer, and any other agreements
regarding the Properties or the LLCs; (e)
propose, negotiate, and decide whether
to enter into any agreements on behalf
of the Plan to amend the Leases; (f)
evaluate and decide whether to grant
requests for alterations to the Properties,
to the extent that such alterations
would: (i) Diminish the fair market
value or remaining useful life of the
Properties; (ii) affect the structure or
systems of any building existing on the
Properties, or (iii) effect an expansion of
any building existing on the Properties;
(g) ensure compliance with all of the
terms of the Leases throughout the
initial term of such Leases and
throughout the duration of any renewal
of such Leases; (h) arrange for appraisals
of the Properties as may be necessary to
satisfy the Plan’s responsibilities under
ERISA and the terms of this exemption;
(i) manage the disposition of the
Properties or the LLC Interests in
connection with the Right of First Offer,
and ensure that the Plan does not
transfer any portion of its LLC Interests
to a party in interest, such as ABARTA
or the Tenants; (j) determine whether
the continued ownership of the LLC
Interests or the Properties is in the
interests of the Plan’s participants and
beneficiaries and whether, when and on
what terms to seek prudently to sell one
or both of the LLCs or to cause the
respective LLCs to sell one or both of
the Properties; (k) negotiate the terms
and conditions of, and consummate
such sale and disposition, in the event
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such fiduciary determines to sell one or
both of the LLCs or to cause the
respective LLCs to sell or otherwise
dispose of one or both Properties; and
(l) monitor and enforce compliance with
the conditions of this exemption, if
granted.
To assist with the negotiation of the
Leases and Transfer Agreements,
Evercore engaged the law firms of
Pillsbury Winthrop Shaw Pittman LLP
(Pillsbury) and Chernow Kapustin LLC
(Chernow). The fees and expenses of
Evercore, as well as all fees and
expenses of Pillsbury and Chernow, will
be paid by ABARTA.
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The Independent Fiduciary Report
21. In the preliminary Independent
Fiduciary Report, Evercore concludes
that the Covered Transactions are
prudent and in the interest of the Plan’s
participants and beneficiaries. In
support of this conclusion, Evercore
emphasizes that the Covered
Transactions will immediately improve
the Plan’s actuarial position, diversify
the Plan’s overall portfolio of assets, and
reduce the Plan’s reliance on future cash
contributions from ABARTA.
Specifically, Evercore notes that,
absent receipt by the Plan of the LLC
Interests and a $500,000 cash
contribution, and assuming the Plan’s
future receipt of required minimum
contributions, the Plan’s AFTAP
funding percentage would be 80.54%
for Plan year 2016 and 83.14% for Plan
year 2017. Evercore concludes that, with
the acquisition of the LLC Interests and
the $500,000 cash contribution from
ABARTA, the Plan’s projected funding
levels will improve, on a MAP–21/
HAFTA basis, to 83.37% for 2016 and
85.27% for 2017.
In further support of this conclusion,
Evercore asserts that the Covered
Transactions will improve the
diversification of the Plan’s
investments. Evercore emphasizes that
the Plan currently holds no real estate,
and that its current investments consist
entirely of liquid, marketable equity and
fixed income securities. Evercore
explains that the Plan’s ownership and
leasing of the Properties to creditworthy
tenants will enhance the diversification
of its portfolio in view of the low
correlation of returns between real
estate and other asset classes, such as
the equity and fixed income securities
in which the Plan’s assets are currently
invested. Based upon its analysis of the
Plan’s current investments, Evercore
concludes that adding real estate
exposure to the Plan’s asset allocation
can be expected to improve the Plan’s
overall risk adjusted return.
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Evercore asserts that the terms of the
Covered Transactions, as set forth in the
Transfer Agreements and Leases, are
both reasonable and consistent with
terms negotiated between unrelated
parties in a similar arm’s-length
transaction. Evercore emphasizes that
its own representatives, as well as
expert real estate counsel were directly
involved in negotiations with ABARTA
regarding the terms of the Transfer
Agreements and the Leases. Evercore
also emphasizes that the bondable
structure of the Leases is advantageous
to the Plan, as it (a) provides additional
assurances that rent due under the
Leases will be paid to the Plan; and (b)
relieves the Plan of any obligation to
expend Plan assets on the Properties for
any purpose, including repairs and
capital improvements.
Evercore concludes that the Covered
Transactions do not place any financial
burden on the Tenants. Evercore notes
that the annual rent of $379,441 under
the Pennsylvania Property Lease
represents only 12.6% of the $3.0
million average EBITDA generated by
Coca-Cola Lehigh Valley, and that the
annual rent of $348,563 under the New
York Lease represents only 13.9% of the
$2.5 million average EBITDA generated
by Coca-Cola Buffalo.
Evercore concludes that the rental
rates and escalator clauses under the
Leases are consistent with the
Independent Appraiser’s determination
of fair market rental value in the
Properties’ respective markets. In this
regard, Evercore asserts that the
bondable structure of the Leases make
them more marketable and financeable
than a standard, non-bondable lease.
With respect to the New York Lease,
Evercore states that the bondable lease
structure serves to mitigate the absence
of an escalator clause.
Finally, Evercore concludes that there
is no marketability limitation
attributable to the LLC Interests, other
than as provided generally by applicable
law. In this regard, Evercore asserts that
the Right of First Offer will not impair
the Plan’s ability to sell the LLC
Interests or the Properties at fair market
value. Evercore cites to the fact that the
Right of First Offer is exercisable only
at either: (a) Each Property’s fair market
value; or (b) the value of an unsolicited
offer from an unrelated party. Evercore
also emphasizes that ABARTA has
agreed that if it declines to exercise the
Right of First Offer and the Plan
proceeds with a sale to an unrelated
party, the purchaser will not have any
Right of First Offer obligation with
respect to ABARTA.
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29703
Environmental Assessments of the
Properties
22. The Independent Fiduciary
retained CBRE to render a Limited
Subsurface Environmental Site
Assessment Reports for the Properties.
CBRE conducted a Phase II Limited
Subsurface Environmental Site
Assessment of the Pennsylvania
Property on January 5, 2015 (the
Pennsylvania Assessment). To complete
the Pennsylvania Assessment, CBRE
engaged EnviroProbe Service, Inc., a
Pennsylvania-licensed drilling
contractor, to collect seven soil borings
from the Pennsylvania Property. Once
collected, CBRE submitted the soil
samples to TestAmerica Laboratories,
Inc. for an analysis of volatile organic
compounds (VOCs) and semi-volatile
organic compounds (SVOCs). Following
its analysis, TestAmerica, Inc.
concluded that no concentrations of
VOCs or SVOCs were detectable at
concentrations exceeding the most
stringent soil standards established by
the Pennsylvania Department of
Environmental Protection. At the
conclusion of the Pennsylvania
Assessment, CBRE notes that no further
assessment, remediation, or reporting to
the state of Pennsylvania is
recommended.
On December 29, 2014, CBRE
performed a Phase I Environmental Site
Assessment of the New York Property
(the New York Assessment). To
complete the New York Assessment,
CBRE engaged Nature’s Way
Environmental, a New York-licensed
drilling contractor, to collect five soil
borings from the Pennsylvania Property.
Once collected, CBRE submitted the soil
samples to ESC Lab Sciences, a New
York-certified laboratory, for an analysis
of VOCs and SVOCs. Following its
analysis, ESC Lab Sciences concluded
that concentrations of both VOCs and
SVOCs were well below the commercial
and industrial soil cleanup objectives
promulgated by the New York State
Department of Environmental
Conservation. At the conclusion of the
New York Assessment, CBRE states that
no further assessment, remediation, or
reporting to the state of New York is
recommended.
Statutory Findings
23. The Applicant represents that
Covered Transactions are
administratively feasible because they
will be carried out under the
supervision and direction of the
Independent Fiduciary. The Applicant
emphasizes that the Independent
Fiduciary will represent the Plan in all
aspects of the transactions, including
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with respect to the Contribution of the
LLC Interests, as well as all aspects of
the Leases, including the ROFO and any
renewal of the Leases.
The Applicant represents that the
Covered Transactions are in the interest
of the Plan and its participants and
beneficiaries and are protective of their
rights. In this regard, the Applicant
emphasizes that the Contribution,
which is well in excess of ABARTA’s
minimum required contribution
amount, will significantly improve the
Plan’s funding status, as well as reduce
the Plan’s reliance on future cash
contributions from ABARTA.
Additionally, the Applicant emphasizes
that the Plan will receive valuable,
appreciating real property assets that
will produce a steady stream of future
income for the Plan.
24. The Applicant also represents
that, in the event the exemption is
denied, the Plan and its Participants
will incur certain hardships. The
Applicant asserts that a denial of the
proposed exemption would cause the
Plan to forego the benefit of a voluntary
contribution that is in excess of the
minimum required amount, and as
such, would leave the Plan at a lessadvantageous funding level. The
Applicant further represents that a
denial of the proposed exemption
would deprive the Plan of two
appreciating real property assets which
produce a steady stream of reliable
rental income.
Summary
25. In summary, it is represented that
the Covered Transactions will satisfy
the statutory criteria for an exemption
under section 408(a) of the Act because:
(a) The Independent Fiduciary will
negotiate the terms and conditions of
the Contribution, and approve the
Contribution as being in the interest of
the Plan;
(b) The LLC Interests will be
contributed to the Plan at their current
fair market value, as determined by the
Independent Fiduciary following its
review of the Appraisal Report that has
been prepared by the Independent
Appraiser;
(c) On the date of the Contribution,
the aggregate contributed value of the
LLC Interests will be no less than the
current fair market value of the
Properties underlying the LLC Interests,
as verified by the Independent
Fiduciary;
(d) On the date of the Contribution,
ABARTA will contribute to the Plan a
cash amount that is no less than
$500,000;
(e) Immediately following the
Contribution, the aggregate fair market
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17:52 May 11, 2016
Jkt 238001
value of employer real property and
employer securities held by the Plan
will represent less than 20% of the
Plan’s assets;
(f) As long as the Properties and/or
LLC Interests are owned by the Plan, the
Properties will not be altered in any way
that would: (i) Diminish their fair
market value or remaining useful life;
(ii) affect the structure or systems of any
building existing on the Properties; or
(iii) affect an expansion of any building
existing on the Properties, without the
prior written approval of the
Independent Fiduciary;
(g) Following the Contribution, the
Plan will not transfer a portion of its
ownership interests in the LLCs or in
the Properties to a party in interest to
the Plan;
(h) The Independent Fiduciary will
negotiate the terms and conditions of
the each Lease and Lease Renewal, and
approve the Plan’s entering into each
Lease and Lease Renewal, as being in
the interest of, and protective of, the
Plan;
(i) Each Lease and Lease Renewal will
remain, at all times, a bondable triple
net lease, such that all costs attributable
to a Property (including, among other
things, taxes, insurance, utilities, and
non-capital maintenance, repair, and
capital improvements) are the
responsibility of the Tenant, until the
earlier of: (i) The date on which the
Property or LLC Interest is first
transferred to any person or entity that
is not wholly-owned by the Plan; (ii) the
date on which the Plan sells a
controlling interest in the LLC to an
entity that is not wholly-owned by the
Plan; or (iii) the date the Lease or Lease
Renewal terminates by operation of law;
(k) Any amendment to a Lease or
Lease Renewal will be negotiated and
approved by the Independent Fiduciary;
however, in no event will any
amendment be inconsistent with the
terms of this exemption, if granted;
(l) For each Lease Renewal, all
provisions of the Lease on which the
Lease Renewal is based, with the
exception of the specific rent amount
and any escalator provision, will remain
in effect;
(m) After the Contribution, as of the
earlier of: (i) A Sale Date; or (ii) a First
Calculation Date, if (A)(1) the current
fair market value of a Property (or LLC
interest), in the case of a sale, or (2) the
current fair market value of the Property
(or the LLC interest) as of the First
Calculation Date, in the case in which
there has not been a sale, plus (B) any
income generated by the Property
during that period, less (C) any expenses
attributable to the Property (or the LLC
Interest) paid by the Plan during that
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period, is less than (D) the fair market
value of such Property (or the LLC
Interest) at the time of the Contribution,
plus (E) an amount equal to a 5%
percent rate of return on such
Contributed Value during that period,
compounded annually; then the Tenant
will contribute an amount of cash to the
Plan equal to any such difference,
within 60 days of the Sale Date or First
Calculation Date;
(n) If the Plan continues to hold a
Property or LLC Interest during all or a
portion of any of the three consecutive
Lookback Periods, within 60 days of the
earlier of: (i) A Sale Date; or (ii) a
Subsequent Calculation Date, if (A)(1)
the proceeds received from the fair
market value sale of a Property (or LLC
interest), in the case of a sale, or (2) the
current fair market value of the LLC
interest as of the applicable Subsequent
Calculation Date, in the case in which
there has not been a sale, plus (B) any
income generated by the Property
during that period, (C) less any expenses
paid by the Plan during that period
regarding the LLC interest or Property,
is less than (D) the fair market value of
such LLC Interest as of the first day of
the applicable Lookback Period, plus (E)
an amount equal to a 5% percent rate
of return on such Contributed Value
during that period, compounded
annually; then the Tenant will
contribute to the Plan an amount of cash
equal to any such difference, within 60
days of the Sale Date or Subsequent
Calculation Date;
(o) The Plan will receive the full
amount that the Plan may be due under
the Make Whole Obligation within 60
days of the applicable Sale Date,
Calculation Date, or Subsequent
Calculation Date, as verified by the
Independent Fiduciary;
(p) In connection with each Lease and
Lease Renewal, and as set forth in
writing therein, the applicable Tenant
will indemnify, defend upon request,
and hold the Plan harmless from any,
and against all, losses, penalties and
court costs related to: (i) The Tenant’s
use, repair, management, lease,
sublease, maintenance or operation of a
Property, (ii) any violation of any
applicable environmental laws, the
ADA, and other health and/or safety
laws; and (iii) any default by the Tenant
under the Lease or Lease Renewal;
(q) Any amount owed the Plan in
connection with a Tenant’s
Indemnification of the Plan, as
described in the preceding paragraph,
will be negotiated and approved by the
Independent Fiduciary, and will be paid
to the Plan within the timeframe set
forth by the Independent Fiduciary;
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(r) During the term of the Lease and
any Lease Renewal, the Independent
Fiduciary will be solely responsible for
determining whether, when, and under
what terms the Plan may prudently sell
one or both of: (i) The LLCs; or (ii) the
Properties;
(s) During the term of the Lease and
any Lease Renewal, the Independent
Fiduciary will approve any sale by the
Plan of one or both of: (i) The
Properties; or (ii) the LLC, as being in
the interest of, and protective of, the
Plan;
(t) The Independent Fiduciary will
not implement the Right of First Offer
unless the Independent Fiduciary has
first negotiated the terms and conditions
of a proposed sale of an LLC Interest (or
a Property) to a party that is unrelated
to ABARTA or any of its affiliates;
(u) Any sale of an LLC Interest or
Property to ABARTA pursuant to the
Right of First Offer, will equal the
greater of: (1) The price negotiated by
the Independent Fiduciary, as between
the Plan and the party that is unrelated
to ABARTA; or (2) the current fair
market value of the Property, as
determined by the Independent
Appraiser;
(v) If ABARTA does not purchase the
Property or LLC Interest under the same
terms as the terms associated with the
Unrelated Proposed Sale, the Plan may
sell the Property or LLC Interest to the
unrelated third party within 360 days
without triggering a new Right of First
Offer;
(w) The Independent Fiduciary will
represent the interests of the Plan for all
purposes with respect to the Covered
Transactions;
(x) The Independent Fiduciary will:
(i) Review, negotiate and approve the
terms and conditions of each Covered
Transaction; (ii) review and approve the
terms of the Transfer Agreement that
evidences the Contribution; (iii) monitor
and enforce the Plan’s rights and
interests with respect to the Properties;
(iv) monitor ABARTA’s compliance
with the terms of this exemption,
including all obligations set forth under
the Leases; and (v) take all steps that are
necessary and proper to protect the Plan
in the event of any non-compliance by
ABARTA;
(y) The Plan will does not pay any
real estate fees, commissions, costs or
other expenses in connection with the
proposed transactions, including any
fees that are currently charged, or any
fees which accrue in the future; and
(z) The terms and conditions of the
Covered Transactions will be no less
favorable to the Plan than those
obtainable under similar circumstances
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17:52 May 11, 2016
Jkt 238001
when negotiated at arm’s-length with
unrelated third parties.
Notice to Interested Persons
The persons who may be interested in
the publication in the Federal Register
of the Notice of Proposed Exemption
(the Notice) include all individuals who
are participants in the Plan. It is
represented that such interested persons
will be notified of the publication of the
Notice by first class mail to such
interested person’s last known address
within fifteen (15) days of publication of
the Notice in the Federal Register. Such
mailing will contain a copy of the
Notice, as it appears in the Federal
Register on the date of publication, plus
a copy of the Supplemental Statement,
as required, pursuant to 29 CFR
2570.43(b)(2), which will advise all
interested persons of their right to
comment on and/or to request a hearing.
All written comments or hearing
requests must be received by the
Department from interested persons
within 45 days of the publication of this
proposed exemption in the Federal
Register.
All comments will be made available
to the public. Warning: Do not include
any personally identifiable information
(such as name, address, or other contact
information) or confidential business
information that you do not want
publicly disclosed. All comments may
be posted on the Internet and can be
retrieved by most Internet search
engines.
FOR FURTHER INFORMATION CONTACT: Mr.
Joseph Brennan of the Department at
(202) 693–8456. (This is not a toll-free
number.)
Sears Holdings 401(k) Savings Plan (the
Savings Plan) and the Sears Holdings
Puerto Rico Savings Plan (the PR Plan)
(collectively, the Plans), Located in
Hoffman Estates, IL
[Exemption Application Nos. D–11846 and
D–11847]
Proposed Exemption
The Department is considering
granting an exemption under the
authority of section 408(a) of the
Employee Retirement Income Security
Act of 1974, as amended (ERISA or the
Act), and section 4975(c)(2) of the
Internal Revenue Code of 1986, as
amended (the Code), and in accordance
with the procedures set forth in 29 CFR
part 2570, subpart B (76 FR 66637,
66644, October 27, 2011).
Section I. Transactions
(a) If the proposed exemption is
granted, the restrictions of sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
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29705
406(b)(2), and 407(a)(1)(A) of the Act
and the sanctions resulting from the
application of section 4975 of the Code,
by reason of section 4975(c)(1)(E) of the
Code,9 shall not apply to the acquisition
and holding by the Savings Plan of
certain subscription rights (the Rights)
to purchase shares of common stock (the
SC Stock) in Sears Canada Inc. (Sears
Canada) in connection with an offering
(the Offering) by Sears Holdings
Corporation (Holdings) of shares of SC
Stock, provided that the conditions as
set forth, below, in Section II of this
proposed exemption were satisfied for
the duration of the acquisition and
holding; and
(b) If the proposed exemption is
granted, the restrictions of sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
406(b)(2), and 407(a)(1)(A) of the Act 10
shall not apply to the acquisition and
holding of the Rights by the PR Plan in
connection with the Offering of the SC
Stock by Holdings, provided that the
conditions as set forth in Section II of
this proposed exemption were satisfied
for the duration of the acquisition and
holding.
Section II. Conditions
(a) The receipt of the Rights by the
Plans occurred in connection with the
Offering, in which all shareholders of
the common stock of Holdings
(Holdings Stock), including the Plans,
were treated in the same manner;
(b) The acquisition of the Rights by
the Plans resulted from an independent
act of Holdings, as a corporate entity;
(c) Each shareholder of Holdings
Stock, including each of the Plans,
received the same proportionate number
of Rights based on the number of shares
of Holdings Stock held by each such
shareholder;
(d) All decisions with regard to the
holding and disposition of the Rights by
the Plans were made by a qualified
independent fiduciary (the Independent
Fiduciary) within the meaning of 29
CFR 2570.31(j); 11
9 For purposes of this proposed exemption, unless
indicated otherwise, references to section 406 of the
Act should be read to refer as well to the
corresponding provisions of section 4975 of the
Code.
10 The Applicant represents that there is no
jurisdiction under Title II of the Act with respect
to the PR Plan. Accordingly, the Department is not
providing any exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and
holding of the Rights by the PR Plan.
11 29 CFR 2570.31(j) defines a ‘‘qualified
independent fiduciary,’’ in relevant part, to mean
‘‘any individual or entity with appropriate training,
experience, and facilities to act on behalf of the
plan regarding the exemption transaction in
accordance with the fiduciary duties and
responsibilities prescribed by ERISA, that is
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(e) The Independent Fiduciary
determined that it would be in the
interest of the Plans to sell all of the
Rights received in the Offering by the
Plans in blind transactions on the
NASDAQ Global Select Market;
(f) No brokerage fees, commissions,
subscription fees, or other charges were
paid by the Plans with respect to the
acquisition and holding of the Rights, or
were paid to any affiliate of Holdings,
Sears Canada, or the Independent
Fiduciary, with respect to the sale of the
Rights.
Section III. Definitions
(a) The term ‘‘affiliate’’ of a person
includes:
(1) Any person directly or indirectly
through one or more intermediaries,
controlling, controlled by, or under
common control with such person;
(2) Any officer, director, partner,
employee, or relative, as defined in
section 3(15) of the Act, of such person;
and
(3) Any corporation or partnership of
which such person is an officer,
director, partner, or employee.
(c) The term ‘‘control’’ means the
power to exercise a controlling
influence over the management or
policies of a person other than an
individual.
Effective Date: This proposed
exemption, if granted, will be effective
for the period beginning October 16,
2014, and ending November 7, 2014 (the
Offering Period).
Summary of Facts and Representations
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Background
1. Sears Holdings Corporation
(Holdings), is the parent company of
Kmart and Sears, Roebuck, & Co. (Sears
Roebuck). Holdings was formed as a
Delaware corporation in 2004 in
connection with the merger of Kmart
and Sears Roebuck on March 24, 2005.
In August 2014, Sears Holdings
operated a national network of stores
with 1,870 full-line and specialty retail
stores in the United States operating
independent of and unrelated to any party in
interest engaging in the exemption transaction and
its affiliates;’’ in general, a fiduciary is presumed to
be independent ‘‘if the revenues it receives or is
projected to receive, within the current federal
income tax year from parties in interest (and their
affiliates) [with respect] to the transaction are not
more than 2% of such fiduciary’s annual revenues
based upon its prior income tax year. Although the
presumption does not apply when the
aforementioned percentage exceeds 2%, a fiduciary
nonetheless may be considered independent based
upon other facts and circumstances provided that
it receives or is projected to receive revenues that
are not more than 5% within the current federal
income tax year from parties in interest (and their
affiliates) [with respect] to the transaction based
upon its prior income tax year.’’
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17:52 May 11, 2016
Jkt 238001
through Kmart and Sears Roebuck as
well as full-line and specialty retail
stores in Canada operating through
Sears Canada, Inc. (Sears Canada). As of
October 15, 2015, Holdings owned
approximately 51% of Sears Canada.
2. Common stock issued by Holdings
(Holdings Stock), par value $0.01 per
share, is publicly-traded on the
NASDAQ Global Select market under
the symbol, ‘‘SHLD.’’ As of October 16,
2014, there were 12,293 shareholders of
record and approximately 106,484,024
shares of Holdings Stock issued and
outstanding.
ESL Investments, Inc. and its affiliates
(ESL), including Edward S. Lampert
(Mr. Lampert) owned approximately
48.5 percent of the Holdings Stock,
issued and outstanding, as of October
16, 2014. Mr. Lampert is the Chairman
of the Board of Directors and Chief
Executive Officer of Holdings. He is also
the Chairman and Chief Executive
Officer of ESL.
3. Holdings and certain of its affiliates
sponsor the Sears Holdings Savings Plan
(the Savings Plan) and the Sears
Holdings Puerto Rico Savings Plan (the
PR Plan) (collectively the Plans). Each
Plan is a participant-directed account
plan that permits participants to invest
in equity, fixed income, balanced funds,
and an investment fund (the Stock
Fund) comprised of Holdings Stock. The
Plans are designed and operated to
comply with the requirements of section
404(c) of the Act. The Savings Plan and
the PR Plan assets are held together
within the Sears Holdings 401(k)
Savings Plan Master Trust (the Master
Trust), which also holds the Stock Fund
and consequently, shares of Holdings
Stock.12 The Plans’ participants,
therefore, indirectly own shares of
Holdings Stock, through investments in
the Stock Fund.
4. Sears Roebuck and all of its whollyowned (direct and indirect) subsidiaries
and Sears Holdings Management
Corporation (SHMC), a wholly-owned
subsidiary of Holdings, with respect to
certain employees, have adopted the
Savings Plan and are employers under
that Plan.
As of October 16, 2014 (the Record
Date), there were 60,260 participants in
the Savings Plan, and the Savings Plan’s
share of the total assets of the Master
Trust was $2,825,371,014. Also, as of
the Record Date, the Savings Plan’s
allocable share of the Holdings Stock
held in the Stock Fund under the Master
Trust was 1,515,803 shares, and the
approximate percentage of the fair
12 State Street Bank and Trust Company serves as
the master trustee and custodian for the Master
Trust.
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market value of the total assets of the
Savings Plan invested in Holdings Stock
was two percent, which amount
constituted approximately one percent
of the 106 million shares of Holdings
Stock issued and outstanding.
The Savings Plan is administered by
the Sears Holding Corporation
Administrative Committee (the
Administrative Committee), whose
members are officers and/or employees
of SHMC. The Sears Holdings
Corporation Investment Committee (the
Investment Committee), whose members
are officers and/or employees of SHMC,
has authority over decisions relating to
the investment of the Savings Plan’s
assets.
5. The PR Plan was established by
Holdings for employees of Sears
Roebuck de Puerto Rico (Sears Roebuck
PR) who reside in the Commonwealth of
Puerto Rico. The Applicant represents
that the fiduciaries of the PR Plan have
not made an election under section
1022(i)(2) of the Act, whereby such plan
would be treated as a trust created and
organized in the United States for
purposes of tax qualification under
section 401(a) of the Code. Therefore,
according to the Applicant, there is no
jurisdiction under Title II of the Act.
There is, however, jurisdiction under
Title I of the Act.
As of December 31, 2014, there were
7,550 participants in the PR Plan. As of
the Record Date there were 1,765
participants in the PR Plan with account
balances, and the PR Plan’s share of the
total assets of the Master Trust was
$17,023,422. Also, as of the Record
Date, the PR Plan’s allocable share of the
Holdings Stock held in the Stock Fund
under the Master Trust was 46,880
shares, and the approximate percentage
of the fair market value of the total
assets of the PR Plan invested in
Holdings Stock was eight percent,
which amount constituted less than one
tenth of one percent of the 106 million
shares of Holdings Stock issued and
outstanding.
The PR Plan is administered by the
Administrative Committee, and the
Investment Committee makes
investment decisions for the PR Plan.
Banco Popular de Puerto Rico serves as
the trustee of the PR Plan.
Sears Canada
6. Sears Canada was incorporated in
Canada in 1952 and its headquarters are
in Toronto, Ontario. It is a multi-format
retailer and, as of October 14, 2014, had
a total network of 113 full-line
department stores, 307 specialty stores,
1,378 catalogue merchandise pick-up
locations, and 96 Sears Travel offices.
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As of October 16, 2014, approximately
51% of SC Stock was held by Holdings.
Prior to the Offering, SC Stock traded on
the Canadian Toronto Stock Exchange
(TSX) under the symbol ‘‘SCC’’ and, as
of October 8, 2014, it was also listed and
trading on the U.S. NASDAQ under the
symbol ‘‘SRSC.’’
The Offering
7. On October 2, 2014, Holdings
announced its intent to conduct a rights
offering to shareholders (the Offering) as
a means of disposing of a non-core asset
(its Sears Canada holdings) and raising
substantial cash proceeds for Holdings.
Furthermore, in the opinion of
Holdings, the Offering gave
shareholders of Holdings Stock the
ability to avoid dilution by retaining
their ownership percentage in Holdings
and in Sears Canada. On October 15,
2014, Holdings issued the final
prospectus describing the Offering to
shareholders of record, including the
Plans, as of the Record Date.
Under the terms of the Offering, on
October 16, 2014, all shareholders of
record of Holdings Stock, including the
Plans, automatically received one Right
for each whole share of Holdings Stock
held by each such shareholder. The
Applicant represents that the Master
Trust (the Trust) acquired 1,562,683
Rights through the Offering.
8. Each Right permitted the holder
thereof to purchase 0.375643 shares of
SC Stock from Holdings at a
subscription price of $9.50 per whole
share.13 Each Right also contained an
over-subscription privilege permitting
the holder to subscribe for additional
shares of SC Stock, up to the number of
shares of SC Stock that were not
subscribed for by the other holders of
the Rights. The Plans were not eligible
to participate in the over-subscription
privilege because a qualified,
independent fiduciary acting on behalf
of the Plans, sold the Rights received by
the Plans, as discussed more fully
below.
9. All shareholders of Holdings Stock
held the Rights until such Rights
expired, were exercised, or were sold.
With regard to the exercise of the Rights,
the Applicant represents that the Rights
could only be exercised in whole
numbers. Each shareholder of Holdings
Stock needed to have at least three
Rights to purchase a share of SC Stock,
because only whole shares could be
13 The subscription price was determined by
Holdings and is the U.S. dollar equivalent of the
closing price of Sears Canada Stock on the TSX on
September 26, 2014, the last trading day before
Holdings requested Sears Canada’s cooperation
with the filing of a prospectus qualifying the shares
deliverable upon exercise of the Rights.
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purchased by the exercise of the Rights.
Fractional shares or cash in lieu of
fractional shares were not issued in
connection with the Offering.
10. With regard to the sale of the
Rights, the Applicant represents that the
Rights were transferable. Further, the
Applicant represents that the Rights
were traded on the NASDAQ Global
Select Market under the symbol,
‘‘SHLDR.’’ The allocation of the Rights
to shareholders was handled by
Depository Trust Company (DTC). The
Applicant represents that the public
trading of Rights (the Trading Period)
began on October 16, 2014, and
continued until the close of business on
November 4, 2014, the third business
day prior to the close of the Offering.
The Applicant further represents that
this deadline applied uniformly to all
holders of the Rights.
11. While the Plans generally permit
participants to direct the investment of
their own accounts, including their
investments in Holdings Stock, all
decisions regarding the holding and
disposition of the Rights by each Plan
were made, in accordance with the Plan
provisions, by a qualified independent
fiduciary acting solely in the interest of
Plan participants.14 Participants in the
Plans who were invested in Holdings
Stock as of the Record Date were
notified of the Offering, the engagement
of the independent fiduciary, the fact
that the Rights would be held in the
Stock Fund, that the independent
fiduciary would determine whether the
Rights should be exercised or sold, and
the means by which a participant could
obtain more information. Holdings also
communicated generally with
employees regarding the Offering and
with the public through public releases
at www.searsholdings.com.
12. The Offering closed at 5 p.m.
eastern standard time on November 7,
2014. The Applicant represents that
40,000,000 shares of SC Stock were
subscribed for by shareholders or their
transferees at a price of $9.50 per whole
share. During the Trading Period, the
price of the SC Stock on the NASDAQ
ranged from $9.06 to $10.00 with a
volume-weighted average price (VWAP)
of $9.75.
14 Each of the Plans was amended to: (i) Permit
the Plan to temporarily acquire and hold the Rights
(and any Sears Canada stock acquired through the
exercise of the Rights) pending their orderly
disposition; (ii) confirm that participants were not
entitled to direct the holding, exercise, sale, or other
disposition of the Rights received by the Plan; and
(iii) authorize the designated independent fiduciary
to exercise discretionary authority with respect to
the holding, exercise, sale, or other disposition of
the Rights and any shares of Sears Canada stock
acquired through the exercise of the Rights.
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29707
Following the Offering, Holdings’
interest in Sears Canada was reduced to
approximately 11.7 percent.
Accordingly, the Applicant states that
following the closing of the Offering,
Sears Canada became independent of
Holdings. The Applicant represents that
the gross proceeds payable to and
received by Holdings from the sale of
the SC Stock pursuant to the Offering,
net of any selling expenses, was
approximately $380 million.
The Independent Fiduciary
13. Fiduciary Counselors Inc. (FCI)
was retained by the Investment
Committee pursuant to an agreement
(the Agreement), dated October 16,
2014, to act as the independent
fiduciary on behalf of the Plans, in
connection with the Offering and an
exemption application. Pursuant to the
terms of the Agreement, FCI’s
responsibilities were to determine
whether or not and when to exercise or
sell the Rights received by each Plan in
the Offering.15
The Applicant represents that hiring
an independent fiduciary to manage the
holding and disposition of the Rights
was appropriate in this case for the
following reasons: (i) There would have
been a significant cost to developing
and implementing a process under each
Plan to administer a pass-through of the
Rights to participants; (ii) It was not
practicable to initiate and implement a
pass-through of the Rights to
participants given the limited notice
provided to shareholders of the Offering
and the short subscription period (16
days), because such process would have
included establishment of a ‘‘rights
fund’’ and a Sears Canada fund within
each Plan, the design and testing of
procedures for allocating the Rights
among participant accounts, soliciting
participant directions on the exercise or
sale of the Rights and identifying the
source of funding (e.g., which
investment account is to be liquidated)
for each participant who chose to
exercise the Rights, and the short
Offering period meant that there would
have been insufficient time to
adequately educate participants
regarding their rights and obligations;
(iii) There would have been a loss of
value that participants might otherwise
have gained, because participants’
unfamiliarity with rights offerings as
well as general participant inertia would
have resulted in a significant percentage
of participants allowing their Rights to
15 Because the Rights were automatically issued
to all shareholders including the Plans and there
was no option to decline them, the independent
fiduciary was not asked to determine whether the
Plans should acquire the Rights.
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expire without selling or exercising
them; (iv) It was not in the interest of
participants to require the Plans to offer
and hold for participant investment a
single stock (SC Stock) that had not
been selected by the plan fiduciary as an
investment option appropriate for the
Plan; and (v) The Rights are most
appropriately viewed as a non-cash
dividend payable to owners of Holdings
Stock such as the Plans, so that the
fiduciary of the Stock Fund is the
appropriate person to manage the
‘‘proceeds’’ of the Plans’ investment in
Holdings Stock. The Applicant
represents that, in this case, the
independent fiduciary appointed to
manage the Rights took responsibility
for realizing the value in the Rights by
selling them. The cash proceeds of that
sale were then reinvested in Holdings
Stock pursuant to the terms of the plan.
The Applicant represents that FCI is
qualified to serve as the independent
fiduciary for the Plans in connection
with the Offering, because FCI is a
registered investment adviser under the
Investment Advisers Act of 1940, and
FCI is an independent company whose
primary focus is providing independent
fiduciary services for employee benefit
plans. FCI has served as an independent
fiduciary to employee benefit plans
since 2001.
In its ‘‘Report of Independent
Fiduciary Regarding Sears Canada
Rights Offering,’’ dated February 23,
2015 (The IF Report), FCI represents and
warrants that it is independent and
unrelated to Holdings. FCI further
represents that it did not directly or
indirectly receive any compensation or
other consideration for its own account
in connection with the Offering, except
compensation from Holdings for
performing services described in the
Agreement. The percentage of FCI’s
2014 revenue derived from any party in
interest involved in the subject
transaction or its affiliates was less than
five percent of FCI’s 2013 revenue.
FCI represents further that it
understands and acknowledges its
duties and responsibilities under the
Act in acting as a fiduciary on behalf of
the Plans in connection with the
Offering. In the IF Report, FCI
represents that it conducted a due
diligence process in evaluating the
Offering on behalf of the Plans. This
process included numerous discussions
and correspondence with
representatives of the Plans and
Holdings, Holdings’ counsel, brokerdealers and representatives of the Plans’
trustee enabling FCI to better
understand a number of important
elements related to the Offering. In
addition, FCI reviewed publicly
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Jkt 238001
available information and information
provided by Holdings.
As detailed in the IF Report, with
regard to the Offering, FCI considered
the following four options: (i) Continue
holding the Rights within the Stock
Fund; (ii) Exercising all of the Rights
and acquiring SC Stock; (iii) Selling a
portion of the Rights and using the
proceeds to exercise the remaining
Rights to acquire SC Stock; or (iv)
Selling all of the Rights on the NASDAQ
Global Select Market at the prevailing
market price. Acting as the independent
fiduciary on behalf of the Plans, FCI
chose to sell all of the Rights on the
NASDAQ Global Select Market.
In determining to sell all of the Plans’
Rights, FCI represents that the proceeds
from the sale would be invested in
Holdings Stock, as per the governing
documents of the Stock Fund. As
described in the IF Report, FCI
determined that the benefits of selling
the Rights included simplicity, lower
transaction costs, and less exposure to
risk than the options that involved
exercising any of the Rights. According
to FCI, this option allowed the Plans to
realize the benefits of the Rights in a
timely manner while maintaining
maximum exposure to shares of Sears
Holdings within the Stock Fund,
consistent with the purpose of the Stock
Fund. FCI understood that the Plans
would incur some transactions costs
through this option, estimated at $0.015
to $0.05 per Right traded. Accordingly,
FCI concluded that this sale of the
Rights was in the interest of the Plans
and the Plans’ participants and
beneficiaries and was protective of such
participants and beneficiaries of the
Plans.
14. The Trading Period ended on
November 4, 2014. According to the IF
Report, over the sixteen-day period that
the Rights traded on the NASDAQ, the
volume-weighted average price for the
58,546,218 Rights traded was $0.1239
according to data reported by
Bloomberg. The IF Report provides that
FCI completed the sale of the Plans’
1,562,683 Rights in blind transactions
on the NASDAQ Global Select Market
between October 22 and October 31,
2014, realizing an average selling price
of $0.1333 per Right.
According to the Applicant, as a
result of the Rights sale, the total net
proceeds generated for the Savings Plan
and the PR Plan was $200,557.36. These
proceeds were credited to each Plan and
the unit value of each participant’s
account balance reflected the addition
of assets credited to the Plan.
15. The Applicant represents that no
brokerage fees, commissions,
subscription fees, or other charges were
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Sfmt 4703
paid by the Plans with respect to the
acquisition and holding of the Rights, or
were paid to any broker affiliated with
FCI, Holdings, or Sears Canada in
connection with the sale of the Rights.
In this regard, FCI represents that it
selected State Street Global Markets as
the broker for the sale of the Plans’
Rights, based on FCI’s confidence in the
broker’s execution ability and an
attractive fee schedule of 0.005 cents per
Right traded. In connection with the
sale of the Rights, the Plans paid
$7,813.42 in commissions to
independent, third parties and $4.66 in
SEC fees.
Requested Relief
16. The Applicant represents that the
subject transactions have already been
consummated. In this regard, the Plans
acquired the Rights pursuant to the
Offering, and held such Rights until the
Rights were sold by the independent
fiduciary. The Applicant states that,
because there was insufficient time
between the dates when the Plans
acquired the Rights and when such
Rights were sold, to apply for and be
granted an exemption, Holdings was
required to request retroactive relief,
effective as of October 16, 2014, the
Record Date.
17. Section 406(a)(1)(E) of the Act
prohibits a fiduciary from causing a
plan to engage in a transaction, if he
knows or should know that such
transaction constitutes a direct or
indirect acquisition, on behalf of a plan,
of any employer security or employer
real property in violation of section
407(a). Section 406(a)(2) of the Act
prohibits a fiduciary who has authority
or discretion to control or manage the
assets of a plan from permitting a plan
to hold any employer security or
employer real property if he knows or
should know that holding such security
or real property violates section 407(a).
The Applicant represents that because
the Rights are non-qualifying employer
securities, the acquisition and holding
of the Rights violated sections
406(a)(1)(E), 406(a)(2), and 407(a) of the
Act.
Furthermore, section 406(b)(1) of the
Act prohibits a fiduciary from dealing
with the assets of a plan in his own
interest or for his own account. Section
406(b)(2) of the Act prohibits a
fiduciary, in his individual or in any
other capacity, from acting in any
transaction involving the plan on behalf
of a party (or representing a party)
whose interests are adverse to the
interests of the plan or the interests of
its participants or beneficiaries. The
Applicant states that, although Holdings
retained an independent fiduciary to
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represent the Plans in connection with
the disposition of the Rights, by causing
the participation of the Plans in the
Offering, Holdings may have dealt with
the assets of the Plans for its own
account, and also may have acted in a
transaction on behalf of itself and the
Plans.
Therefore, the Applicant requests an
administrative exemption from sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
406(b)(2), and 407(a)(1)(A) of the Act
and section 4975 of the Code by reason
of 4975(c)(1)(E) of the Code, with regard
to the Savings Plan, and from sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
406(b)(2), and 407(a)(1)(A) of the Act
with regard to the PR Plan.16
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Statutory Findings
18. The Applicant represents that the
requested exemption is administratively
feasible because the acquisition,
holding, and sale of the Rights by the
Plans was a one-time transaction which
will not require continued monitoring
or other involvement by the
Department.
19. The Applicant represents that the
transactions which are the subject of
this proposed exemption are in the
interest of the Plans, because the Rights
were automatically issued at no cost to
all shareholders of Holdings Stock as of
a specified Record Date, including the
Plans. The Plans were then able to
realize value through their sale.
20. The Applicant represents that the
transactions were protective of the Plans
and their respective participants and
beneficiaries, as the Plans obtained the
Rights as a result of an independent act
of Holdings as a corporate entity. In
addition, the acquisition of the Rights
by the Plans occurred on the same terms
made available to other holders of
Holdings Stock and the Plans received
the same proportionate number of
Rights as other owners of Holdings
Stock. The Plans were also protected in
that all decisions regarding the holding
and disposition of the Rights by the
Plans were made, in accordance with
Plan provisions, by the independent
fiduciary. Furthermore, the independent
fiduciary determined that it would be in
the interest of the Plans to sell all of the
Rights received in the Offering by the
Plans in blind transactions on the
NASDAQ Global Select Market.
16 The Applicant represents that there is no
jurisdiction under Title II of the Act with respect
to the PR Plan. Accordingly, the Department is not
providing any exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and
holding of the Rights by the PR Plan.
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Summary
21. In summary, the Applicant
represents that the proposed exemption
satisfies the statutory criteria for an
exemption under section 408(a) of the
Act and section 4975(c)(2) of the Code
for the reasons stated above and for the
following reasons:
(a) The receipt of the Rights by the
Plans occurred in connection with the
Offering, in which all shareholders of
Holdings Stock, including the Plans,
were treated in the same manner;
(b) The acquisition of the Rights by
the Plans resulted from an independent
act of Holdings, as a corporate entity,
and without any participation on the
part of the Plans;
(c) Each shareholder of Holdings
Stock, including each of the Plans,
received the same proportionate number
of Rights based on the number of shares
of Holdings Stock held by each such
shareholder;
(d) All decisions with regard to the
holding and disposition of the Rights by
the Plans were made by a qualified,
independent fiduciary within the
meaning of 29 CFR 2570.31(j);
(e) The independent fiduciary
determined that it would be in the
interest of the Plans to sell all of the
Rights received in the Offering by the
Plans in blind transactions on the
NASDAQ Global Select Market; and
(f) No brokerage fees, commissions,
subscription fees, or other charges were
paid by the Plans with respect to the
acquisition and holding of the Rights, or
were paid to any affiliate of Holdings,
Sears Canada, or the independent
fiduciary with respect to the sale of the
Rights.
Notice to Interested Persons
Notice of the proposed exemption
will be given to all interested persons
within 22 days of the publication of the
notice of proposed exemption in the
Federal Register, by first class U.S. mail
to the last known address of all such
individuals. Such notice will contain a
copy of the notice of proposed
exemption, as published in the Federal
Register, and a supplemental statement,
as required pursuant to 29 CFR
2570.43(a)(2). The supplemental
statement will inform interested persons
of their right to comment on and to
request a hearing with respect to the
pending exemption. Written comments
and hearing requests are due within 52
days of the publication of the notice of
proposed exemption in the Federal
Register. All comments will be made
available to the public.
Warning: If you submit a comment,
EBSA recommends that you include
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29709
your name and other contact
information in the body of your
comment, but DO NOT submit
information that you consider to be
confidential, or otherwise protected
(such as Social Security number or an
unlisted phone number) or confidential
business information that you do not
want publicly disclosed. All comments
may be posted on the Internet and can
be retrieved by most Internet search
engines.
FOR FURTHER INFORMATION CONTACT:
Scott Ness of the Department, telephone
(202) 693–8561. (This is not a toll-free
number.)
Sears Holdings 401(k) Savings Plan (the
Savings Plan) and the Sears Holdings
Puerto Rico Savings Plan (the PR Plan)
(collectively, the Plans), Located in
Hoffman Estates, IL
[Exemption Application Nos. D–11851 and
D–11852]
Proposed Exemption
The Department is considering
granting an exemption under the
authority of section 408(a) of the
Employee Retirement Income Security
Act of 1974, as amended (ERISA or the
Act), and section 4975(c)(2) of the
Internal Revenue Code of 1986, as
amended (the Code), and in accordance
with the procedures set forth in 29 CFR
part 2570, subpart B (76 FR 66637,
66644, October 27, 2011).
Section I. Transactions
(a) The restrictions of sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
406(b)(2), and 407(a)(1)(A) of the Act
and the sanctions resulting from the
application of section 4975 of the Code,
by reason of section 4975(c)(1)(E) of the
Code,17 shall not apply to the
acquisition and holding of certain
subscription rights (the Rights) issued
by Sears Holdings Corporation
(Holdings) by the Savings Plan in
connection with an offering (the
Offering) by Holdings of unsecured
obligations issued by Holdings (Notes)
and warrants to purchase the common
stock of Holdings (Warrants)(together
referred to as Units), provided that the
conditions as set forth, below, in
Section II of this proposed exemption
were satisfied for the duration of the
acquisition and holding; and
(b) The restrictions of sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
17 For purposes of this proposed exemption,
unless indicated otherwise, references to section
406 of the Act should be read to refer as well to
the corresponding provisions of section 4975 of the
Code.
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406(b)(2), and 407(a)(1)(A) of the Act 18
shall not apply to the acquisition and
holding of the Rights by the PR Plan in
connection with the Offering by
Holdings, provided that the conditions
as set forth in Section II of this proposed
exemption were satisfied for the
duration of the acquisition and holding.
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Section II. Conditions
(a) The receipt of the Rights by the
Plans occurred in connection with the
Offering, in which all shareholders of
the common stock of Holdings
(Holdings Stock), including the Plans,
were treated in the same manner;
(b) The acquisition of the Rights by
the Plans resulted from an independent
act of Holdings, as a corporate entity;
(c) Each shareholder of Holdings
Stock, including each of the Plans,
received the same proportionate number
of Rights based on the number of shares
of Holdings Stock held by each such
shareholder;
(d) All decisions with regard to the
holding and disposition of the Rights by
the Plans were made by a qualified
independent fiduciary (the Independent
Fiduciary) within the meaning of 29
CFR 2570.31(j);
(e) The Independent Fiduciary
determined that it would be in the
interest of the Plans to sell all of the
Rights received in the Offering by the
Plans in blind transactions on the
NASDAQ Global Select Market;
(f) No brokerage fees, commissions,
subscription fees, or other charges were
paid by the Plans with respect to the
acquisition and holding of the Rights, or
were paid to any affiliate of Holdings or
the Independent Fiduciary in
connection with the sale of the Rights.
Section III. Definitions
(a) The term ‘‘affiliate’’ of a person
includes:
(1) Any person directly or indirectly
through one or more intermediaries,
controlling, controlled by, or under
common control with such person;
(2) Any officer, director, partner,
employee, or relative, as defined in
section 3(15) of the Act, of such person;
and
(3) Any corporation or partnership of
which such person is an officer,
director, partner, or employee.
(c) The term ‘‘control’’ means the
power to exercise a controlling
influence over the management or
policies of a person other than an
individual.
18 The Applicant represents that there is no
jurisdiction under Title II of the Act with respect
to the PR Plan. Accordingly, the Department is not
providing any exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and
holding of the Rights by the PR Plan.
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Effective Date: This proposed
exemption, if granted, will be effective
for the period beginning October 30,
2014, and ending November 18, 2014
(the Offering Period).
Summary of Facts and Representations
Background
1. Sears Holdings Corporation
(Holdings), is the parent company of
Kmart and Sears, Roebuck, & Co. (Sears
Roebuck). Holdings was formed as a
Delaware corporation in 2004 in
connection with the merger of Kmart
and Sears Roebuck on March 24, 2005.
By August 2014, Holdings operated a
national network of stores with 1,870
full-line and specialty retail stores in the
United States operating through Kmart
and Sears Roebuck. In October 2014,
Holdings completed the spin-off of a
substantial portion of Sears Canada,
Inc., which allowed it to dispose of a
non-core asset and raise substantial cash
proceeds.
2. Common stock issued by Holdings
(Holdings Stock), par value $0.01 per
share, is publicly-traded on the
NASDAQ Global Select market under
the symbol, ‘‘SHLD.’’ As of October 30,
2014, there were 12,236 shareholders of
record and approximately 106.5 million
shares of Holdings Stock issued and
outstanding.
3. ESL Investments, Inc. and its
affiliates (ESL), including Edward S.
Lampert (Mr. Lampert) owned
approximately 48.5 percent of the
Holdings Stock, issued and outstanding,
as of October 30, 2014. Mr. Lampert is
the Chairman of the Board of Directors
and Chief Executive Officer of Holdings.
He is also the Chairman and Chief
Executive Officer of ESL.
4. Holdings and certain of its affiliates
sponsor the Sears Holdings 401(k)
Savings Plan (the Savings Plan) and the
Sears Holdings Puerto Rico Savings Plan
(the PR Plan) (collectively the Plans).
Each Plan is a participant-directed
account plan that permits participants
to invest in equity, fixed income,
balanced funds, and an investment fund
(the Stock Fund) comprised of Holdings
Stock. The Plans are designed and
operated to comply with the
requirements of section 404(c) of the
Act. The Savings Plan and the PR Plan
assets are held together within the Sears
Holdings 401(k) Savings Plan Master
Trust (the Master Trust), which also
holds the Stock Fund and consequently,
shares of Holdings Stock.19 The Plans’
19 State Street Bank and Trust Company serves as
the master trustee and custodian for the Master
Trust. As of October 30, 2014, the Master Trust had
approximately $2.95 billion in total assets. As of
October 30, 2014, the Stock Fund within the Master
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participants, therefore, indirectly own
shares of Holdings Stock through
investments in the Stock Fund.
5. Sears Roebuck and all of its whollyowned (direct and indirect) subsidiaries
and Sears Holdings Management
Corporation (SHMC), a wholly-owned
subsidiary of Holdings, with respect to
certain employees, have adopted the
Savings Plan and are employers under
that Plan.
6. As of October 30, 2014 (the Record
Date), there were 60,260 participants in
the Savings Plan, and the Savings Plan’s
share of the total assets of the Master
Trust was approximately $2.95 billion.
Also, as of the Record Date, the Savings
Plan’s allocable share of the Holdings
Stock held in the Stock Fund under the
Master Trust was 1,411,133 shares, and
the approximate percentage of the fair
market value of the total assets of the
Savings Plan invested in Holdings Stock
was 1.79 percent, which amount
constituted approximately one percent
of the 106.5 million shares of Holdings
Stock issued and outstanding.
7. The Savings Plan is administered
by the Sears Holding Corporation
Administrative Committee (the
Administrative Committee), whose
members are officers and/or employees
of SHMC. The Sears Holdings
Corporation Investment Committee (the
Investment Committee), whose members
are officers and/or employees of SHMC,
has authority over decisions relating to
the investment of the Savings Plan’s
assets.
8. The PR Plan was established by
Holdings for employees of Sears
Roebuck de Puerto Rico (Sears Roebuck
PR) who reside in the Commonwealth of
Puerto Rico. The Applicant represents
that the fiduciaries of the PR Plan have
not made an election under section
1022(i)(2) of the Act, whereby such plan
would be treated as a trust created and
organized in the United States for
purposes of tax qualification under
section 401(a) of the Code. Therefore,
according to the Applicant, there is no
jurisdiction under Title II of the Act.
There is, however, jurisdiction under
Title I of the Act.
9. As of December 31, 2014, there
were 7550 participants in the PR Plan.
As of the Record Date, there were 1,766
participants with account balances, and
the PR Plan’s share of the total assets of
the Master Trust was $17,859,181.57.
Also, as of the Record Date, the PR
Plan’s allocable share of the Holdings
Stock held in the Stock Fund under the
Master Trust was 40,650 shares, and the
approximate percentage of the fair
Trust held 1,451,783 shares of Holdings Stock with
a fair market value of $53,338,507.40.
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market value of the total assets of the PR
Plan invested in Holdings Stock was
8.36 percent, which amount constituted
0.04 percent of the 106.5 million shares
of Holdings Stock issued and
outstanding.
10. The PR Plan is administered by
the Administrative Committee, and the
Investment Committee makes
investment decisions for the PR Plan.
Banco Popular de Puerto Rico serves as
the trustee of the PR Plan.
The Offering
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11. By late October 2014, Holdings
had reduced its stake in Sears Canada,
Inc. and raised significant cash through
a rights offering. On October 20, 2014,
Holdings announced its intent to
conduct an additional rights offering to
shareholders (the Offering) as a means
of further evolving Holdings’ capital
structure and enhancing its financial
flexibility. On October 20, 2014,
Holdings issued a prospectus describing
the Offering to shareholders of record,
including the Plans, as of the Record
Date. The prospectus was supplemented
on October 30, 2014.
12. Under the terms of the Offering,
on October 30, 2014, each shareholder
of record of Holdings Stock, including
the Plans, automatically received one (1)
Right for every 85.1872 shares of
Holdings Stock held by such
shareholder. The Applicant represents
that only whole Rights were distributed
to shareholders, including the Plans,
and the Master Trust acquired 17,189
Rights through the Offering. The
allocation of the Rights to shareholders
was handled by Depository Trust
Company.
13. Each Right permitted the holder
thereof to purchase for $500, one
‘‘Unit,’’ consisting of (a) a note issued by
Holdings in the principal amount of
$500 (Note),20 and (b) 17.5994 warrants
(Warrants), each entitling the holder to
purchase one share of Holdings Stock.21
20 The Notes are unsecured obligations and bear
interest at a rate of 8% per annum, which is paid
semi-annually. The Notes mature on December 15,
2019. While the Notes are transferable, they are not
listed on any exchange and can only be sold in a
private transaction. Holdings issued $625 million
aggregate original principal amount of the Notes in
the Offering.
21 Each Warrant is initially exercisable for one
share of Holdings stock at an exercise price per
share of $28.41. Subject to applicable laws and
regulations, the Warrants may be exercised at any
time starting on their date of issuance until 5:00
p.m., New York City time, on December 15, 2019.
The exercise price may be paid with cash or Notes,
provided that Holdings maintains an effective
registration statement for the Holdings Stock
issuable upon exercise of the Warrants. If the
exercise of a Right would result in the delivery of
a fractional Warrant, the number of Warrants would
be rounded down to the nearest whole number. The
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Each Right also contained an oversubscription privilege permitting the
holder to subscribe for additional Units,
up to the number of Units that were not
subscribed for by the other holders of
the Rights. The Plans were not eligible
to participate in the over-subscription
privilege because a qualified,
independent fiduciary acting on behalf
of the Plans, sold the Rights received by
the Plans, as discussed more fully
below.
14. All shareholders of Holdings
Stock held the Rights until such Rights
expired, were exercised, or were sold.
With regard to the exercise of the Rights,
the Applicant represents that the Rights
could only be exercised in whole
numbers. Furthermore, each
shareholder of Holdings Stock needed to
have at least eighty-six Rights to
purchase a Unit, because only whole
Units could be purchased through the
exercise of the Rights. Fractional Units
or cash in lieu of fractional Units were
not issued in connection with the
Offering.
15. With regard to the sale of the
Rights, the Applicant represents that the
Rights were transferable and that they
traded on the NASDAQ Global Select
Market under the symbol ‘‘SHLDZ.’’ The
Applicant represents that the public
trading of Rights (the Trading Period)
began on or around October 31, 2014,
and continued until the close of
business on November 13, 2014, the
third business day prior to the close of
the Offering. The Applicant further
represents that this deadline applied
uniformly to all holders of the Rights.
16. While the Plans generally permit
participants to direct the investment of
their own accounts, including their
investments in Holdings Stock, all
decisions regarding the holding and
disposition of the Rights by each Plan
were made, in accordance with the Plan
provisions, by a qualified independent
fiduciary acting solely in the interest of
Plan participants.22 Participants in the
Plans who were invested in Holdings
Stock as of the Record Date were
notified of the Offering, the engagement
of the independent fiduciary, the fact
that the Rights would be held in the
Warrants are transferable and listed on the Nasdaq
Global Select Market under ‘‘SHLDW.’’
22 Each of the Plans was amended as required to:
(i) Permit the Plan to temporarily acquire and hold
the Rights (and any Notes or Warrants acquired
through the exercise of the Rights) pending their
orderly disposition; (ii) confirm that participants
are not entitled to direct the holding, exercise, sale
or other disposition of the Rights received by the
Plan; and (iii) authorize the designated independent
fiduciary to exercise discretionary authority with
respect to the holding, exercise, sale or other
disposition of the Rights and any Notes or Warrants
acquired through the exercise of the Rights.
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Stock Fund, that the independent
fiduciary would determine whether the
Rights should be exercised or sold, and
the means by which a participant could
obtain more information. Holdings also
communicated generally with
employees regarding the Offering and
with the public through public releases
at www.searsholdings.com.
17. The Offering expired at 5 p.m.
eastern standard time on November 18,
2014. The Applicant represents that
Holdings issued 1,250,000 Units,
including $625 million aggregated
principal amount of Notes and Warrants
to purchase 21,999,296 shares of
Holdings Stock. Over the 10-day period
that the Rights traded on the Nasdaq,
the volume weighted average price per
Right for the 751,041 Rights traded was
$201.1554, according to data reported
by Bloomberg. The Applicant represents
that the gross proceeds payable to and
received by Holdings from the sale of
the Units pursuant to the Offering, net
of any selling expenses, was
approximately $625 million.
The Independent Fiduciary
18. Fiduciary Counselors Inc. (FCI)
was retained by the Investment
Committee pursuant to an agreement
(the Agreement), dated November 3,
2014, to act as the independent
fiduciary on behalf of the Plans, in
connection with the Offering and an
exemption application. Pursuant to the
terms of the Agreement, FCI’s
responsibilities were to determine: (a)
Whether or not and when to exercise or
sell the Rights received by each Plan in
the Offering; or (b) if it determined to
exercise any of a Plan’s Rights to
purchase the Units, to manage the
investment in the Notes and Warrants
within that Plan’s Stock Fund, and
determine when to liquidate or exercise
the Notes and Warrants for the purpose
of reinvesting the proceeds in Holdings
Stock.23
19. The Applicant represents that
hiring an independent fiduciary to
manage the holding and disposition of
the Rights was appropriate in this case
for the following reasons: (a) There
would have been a significant cost to
each Plan to develop and implement a
process to administer a pass-through of
the Rights to participants; (b) It was not
practicable to initiate and implement a
pass-through of the Rights to
participants given the limited notice
provided to shareholders of the Offering
and the short subscription period (15
23 Because the Rights were automatically issued
to all shareholders including the Plans and there
was no option to decline them, the independent
fiduciary was not asked to determine whether the
Plans should acquire the Rights.
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days); (c) Participants’ unfamiliarity
with rights offerings as well as general
participant inertia may have resulted in
a significant percentage of participants
allowing their Rights to expire without
selling or exercising them; (d) The Notes
and Warrants had not been previously
selected by the plan fiduciary as an
investment option appropriate for the
Plan; and (5) The Rights are most
appropriately viewed as a non-cash
dividend payable to owners of Holdings
Stock such as the Plans, so that the
fiduciary of the Stock Fund is the
appropriate person to manage the
‘‘proceeds’’ of the Plans’ investment in
Holdings Stock. The Applicant
represents that, in this case, the
independent fiduciary appointed to
manage the Rights took responsibility
for realizing the value in the Rights by
selling them. The cash proceeds of that
sale were then reinvested in Holdings
Stock pursuant to the terms of the plan.
20. The Applicant represents that FCI
is qualified to serve as the independent
fiduciary for the Plans in connection
with the Offering, because FCI is a
registered investment adviser under the
Investment Advisers Act of 1940, and
over the past 13 years, FCI has served
or is serving as an independent
fiduciary on behalf of employee benefit
plans in connection with more than 14
prohibited transaction exemption
applications, not counting applications
involving the Plans. Additionally, FCI
represents that it is an independent
company whose primary focus is
providing independent fiduciary
services for employee benefit plans.
21. In its ‘‘Report of Independent
Fiduciary Regarding Sears Rights
Offering for Debt and Warrants,’’ dated
February 23, 2015 (the IF Report), FCI
represents and warrants that it is
independent and unrelated to Holdings.
FCI further represents that it did not
directly or indirectly receive any
compensation or other consideration for
its own account in connection with the
Offering, except compensation from
Holdings for performing services
described in the Agreement. The
percentage of FCI’s 2014 revenue
derived from any party in interest
involved in the subject transaction or its
affiliates was less than five percent of
FCI’s 2013 revenue.
22. FCI represents further that it
understands and acknowledges its
duties and responsibilities under the
Act in acting as a fiduciary on behalf of
the Plans in connection with the
Offering. In the IF Report, FCI
represents that it conducted a due
diligence process in evaluating the
Offering on behalf of the Plans. This
process included numerous discussions
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17:52 May 11, 2016
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and correspondence with
representatives of the Plans and
Holdings, Holdings’ counsel, brokerdealers, and representatives of the
Plans’ trustee, enabling FCI to better
understand a number of important
elements related to the Offering. In
addition, FCI reviewed publicly
available information and information
provided by Holdings.
23. As detailed in the IF Report, with
regard to the Offering, FCI considered
the following four (4) options: (a)
Continue holding the Rights within the
Stock Fund; (b) Exercising all of the
Rights and acquiring the Notes and
Warrants, then sell the Notes or use
them to exercise Warrants, sell or
exercise the Warrants, and use any
remaining cash to acquire Holdings
Stock in the market; (c) Selling all of the
Rights on the NASDAQ Global Select
Market at the prevailing market price; or
(d) Selling a portion of the Rights and
using the proceeds to exercise the
remaining Rights, so as to acquire Notes
and Warrants (then sell the Notes or use
them to exercise Warrants, then sell or
exercise the Warrants and use any
remaining cash to acquire Holdings
Stock in the market). Acting as the
independent fiduciary on behalf of the
Plans, FCI chose to sell all of the Rights
on the NASDAQ Global Select Market.
24. In determining to sell all of the
Plans’ Rights, FCI represents that the
proceeds from the sale would be
invested in Holdings Stock, as per the
governing documents of the Stock Fund.
As described in the IF Report, FCI
determined that the benefits of selling
the Rights included simplicity, lower
transaction costs, and less exposure to
risk than the options that involved
exercising any of the Rights. According
to FCI, this option allowed the Plans to
realize the benefits of the Rights in a
timely manner at the best available
market prices so that cash raised
through the sale could be reinvested in
Holdings Stock, consistent with the
purpose and intent of the Stock Fund.
FCI understood that the Plans would
incur some transactions costs through
this option, estimated at $0.015 to $0.05
per Right traded. Accordingly, FCI
concluded that this sale of the Rights
was in the interest of the Plans and the
Plans’ participants and beneficiaries and
was protective of such participants and
beneficiaries of the Plans.
25. At FCI’s direction, the Plans sold
the Rights over a period of days while
trying not to be too high a percentage of
the daily volume so as to avoid putting
downward pressure on the price of the
Rights. The Trading Period ended on
November 13, 2014. According to the IF
Report, and as noted above, over the
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ten-day period that the Rights traded on
the NASDAQ, the volume-weighted
average price for the 751,041 Rights
traded was $201.1554 according to data
reported by Bloomberg. The IF Report
provides that FCI completed the sale of
the Plans’ 17,189 Rights in blind
transactions on the NASDAQ Global
Select Market between November 4 and
November 7, 2014, realizing an average
selling price of $211.6283 per Right.
26. According to the Applicant, as a
result of the Rights sale, the total net
proceeds generated for the Savings Plan
and the PR Plan was $3,637,509.54.
These proceeds were credited to each
Plan and the unit value of each
participant’s account balance reflected
the addition of assets credited to the
Plan.
27. The Applicant represents that no
brokerage fees, commissions,
subscription fees, or other charges were
paid by the Plans with respect to the
acquisition and holding of the Rights, or
were paid to any broker affiliated with
FCI or Holdings in connection with the
sale of the Rights. In this regard, FCI
represents that it selected State Street
Global Markets as the broker for the sale
of the Plans’ Rights, based on FCI’s
confidence in the broker’s execution
ability and an attractive fee schedule of
0.015 cents per Right traded. In
connection with the sale of the Rights,
the Plans paid $257.84 in commissions
to independent, third parties and $80.42
in SEC fees.
Requested Relief
28. The Applicant represents that the
subject transactions have already been
consummated. In this regard, the Plans
acquired the Rights pursuant to the
Offering, and held such Rights until the
Rights were sold by the independent
fiduciary. The Applicant states that,
because there was insufficient time
before the Plans acquired the Rights to
apply for and be granted an exemption,
Holdings was required to request
retroactive relief, effective as of October
30, 2014, the Record Date.
29. Section 406(a)(1)(E) of the Act
prohibits a fiduciary from causing a
plan to engage in a transaction, if he
knows or should know that such
transaction constitutes a direct or
indirect acquisition, on behalf of a plan,
of any employer security or employer
real property in violation of section
407(a). Section 406(a)(2) of the Act
prohibits a fiduciary who has authority
or discretion to control or manage the
assets of a plan from permitting a plan
to hold any employer security or
employer real property if he knows or
should know that holding such security
or real property violates section 407(a).
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The Applicant represents that because
the Rights are non-qualifying employer
securities, the acquisition and holding
of the Rights violated sections
406(a)(1)(E), 406(a)(2), and 407(a) of the
Act.
30. Furthermore, section 406(b)(1) of
the Act prohibits a fiduciary from
dealing with the assets of a plan in his
own interest or for his own account.
Section 406(b)(2) of the Act prohibits a
fiduciary, in his individual or in any
other capacity, from acting in any
transaction involving the plan on behalf
of a party (or representing a party)
whose interests are adverse to the
interests of the plan or the interests of
its participants or beneficiaries. The
Applicant states that, although Holdings
retained an independent fiduciary to
represent the Plans in connection with
the disposition of the Rights, by causing
the participation of the Plans in the
Offering, Holdings may have dealt with
the assets of the Plans for its own
account, and also may have acted in a
transaction on behalf of itself and the
Plans.
31. Therefore, the Applicant requests
an administrative exemption from
sections 406(a)(1)(E), 406(a)(2),
406(b)(1), 406(b)(2), and 407(a)(1)(A) of
the Act and section 4975 of the Code by
reason of 4975(c)(1)(E) of the Code, with
regard to the Savings Plan, and from
sections 406(a)(1)(E), 406(a)(2),
406(b)(1), 406(b)(2), and 407(a)(1)(A) of
the Act with regard to the PR Plan.24
Statutory Findings
32. The Applicant represents that the
requested exemption is administratively
feasible because the acquisition,
holding, and sale of the Rights by the
Plans was a one-time transaction which
will not require continued monitoring
or other involvement by the
Department.
33. The Applicant represents that the
transactions which are the subject of
this proposed exemption are in the
interest of the Plans, because the Rights
were automatically issued at no cost to
all shareholders of Holdings Stock as of
a specified Record Date, including the
Plans. The Plans were then able to
realize value through their sale.
34. The Applicant represents that the
transactions were protective of the
Plans, and their respective participants
and beneficiaries, as the Plans obtained
the Rights as a result of an independent
act of Holdings as a corporate entity. In
24 The Applicant represents that there is no
jurisdiction under Title II of the Act with respect
to the PR Plan. Accordingly, the Department is not
providing any exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and
holding of the Rights by the PR Plan.
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addition, the acquisition of the Rights
by the Plans occurred on the same terms
made available to other holders of
Holdings Stock and the Plans received
the same proportionate number of
Rights as other owners of Holdings
Stock. The Plans were also protected in
that all decisions regarding the holding
and disposition of the Rights by the
Plans were made, in accordance with
Plan provisions, by the independent
fiduciary. Furthermore, the independent
fiduciary determined that it would be in
the interest of the Plans to sell all of the
Rights received in the Offering by the
Plans in blind transactions on the
NASDAQ Global Select Market.
Summary
35. In summary, the Applicant
represents that the proposed exemption
satisfies the statutory criteria for an
exemption under section 408(a) of the
Act and section 4975(c)(2) of the Code
for the reasons stated above and for the
following reasons:
(a) The receipt of the Rights by the
Plans occurred in connection with the
Offering, in which all shareholders of
Holdings Stock, including the Plans,
were treated in the same manner;
(b) The acquisition of the Rights by
the Plans resulted from an independent
act of Holdings, as a corporate entity,
and without any participation on the
part of the Plans;
(c) Each shareholder of Holdings
Stock, including each of the Plans,
received the same proportionate number
of Rights based on the number of shares
of Holdings Stock held by each such
shareholder;
(d) All decisions with regard to the
holding and disposition of the Rights by
the Plans were made by a qualified,
independent fiduciary within the
meaning of 29 CFR 2570.31(j);
(e) The independent fiduciary
determined that it would be in the
interest of the Plans to sell all of the
Rights received in the Offering by the
Plans in blind transactions on the
NASDAQ Global Select Market; and
(f) No brokerage fees, commissions,
subscription fees, or other charges were
paid by the Plans with respect to the
acquisition and holding of the Rights, or
were paid to any affiliate of Holdings or
the independent fiduciary in connection
with the sale of the Rights.
Notice to Interested Persons
Notice of the proposed exemption
will be given to all interested persons
within 22 days of the publication of the
notice of proposed exemption in the
Federal Register, by first class U.S. mail
to the last known address of all such
individuals. Such notice will contain a
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29713
copy of the notice of proposed
exemption, as published in the Federal
Register, and a supplemental statement,
as required pursuant to 29 CFR
2570.43(a)(2). The supplemental
statement will inform interested persons
of their right to comment on and to
request a hearing with respect to the
pending exemption. Written comments
and hearing requests are due within 52
days of the publication of the notice of
proposed exemption in the Federal
Register. All comments will be made
available to the public.
Warning: If you submit a comment,
EBSA recommends that you include
your name and other contact
information in the body of your
comment, but DO NOT submit
information that you consider to be
confidential, or otherwise protected
(such as Social Security number or an
unlisted phone number) or confidential
business information that you do not
want publicly disclosed. All comments
may be posted on the Internet and can
be retrieved by most Internet search
engines.
Erin
S. Hesse of the Department, telephone
(202) 693–8546. (This is not a toll-free
number.)
FOR FURTHER INFORMATION CONTACT:
Sears Holdings 401(k) Savings Plan (the
Savings Plan) and the Sears Holdings
Puerto Rico Savings Plan (the PR Plan)
(together, the Plans) Located in
Hoffman Estates, IL
[Application Nos. D–11871 and D–11872,
Respectively]
Proposed Exemption
The Department is considering
granting an exemption under the
authority of section 408(a) of the Act (or
ERISA), as amended, and section
4975(c)(2) of the Code, as amended, and
in accordance with the procedures set
forth in 29 CFR part 2570, subpart B (76
FR 66637, 66644, October 27, 2011).
Section I. Transactions
(a) If the proposed exemption is
granted, the restrictions of sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
406(b)(2), and 407(a)(1)(A) of the Act
and the sanctions resulting from the
application of section 4975 of the Code,
by reason of section 4975(c)(1)(E) of the
Code,25 shall not apply, effective for the
period beginning June 11, 2015 and
ending July 2, 2015, to the acquisition
and holding by the Savings Plan of
certain subscription rights (the Rights)
25 For purposes of this proposed exemption,
references to specific provisions of Title I of the
Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
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to purchase shares of common stock
(Seritage Growth Stock) in Seritage
Growth Properties (Seritage Growth), in
connection with an offering (the
Offering) by Sears Holdings Corporation
(Holdings or the Applicant) of Seritage
Growth Stock, provided that the
conditions, as set forth below in Section
II of this proposed exemption were
satisfied for the duration of the
acquisition and holding; and
(b) If the proposed exemption is
granted, the restrictions of sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
406(b)(2), and 407(a)(1)(A) of the Act 26
shall not apply, effective for the period
beginning June 11, 2015, and ending
July 2, 2015, to the acquisition and
holding of the Rights by the PR Plan in
connection with the Offering of Seritage
Growth Stock by Holdings, provided
that the conditions, as set forth in
Section II of this proposed exemption
were satisfied for the duration of the
acquisition and holding.
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Section II. Conditions
(a) The receipt of the Rights by the
Plans occurred in connection with the
Offering, in which all shareholders of
the common stock of Holdings
(Holdings Stock), including the Plans,
were treated in the same manner;
(b) The acquisition of the Rights by
the Plans resulted solely from an
independent act of Holdings, as a
corporate entity;
(c) Each shareholder of Holdings
Stock, including each of the Plans,
received the same proportionate number
of Rights based on the number of shares
of Holdings Stock held by each such
shareholder;
(d) All decisions with regard to the
holding and disposition of the Rights by
the Plans were made by a qualified
independent fiduciary (the Independent
Fiduciary) within the meaning of 29
CFR 2570.31(j); 27
26 The Applicant represents that there is no
jurisdiction under Title II of the Act with respect
to the PR Plan because the PR Plan fiduciaries have
not made an election under section 1022(i)(2) of the
Act, whereby the PR Plan would be treated as a
trust created and organized in the United States for
purposes of tax qualification under section 401(a)
of the Code. Accordingly, the Department is not
providing exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and
holding of the Rights by the PR Plan.
27 29 CFR 2570.31(j) defines a ‘‘qualified
independent fiduciary,’’ in relevant part, to mean
‘‘any individual or entity with appropriate training,
experience, and facilities to act on behalf of the
plan regarding the exemption transaction in
accordance with the fiduciary duties and
responsibilities prescribed under the Act, that is
independent of and unrelated to any party in
interest engaging in the exemption transaction and
its affiliates;’’ in general, a fiduciary is presumed to
be independent ‘‘if the revenues it receives or is
projected to receive, within the current federal
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(e) The Independent Fiduciary
determined that it would be in the
interest of the Plans to sell all of the
Rights received in the Offering by the
Plans in blind transactions on the New
York Stock Exchange (NYSE); and
(f) No brokerage fees, commissions,
subscription fees, or other charges were
paid by the Plans with respect to the
acquisition and holding of the Rights; or
were paid to any affiliate of the
Independent Fiduciary or Holdings, in
connection with the sale of the Rights.
Section III. Definitions
(a) The term ‘‘Holdings’’ refers to
Sears Holdings Corporation and its
affiliates.
(b) The term ‘‘affiliate’’ of a person
includes:
(1) Any person directly or indirectly
through one or more intermediaries,
controlling, controlled by, or under
common control with such person;
(2) Any officer, director, partner,
employee, or relative, as defined in
section 3(15) of the Act, of such person;
and
(3) Any corporation or partnership of
which such person is an officer,
director, partner, or employee.
(c) The term ‘‘control’’ means the
power to exercise a controlling
influence over the management or
policies of a person other than an
individual.
EFFECTIVE DATE: This proposed
exemption, if granted, will be effective
for the Offering period, beginning June
11, 2015, and ending July 2, 2015 (the
Offering Period).
Summary of Facts and
Representations 28
The Plans
1. Employees of certain affiliates of
Holdings participate in the Plans. The
Plans consist of the Savings Plan and
the PR Plan. The Plans are defined
contribution, eligible individual account
plans that are designed and operated to
comply with the requirements of section
404(c) of the Act. The Plans allow
income tax year from parties in interest (and their
affiliates) [with respect] to the transaction are not
more than 2% of such fiduciary’s annual revenues
based upon its prior income tax year. Although the
presumption does not apply when the
aforementioned percentage exceeds 2%, a fiduciary
nonetheless may be considered independent based
upon other facts and circumstances provided that
it receives or is projected to receive revenues that
are not more than 5% within the current federal
income tax year from parties in interest (and their
affiliates) [with respect] to the transaction based
upon its prior income tax year.’’
28 The Summary of Facts and Representations is
based solely on the representations of the Applicant
and does not reflect the views of the Department,
unless indicated otherwise.
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participants to purchase units in certain
stock funds which invest in Holdings
Stock. In this regard, the Savings Plan
and the PR Plan share a single stock
fund (the Stock Fund) within the Sears
Holdings 401(k) Savings Plan Master
Trust (the Master Trust) to hold shares
of Holdings Stock. As of June 11, 2015,
the Master Trust held approximately
$2.8 billion in total assets. State Street
Bank and Trust Company (State Street)
serves as the Master Trustee and
Custodian for the Master Trust.
2. Sears, Roebuck and Co. (Sears
Roebuck) and all of its wholly-owned
(direct and indirect) subsidiaries (except
Lands’ End Inc. (Lands’ End), Sears de
Puerto Rico, Inc., Kmart Holding
Corporation (Kmart), and its whollyowned (direct and indirect) subsidiaries
(excluding employees residing in Puerto
Rico), and Sears Holdings Management
Corporation, with respect to certain
employees, have adopted the Savings
Plan and are employers under such
plan.
As of June 11, 2015, (the Record Date),
there were 53,831 participants in the
Savings Plan, and the Savings Plan’s
share of the total assets of the Master
Trust was $2,820,235,014. Also, as of
the Record Date, the Savings Plan’s
allocable portion of Holdings Stock held
in the Stock Fund on behalf of 14,476
participants under the Master Trust was
1,286,302.45 shares, which constituted
approximately 1.2% of the 106,603,021
shares of Holdings Stock issued and
outstanding. The approximate
percentage of the fair market value of
the total assets of the Savings Plan
invested in Holdings Stock was 1.3%.
The Savings Plan is administered by
the Sears Holding Corporation
Administrative Committee (the
Administrative Committee), whose
members are employees of Holdings.
The Sears Holdings Corporation
Investment Committee (the Investment
Committee), whose members are officers
and/or employees of Holdings and/or its
subsidiaries, has authority over
decisions relating to the investment of
the Plans’ assets.
3. The PR Plan, which is sponsored
and maintained by Holdings, was
originally established by Sears Roebuck
for employees of Sears Roebuck de
Puerto Rico Inc. (Sears Roebuck de
Puerto Rico) and Kmart, who reside in
the Commonwealth of Puerto Rico,
upon the merger of the Kmart
Corporation Retirement Savings Plan for
Puerto Rico employees with and into
the prior Sears Roebuck de Puerto Rico
Savings Plan, as of March 31, 2012.
According to the Applicant, the PR Plan
has not made an election under section
1022(i)(2)of the Act, whereby such plan
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would be treated as a trust created and
organized in the United States for
purposes of tax qualification under
section 401(a) of the Code. Therefore,
according to the Applicant, there is no
jurisdiction under Title II of the Act.
There is, however, jurisdiction under
Title I of the Act.
As of the Record Date, there were
1,696 participants in the PR Plan, and
the PR Plan’s share of the total assets of
the Master Trust was $17,324,339. Also,
as of the Record Date, the PR Plan’s
allocable portion of Holdings Stock held
in the Stock Fund under the Master
Trust on behalf of 629 participants was
39,782,55 shares, which constituted
approximately 0.04% of the 106,603,021
shares of Holdings Stock issued and
outstanding, on June 11, 2015. The
approximate percentage of the fair
market value of the total assets of the PR
Plan invested in Holdings Stock was
6.5%,
The PR Plan is administered by the
Administrative Committee, and the
Investment Committee makes
investment decisions for such plan.
Banco Popular de Puerto Rico serves as
the PR Plan trustee.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Holdings
4. Holdings, the sponsor of each of the
Plans, is a retail merchant with full-line
and specialty retail stores in the United
States, Guam, Puerto Rico, the U.S.
Virgin Islands, and Canada. Holdings
was formed as a Delaware corporation
in 2004 in connection with the merger
of Kmart and Sears Roebuck, which took
place on March 24, 2005. Holdings is
the parent company of Kmart Holding
Company and Sears Roebuck. The
principal executive office of Holdings is
located in Hoffman Estates, Illinois.
According to the Form 10–K for the
fiscal year ending January 31, 2015,
Holdings and its subsidiaries had total
assets of approximately $11.3 billion.
Also as of January 31, 2015, Holdings
and its subsidiaries employed
approximately 196,000 employees.
Holdings Stock/Ownership
5. Common stock issued by Holdings
(i.e., Holdings Stock), with a par value
$0.01 per share, is publicly-traded on
the NASDAQ Global Select Market
under the symbol, ‘‘SHLD.’’ There were
11,659 shareholders of record, as of June
11, 2015.
ESL Investments, Inc. and its
affiliates, (ESL), including Edward S.
Lampert (Mr. Lampert) owned
approximately 53.2% of Holdings Stock
issued and outstanding as of June 9,
2015. Mr. Lampert is the Chairman of
the Board of Directors and Chief
Executive Officer of Holdings. He is also
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Jkt 238001
the Chairman and Chief Executive
Officer of ESL.
Seritage Growth
6. Seritage Growth is a publicly
traded, self-administered, self-managed
real estate investment trust that is
primarily engaged in the real property
business through its investment in its
operating partnership, Seritage Growth
Properties, L.P. Seritage Growth’s
portfolio contains 235 wholly-owned
properties and 31 joint venture
properties, consisting of approximately
42 million square feet of building space,
which is broadly diversified by location
across 49 states and Puerto Rico.
Pursuant to a master lease, 224 of
Seritage Growth’s wholly-owned
properties are leased to Holdings and
are operated under either the Sears
Roebuck or K-Mart brand. The master
lease provides Seritage with rights to
recapture certain space from Sears
Holdings at each property.
Prior to the Offering described below,
Seritage Growth Stock was owned
exclusively by Benjamin Schall, the
Chief Executive Officer of Seritage
Growth. Immediately following the
Offering, ESL owned 4% of Seritage
Growth Stock, 100% of Seritage
Growth’s Class B non-economic shares,
9.8% of Seritage Growth’s voting power,
43.5% of Seritage Growth (Operating
Partnership) units, and 45.3% of the
consolidated economics of Seritage
Growth and the Operating
Partnership.29
The Offering
7. On April 1, 2015, Holdings
announced its intention to conduct a
Rights Offering of 53,298,899 shares of
Seritage Growth Stock to Holdings
shareholders. Holdings issued a
prospectus describing the Offering of
certain subscription Rights to
shareholders of record, including the
Master Trust, as of June 11, 2015, the
Record Date. The Holdings Board of
Directors determined that the Offering
was in the best interest of Holdings and
its stockholders. According to the
Applicant, the purpose of the Offering
was to allow Seritage Growth to
purchase a portfolio of Holdings real
properties from Holdings using the
proceeds obtained from the Offering.
Under the terms of the Offering, all
shareholders of Holdings Stock
automatically received the Rights, at no
charge. Specifically, each shareholder as
29 To clarify the relationship between Seritage
Growth and the Operating Partnership, the
Applicant represents that Seritage Growth is the
general partner of the Operating Partnership and
owns the majority of the Operating Partnership
units.
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29715
of the Record Date, received one Right
for every whole share of Holdings Stock
it held. Each Right entitled the holder to
purchase one half of one share of
Seritage Growth Stock at the
subscription price of $29.58 per whole
share. According to the Applicant, the
Rights were distributed as practicable as
possible after the June 11, 2015 Record
Date.
8. Each Right also contained an oversubscription privilege permitting the
holder to subscribe for additional
Seritage Growth Stock, up to the
number of common shares that were not
subscribed for by the other holders of
the Rights. The Plans were not eligible
to participate in the over-subscription
privilege because the Independent
Fiduciary sold the Rights received by
the Plan, as discussed more fully below.
9. All shareholders of Holdings Stock
held the Rights until such Rights
expired, were exercised, or were sold. A
shareholder had the right to exercise
some, all, or none of its Rights.
However, its election to exercise the
Rights had to be received by the
subscription agent, Computershare
Trust Company, N.A., by July 2, 2015.
The election to exercise any of the
Rights was irrevocable.
All shareholders of Holdings Stock
held the Rights until such Rights
expired, were exercised, or were sold.
Each shareholder of the Holdings Stock
needed to have at least two Rights to
purchase one whole share of Seritage
Growth Stock, because only whole
shares could be purchased by the
exercise of the Rights. Fractional shares
or cash in lieu of fractional shares were
not issued in connection with the
Offering. Fractional shares of the
Seritage Growth Stock resulting from
the exercise of basic Rights, as to any
holder of such Rights were rounded
down to the nearest whole number.
10. With regard to the sale of the
Rights, the Applicant represents that the
Rights were transferable. The Applicant
also represents that the Rights began to
trade on the NYSE under the symbol
‘‘SRGRT’’ on or around June 12, 2015,
and continued to trade until the trading
deadline at the close of business on June
26, 2015. Further, the Applicant
explains that the trading deadline
applied uniformly to all holders of the
Rights.
11. The Offering expired at 5 p.m.
New York City time on July 2, 2015. The
Applicant represents that the Offering
was oversubscribed and all of the Rights
were exercised at a price of U.S. $29.58
per share of Seritage Growth Stock.
Accordingly, in connection with the
Offering, Seritage Growth offered and
issued up to 106,603,021 Rights to
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purchase up to 53,298,899 shares of
Seritage Growth Stock.
12. All of the gross proceeds from the
exercise of the Rights to purchase
Seritage Growth Stock, approximately
$1,576,581,444, net of any selling
expenses, were payable to and received
by Seritage Growth. The Applicant
asserts that the proceeds were or will be
used by Seritage Growth to purchase a
portfolio of real properties from
Holdings.
13. Based on the ratio of one Right for
each share of Holdings Stock held, the
Applicant explains that the Master Trust
acquired 1,326,085 Rights as a result of
the Offering. While the Plans generally
permit participants to direct the
investment of their own accounts,
including their investments in Holdings
Stock, the Applicant represents that all
decisions regarding the holding and
disposition of the Rights by each Plan
were made, in accordance with the Plan
provisions, by the Independent
Fiduciary acting solely in the interest of
Plan participants. According to the
Applicant, participants in the Plans who
were invested in Holdings Stock as of
the Record Date were notified of the
Offering, the engagement of the
Independent Fiduciary, the fact that the
Rights would be held in the Stock Fund,
that the Independent Fiduciary would
determine whether the Rights should be
exercised or sold, and the means by
which a participant could obtain more
information. The Applicant further
represents that Holdings communicated
generally with employees regarding the
Offering and with the public through
public releases at
www.searsholdings.com.
Role of the Independent Fiduciary
14. Evercore Trust Company, N.A.
(Evercore) was retained by the
Investment Committee, pursuant to an
agreement (the Agreement) dated June 5,
2015, to act as the Independent
Fiduciary on behalf of the Plans, in
connection with the Offering and with
the application for exemption submitted
to the Department. Pursuant to the terms
of the Agreement, Evercore’s
responsibilities were: (a) To determine
whether and when to exercise or sell
each of the Plan’s Rights; and (b) if it
determined to exercise any of a Plan’s
Rights to purchase Seritage Growth
Stock, to manage the investment within
that Plan’s Stock Fund, and determine
when to liquidate or exercise the shares
for the purpose of reinvesting the
proceeds in Holdings Stock.
The Applicant represents that hiring
an Independent Fiduciary to manage the
holding and disposition of the Rights
was appropriate in this case for the
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Jkt 238001
following reasons: (a) There would have
been a significant cost to develop and
implement a process under each Plan to
administer the pass-through of the
Rights to participants; (b) it was not
practicable to initiate and implement a
pass-through of the Rights to
participants given the limited notice
provided to shareholders of the Offering
and the short subscription period (21
days), because such process would have
included the establishment of a ‘‘rights
fund’’ and a Seritage Growth fund
within each Plan, the design and testing
of procedures for allocating the Rights
among participant accounts, soliciting
participant directions on the exercise or
sale of the Rights and identifying the
source of funding (e.g., which
investment account is to be liquidated)
for each participant who chose to
exercise the Rights, and the short
Offering Period meant that there would
have been insufficient time to
adequately educate participants
regarding their rights and obligations;
(c) there would have been a loss of value
that participants might otherwise have
gained, because participants’
unfamiliarity with rights offerings as
well as general participant inertia would
have resulted in a significant percentage
of participants allowing their Rights to
expire without selling or exercising
them; (d) it was not in the interest of
participants to require the Plans to offer
and hold for participant investment a
single stock (i.e., Seritage Growth Stock)
that had not been selected by the plan
fiduciary as an investment option
appropriate for the Plans; and (e) the
Rights are most appropriately viewed as
a non-cash dividend payable to owners
of Holdings Stock, such as the Plans, so
that the fiduciary of the Stock Fund is
the appropriate person to manage the
‘‘proceeds’’ of the Plans’ investment in
Holdings Stock. The Applicant
represents that, in this case, the
Independent Fiduciary appointed to
manage the Rights on behalf of the Plans
took responsibility for realizing the
value in the Rights by selling them. The
cash proceeds of the sale were then
reinvested in Holdings Stock pursuant
to the terms of the Plans.
In the Agreement, Evercore represents
that it is qualified to serve as the
Independent Fiduciary for the Plans in
connection with the Offering because it
is a national trust bank chartered by the
Office of the Comptroller of the
Currency. Evercore states that it has
provided specialized investment
management, independent fiduciary,
and trustee services to employee benefit
plans since 1987. Evercore also
represents that it has served or is
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serving as an independent fiduciary on
behalf of employee benefit plans in
connection with more than 50
prohibited transaction exemption
applications that have been filed with
the Department.
In the Agreement, Evercore further
represents that it is independent and
unrelated to Holdings, and that it did
not directly or indirectly receive any
compensation or other consideration for
its own account in connection with the
Offering, except compensation from
Holdings for performing services
described in the Agreement. According
to the Agreement, Evercore states that
the gross revenue it received (or
expected to receive) in 2015 that was
derived from any party in interest or an
affiliate of such party in interest
involved in the Seritage Growth
transaction, would represent less than
2% its 2014 gross revenue. Also, in the
Agreement, Evercore represents that it
understood and acknowledged its duties
and responsibilities under the Act in
acting as a fiduciary on behalf of the
Plans in connection with the Offering.
In addition, Evercore represents that it
conducted a due diligence process in
evaluating the Offering on behalf of the
Plans. This process included
discussions and correspondence with
representatives of the Plans, Holdings,
Holdings’ counsel, broker-dealers, and
representatives of the trustee of the
Master Trust, enabling Evercore to
improve certain elements related to the
Offering. Evercore also states that it
reviewed publicly available information
and information provided by Holdings.
With regard to the Offering, Evercore
explains that it considered four options
on behalf of the Plans: (a) To continue
holding the Rights within the Stock
Fund; (b) to exercise all of the Rights to
acquire Seritage Growth Stock; (c) to sell
all of the Rights on the NYSE at the
prevailing market price; or (d) to sell a
portion of the Rights and use the
proceeds to exercise the remaining
Rights to acquire Seritage Growth Stock.
In determining to sell all of the Plans’
Rights, Evercore represents that the
proceeds from the sale would be
invested in Holdings Stock, in
accordance with the governing
documents of the Stock Fund. Evercore
reasoned that, although the Plans would
incur some transaction costs by selling
the Rights, estimated at $0.01 per Right
traded, plus a similar expense in
connection with the reinvestment of the
proceeds into shares of Holdings Stock,
the benefits of selling the Rights
included the fact that the proceeds
could be quickly redeployed into shares
of Holdings Stock, lower transaction
costs, and less exposure to risk than the
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options that involved exercising any of
the Rights. Accordingly, Evercore
concluded that the sale of the Rights
was in the interest of the Plans and the
Plans’ participants and beneficiaries and
was protective of such participants and
beneficiaries of the Plans.
15. As a result of the sale of 1,326,085
Rights that were acquired by the Master
Trust during the Offering, the total net
proceeds generated for the Savings Plan
and the PR Plan was $4,106,921.19.
These proceeds were credited to the
Stock Fund, and thus, to each Plan. The
unit value of each participant’s account
balance in each Plan reflected the
addition of the proceeds to the Stock
Fund (as applicable).
The trading period for the sale of the
Rights on the NYSE ended on June 26,
2015. Evercore sold the Plans’ 1,326,085
Rights in blind transactions on the
NYSE between June 16 and June 19,
2015, realizing an average selling price
of $3.10 per Right. According to the
Applicant, the volume-weighted average
price for a total of 46,699,673 Rights that
were sold during the trading period was
$3.66, according to data reported by
Factset.
16. Evercore represents that, as noted
in the Independent Fiduciary Report, its
goal in selling the Rights was to dispose
of them in a timely manner at the best
available market prices so that cash
raised through the sale could be
reinvested in shares of Holdings Stock
as soon as possible and at the discretion
of State Street, the Master Trustee and
Custodian of the Master Trust. This,
according to Evercore was consistent
with the purpose and intent of the Stock
Fund.
Evercore explains that it also believed
it was prudent to take advantage of
available liquidity early in the Offering
Period, given the typical decline in
trading volume experienced over the
course of a rights offering period.
Evercore states that it promptly began to
sell the Rights once it was informed that
the Rights had been delivered to the
Stock Fund account. The liquidation
lasted four days, beginning on June 16,
2015, and ending on June 19, 2015. The
Rights continued to trade over five more
days (June 22 to June 26), during which
time the price of the Rights rose. This
rise in price, Evercore asserts, was
entirely unpredictable beforehand.
Waiting for such a potential outcome,
Evercore explains, would have been at
odds with its goal of promptly realizing
and reallocating proceeds, and further
would have exposed the Plans to the
risk of a significant decline in the price
of the Rights over the course of the
offering period.
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17. In the opinion of Evercore, the
actions outlined above in which it was
engaged on behalf of the Plans, were in
the interest of the Plans and the Plans’
participants and beneficiaries, and were
protective of the rights of such
participants and beneficiaries of the
Plans.
18. No brokerage fees, commissions,
subscription fees, or other charges were
paid by the Plans with respect to the
acquisition and holding of the Rights, or
were paid to any broker affiliated with
Evercore, or Holdings, in connection
with the sale of the Rights. In this
regard, it is represented that Evercore
selected State Street Global Markets to
execute the trades for the sale of the
Rights issued to the Master Trust, based
on Evercore’s confidence in that
broker’s execution ability and an
attractive fee schedule of 0.01 cent per
Right traded. In connection with the
sale of the Rights, the Plans (through the
Master Trust) paid $13,260.85 in
commissions and $75.83 in SEC fees.30
Requested Relief
19. The application was filed by
Holdings on behalf of itself and its
affiliates. In this regard, Holdings has
requested an exemption for the
acquisition and holding of the Rights by
the Plans in connection with the
Offering of Seritage Growth Stock by
Holdings. The Applicant represents that
the subject transactions have already
been consummated. In this regard, the
Plans acquired the Rights pursuant to
the Offering, and held such Rights until
they were sold by the Independent
Fiduciary. The Applicant states that,
because there was insufficient time
between the dates the Plans acquired
the Rights and when the Rights were
sold to apply for and be granted an
administrative exemption by the
Department, Holdings requested
retroactive exemptive relief for the
period June 11, 2015, through July 2,
2015.
20. Section 406(a)(1)(E) of the Act
prohibits a fiduciary from causing a
plan to engage in a transaction, if he
knows or should know that such
transaction constitutes a direct or
30 The Applicant represents that the brokerage
services and the fees that were received by State
Street Global Markets in connection with the sale
of the Rights by the Plans, are exempt under section
408(b)(2) of the Act. The Department, herein, is not
providing any relief for the receipt of any
commissions, fees, or expenses in connection with
the sale of the Rights in blind transactions to
unrelated third parties on the NYSE, beyond that
provided pursuant to section 408(b)(2) of the Act.
In this regard, the Department is not opining as to
whether the conditions as set forth in section
408(b)(2) of the Act and the Department’s
regulations, pursuant to 29 CFR 2550.408(b)(2) have
been satisfied.
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29717
indirect acquisition, on behalf of a plan,
of any employer security or employer
real property in violation of section
407(a). Section 406(a)(2) of the Act
prohibits a fiduciary who has authority
or discretion to control or manage the
assets of a plan from permitting a plan
to hold any employer security or
employer real property if he knows or
should know that holding such security
or real property violates section 407(a).
The Applicant represents that because
the Rights are non-qualifying employer
securities, the acquisition and holding
of the Rights by the Plans violated
sections 406(a)(1)(E), 406(a)(2), and
407(a) of the Act.
Furthermore, section 406(b)(1) of the
Act prohibits a fiduciary from dealing
with the assets of a plan in his own
interest or for his own account. Section
406(b)(2) of the Act prohibits a
fiduciary, in his individual or in any
other capacity, from acting in any
transaction involving the plan on behalf
of a party (or representing a party)
whose interests are adverse to the
interests of the plan or the interests of
its participants or beneficiaries. The
Applicant states that, although Holdings
retained the Independent Fiduciary to
represent the Plans in connection with
the disposition of the Rights, by causing
the participation of the Plans in the
Offering, Holdings may have dealt with
the assets of the Plans for its own
account, and also may have acted in a
transaction on behalf of itself and the
Plans.
Therefore, the Applicant requests an
administrative exemption from sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
406(b)(2), and 407(a)(1)(A) of the Act
and section 4975 of the Code by reason
of 4975(c)(1)(E) of the Code, with regard
to the Savings Plan, and from sections
406(a)(1)(E), 406(a)(2), 406(b)(1),
406(b)(2), and 407(a)(1)(A) of the Act
with regard to the PR Plan.
Statutory Findings
21. The Applicant represents that the
proposed transactions are
administratively feasible because the
acquisition and holding of the Rights by
the Plans were one-time transactions
that involved an automatic distribution
of the Rights to all shareholders, that
would not require any continuing
oversight by the Department.
The Applicant also represents that the
subject transactions were in the interest
of the Plans and their respective
participants and beneficiaries, because
the Rights were automatically issued at
no cost to the shareholders of Holdings
Stock, including the Plans, as of the
Record Date.
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Finally, the Applicant represents that
the transactions were protective of the
rights of the participants and
beneficiaries of the respective Plans
because the Plans obtained the Rights as
a result of an independent act of
Holdings as a corporate entity. In
addition, the acquisition of the Rights
by the Plans occurred on the same terms
made available to other holders of
Holdings Stock, and the Plans received
the same proportionate number of
Rights as other owners of Holdings
Stock. The Plans were also protected in
that all decisions regarding the holding
and disposition of the Rights by the
Plans were made, in accordance with
Plan provisions, by the Independent
Fiduciary. Furthermore, the Applicant
represents that the Independent
Fiduciary determined that it would be
in the interest of the Plans to sell all of
the Rights received in the Offering by
the Plans in blind transactions on the
NYSE.
Summary
22. In summary, Holdings represents
that the subject transactions satisfy the
statutory criteria for an exemption
under of section 408(a) of the Act
because:
(a) The receipt of the Rights by the
Plans occurred in connection with the
Offering in which all shareholders of
Holdings Stock, including the Plans,
were treated in the same manner;
(b) The acquisition of the Rights by
the Plans resulted solely from an
independent act of Holdings, as a
corporate entity;
(c) Each shareholder of Holdings
Stock, including each of the Plans,
received the same proportionate number
of Rights based on the number of shares
of Holdings Stock held by each such
shareholder;
(d) All decisions with regard to the
holding and disposition of the Rights by
the Plans were made by the
Independent Fiduciary on behalf of the
Plans;
(e) The Independent Fiduciary
determined that it would be in the
interest of the Plans to sell all of the
Rights received in the Offering by the
Plans in blind transactions on the
NYSE;
(f) No brokerage fees, commissions,
subscription fees, or other charges were
paid by the Plans with respect to the
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acquisition and holding of the Rights; or
were paid to any broker affiliated with
the Independent Fiduciary or Holdings,
in connection with the sale of the
Rights; and
(g) The acquisition of the Rights by
the Plans occurred on the same terms
made available to other shareholders of
Holdings Stock.
Notice to Interested Persons
The persons who may be interested in
the publication in the Federal Register
of the Notice of Proposed Exemption
(the Notice) include all participants
whose accounts in the Plans were
invested on the Record Date through the
Master Trust in the Stock Fund which
held the Holdings Stock.
It is represented that all such
interested persons will be notified of the
publication of the Notice by first class
mail, to each such interested person’s
last known address within 22 days of
publication of the Notice in the Federal
Register. Such mailing will contain a
copy of the Notice, as it appears in the
Federal Register on the date of
publication, plus a copy of the
Supplemental Statement, as required,
pursuant to 29 CFR 2570.43(a)(2), which
will advise all interested persons of
their right to comment and to request a
hearing. A11 written comments and/or
requests for a hearing must be received
by the Department from interested
persons within 52 days of the
publication of this proposed exemption
in the Federal Register.
All comments will be made available
to the public.
Warning: Do not include any
personally identifiable information
(such as name, address, or other contact
information) or confidential business
information that you do not want
publicly disclosed. All comments may
be posted on the Internet and can be
retrieved by most Internet search
engines.
Ms.
Blessed Chuksorji-Keefe of the
Department, telephone (202) 693–8567.
(This is not a toll-free number.)
FOR FURTHER INFORMATION CONTACT:
General Information
The attention of interested persons is
directed to the following:
(1) The fact that a transaction is the
subject of an exemption under section
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408(a) of the Act and/or section
4975(c)(2) of the Code does not relieve
a fiduciary or other party in interest or
disqualified person from certain other
provisions of the Act and/or the Code,
including any prohibited transaction
provisions to which the exemption does
not apply and the general fiduciary
responsibility provisions of section 404
of the Act, which, among other things,
require a fiduciary to discharge his
duties respecting the plan solely in the
interest of the participants and
beneficiaries of the plan and in a
prudent fashion in accordance with
section 404(a)(1)(b) of the Act; nor does
it affect the requirement of section
401(a) of the Code that the plan must
operate for the exclusive benefit of the
employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be
granted under section 408(a) of the Act
and/or section 4975(c)(2) of the Code,
the Department must find that the
exemption is administratively feasible,
in the interests of the plan and of its
participants and beneficiaries, and
protective of the rights of participants
and beneficiaries of the plan;
(3) The proposed exemptions, if
granted, will be supplemental to, and
not in derogation of, any other
provisions of the Act and/or the Code,
including statutory or administrative
exemptions and transitional rules.
Furthermore, the fact that a transaction
is subject to an administrative or
statutory exemption is not dispositive of
whether the transaction is in fact a
prohibited transaction; and
(4) The proposed exemptions, if
granted, will be subject to the express
condition that the material facts and
representations contained in each
application are true and complete, and
that each application accurately
describes all material terms of the
transaction which is the subject of the
exemption.
Signed at Washington, DC, this 6th day of
May, 2016.
Lyssa E. Hall,
Director, Office of Exemption Determinations,
Employee Benefits Security Administration,
U.S. Department of Labor.
[FR Doc. 2016–11115 Filed 5–11–16; 8:45 am]
BILLING CODE 4510–29–P
E:\FR\FM\12MYN2.SGM
12MYN2
Agencies
[Federal Register Volume 81, Number 92 (Thursday, May 12, 2016)]
[Notices]
[Pages 29695-29718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11115]
[[Page 29695]]
Vol. 81
Thursday,
No. 92
May 12, 2016
Part III
Department of Labor
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Employee Benefits Security Administration
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Proposed Exemptions From Certain Prohibited Transaction Restrictions;
Notice
Federal Register / Vol. 81 , No. 92 / Thursday, May 12, 2016 /
Notices
[[Page 29696]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Proposed Exemptions From Certain Prohibited Transaction
Restrictions
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code). This notice includes the
following proposed exemptions: D-11825, ABARTA, Inc. Pension Plan; D-
11846 and D-11847, Sears Holdings 401(k) Savings Plan (the Savings
Plan) and the Sears Holdings Puerto Rico Savings Plan (the PR Plan); D-
11851 and D-11852, Sears Holdings 401(k) Savings Plan (the Savings
Plan) and the Sears Holdings Puerto Rico Savings Plan (the PR Plan);
and D-11871 and D-11872, Sears Holdings 401(k) Savings Plan (the
Savings Plan) and the Sears Holdings Puerto Rico Savings Plan (the PR
Plan).
DATES: All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice.
ADDRESSES: Comments and requests for a hearing should state: (1) The
name, address, and telephone number of the person making the comment or
request, and (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing. All written comments and requests for a
hearing (at least three copies) should be sent to the Employee Benefits
Security Administration (EBSA), Office of Exemption Determinations,
Room N-5700, U.S. Department of Labor, 200 Constitution Avenue NW.,
Washington, DC 20210. Attention: Application No.__, stated in each
Notice of Proposed Exemption. Interested persons are also invited to
submit comments and/or hearing requests to EBSA via email or FAX. Any
such comments or requests should be sent either by email to:
moffitt.betty@dol.gov, or by FAX to (202) 219-0204 by the end of the
scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1515, 200 Constitution Avenue NW.,
Washington, DC 20210.
Warning: All comments will be made available to the public. Do not
include any personally identifiable information (such as Social
Security number, name, address, or other contact information) or
confidential business information that you do not want publicly
disclosed. All comments may be posted on the Internet and can be
retrieved by most Internet search engines.
SUPPLEMENTARY INFORMATION:
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
The proposed exemptions were requested in applications filed
pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the
Code, and in accordance with procedures set forth in 29 CFR part 2570,
Subpart B (76 FR 66637, 66644, October 27, 2011).\1\ Effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 1 (1996), transferred the authority of the Secretary of the
Treasury to issue exemptions of the type requested to the Secretary of
Labor. Therefore, these notices of proposed exemption are issued solely
by the Department.
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\1\ The Department has considered exemption applications
received prior to December 27, 2011 under the exemption procedures
set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August
10, 1990).
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The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
ABARTA, Inc. Pension Plan (the Plan or the Applicant), Located in
Pittsburgh, PA
[Application No. D-11825]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (76 FR 46637, 66644, October 27,
2011).\2\
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\2\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, provided that the conditions and the
definitions set forth below are satisfied, the restrictions of sections
406(a)(1)(A), 406(a)(1)(B), 406(a)(1)(D), 406(a)(1)(E), 406(a)(2),
406(b)(1), 406(b)(2), and 407(a) of the Act, and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(A), (B), (D) and (E) of the Code, shall not apply
to the following proposed transactions (the Covered Transactions):
(a) The in-kind contribution by ABARTA Inc. (ABARTA) to the Plan
(the Contribution) of ABARTA's 100% ownership interests (the LLC
Interests) in two special purpose entities: Delabarta Pennsylvania Real
Estate, LLC (Delabarta Pennsylvania LLC); and Delabarta New York Real
Estate, LLC (Delabarta New York LLC) (together, the LLCs): Each of
which owns, as its only asset, a parcel of improved real property (a
Property);
(b) Following the Contribution: (1) the Plan's leasing of the
Property owned 100% by the Delabarta Pennsylvania LLC to an ABARTA
subsidiary, Coca-Cola Bottling Company of Lehigh Valley, Inc. (Coca-
Cola Lehigh Valley), and a one-time renewal of that lease; and (2) the
Plan's leasing of the Property owned 100% by the Delabarta New York LLC
to another ABARTA subsidiary, Coca-Cola Bottling Company of Buffalo,
Inc. (Coca-Cola Buffalo), and a one-time renewal of that lease.
Hereinafter, these two leases are referred to as the Leases, and the
two renewals of those Leases are referred to as the Lease Renewals;
(c) The guarantees by Coca-Cola Buffalo and Coca-Cola Lehigh Valley
(the Tenants) to the Plan in connection with a make whole obligation
(the Make Whole Obligation), and any payments to the Plan in
fulfillment of that obligation;
[[Page 29697]]
(d) Each Tenant's indemnification of the Plan (the Indemnification)
in connection with a Leases and a Lease Renewal; and
(e)(1) The Plan's granting of a right of first offer (the Right of
First Offer) to each Tenant, whereby the Tenant may purchase a Property
or LLC interest from the Plan; and (2) a sale by the Plan of a Property
or LLC Interest to a Tenant in connection with a Tenant's exercise of
that Right of First Offer.
Section II. Conditions Regarding the In-Kind Contribution Described in
Section I(A)
(a) The Independent Fiduciary, as defined in Section X(c) of this
proposed exemption, negotiates the terms and conditions of the
Contribution, and approves the Contribution as being in the interest of
the Plan;
(b) The LLC Interests are contributed to the Plan at their current
fair market value, as determined by the Independent Fiduciary,
following the Independent Fiduciary's review of an appraisal report
(the Appraisal Report) prepared by the Independent Appraiser, as
defined in Section X(d) of this proposed exemption;
(c) On the date of the Contribution, the aggregate contributed
value of the LLC Interests is no less than the current fair market
value of the Properties underlying the LLC Interests, as verified by
the Independent Fiduciary;
(d) On the date of the Contribution, ABARTA contributes to the Plan
a cash amount that is no less than $500,000;
(e) Immediately following the Contribution, the aggregate fair
market value of employer real property and employer securities held by
the Plan represents less than 20% of the Plan's assets;
(f) As long as the Properties and/or LLC interests are owned by the
Plan, the Properties are not altered in any way that: (1) Diminishes
the fair market value or remaining useful life of the Property; (2)
affects the structure or systems of any building existing on the
Property; or (3) affects an expansion of any building existing on the
Property, without the prior written approval of the Independent
Fiduciary; and
(g) Following the Contribution, the Plan does not transfer a
portion of its ownership interests in the LLCs or in the Properties to
a party in interest to the Plan.
Section III. Conditions Regarding the Plan's Leasing of the Properties
to the Tenants Described in Section I(B)
(a) The Independent Fiduciary negotiates the terms and conditions
of the each Lease and Lease Renewal, and approves the Plan's entering
into each Lease and Lease Renewal, as being in the interest of, and
protective of, the Plan;
(b) Each Lease and Lease Renewal remains, at all times, a bondable
triple net lease, such that all costs attributable to a Property
(including, among other things, taxes, insurance, utilities, and non-
capital maintenance, repair, and capital improvements) are the
responsibility of the Tenant, until the earlier of: (1) The date on
which the Property or LLC Interest is first transferred to any person
or entity that is not wholly-owned by the Plan; (2) the date on which
the Plan sells a controlling interest in the LLC to an entity that is
not wholly-owned by the Plan; or (3) the date the Lease or Lease
Renewal terminates by operation of law;
(c) Any amendment to a Lease or Lease Renewal must be negotiated
and approved by the Independent Fiduciary; however, in no event may any
amendment be inconsistent with the terms of this exemption, if granted;
and
(d) For each Lease Renewal, all provisions of the Lease on which
the Lease Renewal is based, with the exception of the specific rent
amount and any escalator provision, remain in effect.
Section IV. The Make Whole Obligation Described in Section I(C)
(a) After the Contribution, as of the earlier of: (1) The date of a
sale by the Plan of a Property (or an LLC Interest) (a Sale Date); or
(2) the date that is five years from the date of the Contribution
(hereinafter, a First Calculation Date), if (A)(i) the proceeds
received from the fair market value sale of a Property (or LLC
interest), in the case of a sale, or (ii) the current fair market value
of the Property (or the LLC interest) as of the First Calculation Date,
in the case in which there has not been a sale, plus (B) any income
generated by the Property during that period, less (C) any expenses
attributable to the Property (or the LLC Interest) paid by the Plan
during that period, is less than (D) the fair market value of such
Property (or the LLC Interest) at the time of the Contribution, plus
(E) an amount equal to a 5% percent rate of return on such Contributed
Value during that period, compounded annually; then the Tenant must
contribute an amount of cash to the Plan equal to any such difference,
within 60 days of the Sale Date or First Calculation Date;
(b) If the Plan continues to hold a Property or LLC Interest during
all or a portion of any of the three consecutive five year periods that
follow the First Calculation Date (each, a Lookback Period), with
respect to any of these three Lookback Periods, as of the earlier of:
(1) A Sale Date; or (2) a date that is five years from the first day of
the Lookback Period (a Subsequent Calculation Date), if (A)(i) the
proceeds received from the fair market value sale of a Property (or LLC
interest), in the case of a sale, or (ii) the current fair market value
of the LLC interest as of the applicable Subsequent Calculation Date,
in the case in which there has not been a sale, plus (B) any income
generated by the Property during that period, (C) less any expenses
paid by the Plan during that period regarding the LLC interest or
Property, is less than (D) the fair market value of such LLC Interest
as of the first day of the applicable Lookback Period, plus (E) an
amount equal to a 5% percent rate of return on such Contributed Value
during that period, compounded annually; then the Tenant must
contribute to the Plan an amount of cash equal to any such difference,
within 60 days of the Sale Date or Subsequent Calculation Date; and
(c) The Plan receives the full amount that the Plan may be due
under the Make Whole Obligation within 60 days of the applicable Sale
Date, Calculation Date, or Subsequent Calculation Date, as verified by
the Independent Fiduciary.
Section VI. Tenants' Indemnification of the Plan Described In Section
I(d)
(a) In connection with each Lease and Lease Renewal, and as set
forth in writing therein, the Tenant indemnifies, defends upon request,
and holds the Plan harmless from any, and against all, losses,
penalties and court costs related to: (1) The Tenant's use, repair,
management, lease, sublease, maintenance or operation of a Property,
(2) any violation of any applicable environmental laws, the Americans
with Disabilities Act (the ADA), and other health and/or safety laws;
and (3) any default by the Tenant under the Lease or Lease Renewal; and
(b) Any amount owed the Plan in connection with a Tenant's
indemnification of the Plan, as described in the preceding paragraph,
is negotiated and approved by the Independent Fiduciary, and paid to
the Plan within the timeframe set forth by the Independent Fiduciary.
Section VII. The Right of First Offer and the Sale by the Plan of a
Property or an LLC Interest Described in Section I(E)
(a) During the term of the Lease and any Lease Renewal, the
Independent Fiduciary is solely responsible for determining whether,
when, and under what terms the Plan may prudently sell
[[Page 29698]]
one or both of: (1) The LLCs; or (2) the Properties;
(b) During the term of the Lease and any Lease Renewal, the
Independent Fiduciary must approve any sale by the Plan of one or both
of: (1) The Properties; or (2) the LLC Interests, as being in the
interest of, and protective of, the Plan;
(c) The Independent Fiduciary may not implement the Right of First
Offer unless the Independent Fiduciary has first negotiated the terms
and conditions of a proposed sale of an LLC Interest (or a Property) to
a party that is unrelated to ABARTA or any of its affiliates (the
Unrelated Proposed Sale);
(d) Any sale of an LLC Interest or Property to ABARTA or any of its
affiliates (hereinafter, ABARTA) pursuant to the Right of First Offer,
must equal the greater of: (1) The price negotiated by the Independent
Fiduciary, as between the Plan and the party that is unrelated to
ABARTA; or (2) the current fair market value of the Property, as
determined by the Independent Appraiser; and
(e) If ABARTA does not purchase the Property or LLC Interest under
the same terms as the terms associated with the Unrelated Proposed
Sale, the Plan may sell the Property or LLC Interest to the unrelated
third party within 360 days without triggering a new Right of First
Offer.
Section VIII. The Independent Fiduciary
(a) The Independent Fiduciary represents the interests of the Plan
for all purposes with respect to the Covered Transactions;
(b) The Independent Fiduciary must:
(1) Review, negotiate and approve the terms and conditions of each
Covered Transaction;
(2) Review and approve the terms of the transfer agreement (the
Transfer Agreement) that evidences the Contribution;
(3) Monitor and enforce the Plan's rights and interests with
respect to the Properties;
(4) Monitor ABARTA's compliance with the terms of this exemption,
including all obligations set forth under the Leases; and
(5) Take all steps that are necessary and proper to protect the
Plan in the event of any non-compliance by ABARTA.
Section IX. General Conditions
(a) The Plan does not pay any real estate fees, commissions, costs
or other expenses in connection with the proposed transactions,
including any fees that are currently charged, or any fees which accrue
in the future; and
(b) The terms and conditions of the proposed transactions are no
less favorable to the Plan than those obtainable under similar
circumstances when negotiated at arm's-length with unrelated third
parties.
Section X. Definitions
(a) The term ABARTA means ABARTA, Inc., and any of its affiliates.
(b) The term ``affiliate'' means: (1) Any person directly or
indirectly through one or more intermediaries, controlling, controlled
by, or under common control with the person; (2) any officer, director,
employee, relative, or partner in any such person; or (3) any
corporation or partnership of which such person is an officer,
director, partner, or employee.
For the purposes of clause (a)(1) above, the term ``control'' means
the power to exercise a controlling influence over the management or
policies of a person other than an individual.
(c) The term ``Independent Fiduciary'' means Evercore Trust Company
(Evercore), or another fiduciary of the Plan who: (1) Is independent of
or unrelated to ABARTA and the Tenants, and has the appropriate
training, experience, and facilities to act on behalf of the Plan
regarding the Covered Transactions in accordance with the fiduciary
duties and responsibilities prescribed by the Act (including, if
necessary, the responsibility to seek the counsel of knowledgeable
advisors to assist in its compliance with the Act); and (2) if
relevant, succeeds Evercore in its capacity as Independent Fiduciary to
the Plan in connection with the Covered Transactions. The Independent
Fiduciary will not be deemed to be independent of and unrelated to
ABARTA and the Tenants if: (1) Such Independent Fiduciary directly or
indirectly controls, is controlled by or is under common control, with
ABARTA or the Tenants; (2) such Independent Fiduciary directly or
indirectly receives any compensation or other consideration in
connection with any transaction described in this exemption other than
for acting as Independent Fiduciary in connection with the transactions
described herein, provided that the amount or payment of such
compensation is not contingent upon, or in any way affected by, the
Independent Fiduciary's ultimate decision; and (3) the annual gross
revenue received by the Independent Fiduciary, during any year of its
engagement, from ABARTA and the Tenants, exceeds 2% of the Independent
Fiduciary's annual gross revenue from all sources (for federal income
tax purposes) for is prior tax year.
(d) The term ``Independent Appraiser'' means an individual or
entity meeting the definition of a ``Qualified Independent Appraiser''
under Department Regulation 25 CFR 2570.31(i) retained to determine, on
behalf of the Plan, the fair market value of the Properties as of the
date of the Contribution.
Summary of Facts and Representations 3
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\3\ The Summary of Facts and Representations is based on the
Applicant's representations and does not reflect the views of the
Department, unless indicated otherwise.
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The Parties
1. ABARTA, which was founded in 1933 by Rolland Adams, currently
maintains its headquarters in Pittsburgh, Pennsylvania. ABARTA is
privately-owned and operates in the oil and gas, soft-drink bottling,
and frozen food industries. Within its soft-drink bottling division,
ABARTA owns and operates four Coca-Cola bottling companies, two of
which are Coca-Cola Buffalo and Coca-Cola Lehigh Valley. As of March
31, 2015, ABARTA held assets totaling $238,824,000 and liabilities
totaling $182,748,000.
Coca-Cola Lehigh Valley, which was purchased by ABARTA in 1963,
owns the exclusive franchise rights in perpetuity to distribute
products of the Coca-Cola Company throughout Lancaster, Northampton,
and Lehigh counties, in Pennsylvania, and part of Warren County, in New
Jersey. Coca-Cola Lehigh Valley has generated $3 million in average
annual Earnings Before Interest, Tax, Depreciation, and Amortization
(EBITDA) since 2010.
Coca-Cola Buffalo, which was purchased by ABARTA in 1980, owns the
exclusive franchise rights in perpetuity to distribute products of the
Coca-Cola Company throughout eight counties in and around Buffalo, New
York. Coca-Cola Buffalo has generated $2.5 million in average annual
EBITDA since 2010.
2. The Plan, which was adopted by ABARTA on January 1, 1981, is a
noncontributory, defined benefit pension plan which covers
approximately 4,000 non-union employees of ABARTA. As of January 1,
2015, the Plan had 1,265 participants. As of July 31, 2015, the Plan
held assets totaling $36,737,158. The Plan Administrator is a
Committee, the members of which are designated by ABARTA's Board of
Directors. Contributions required to fund the Plan are remitted to and
held under the ABARTA, Inc. Defined Benefit Master
[[Page 29699]]
Trust (the Master Trust), the custodian of which is Fidelity Management
Trust Company (Fidelity). In addition to ABARTA, seven other companies,
including Coca-Cola Lehigh Valley and Coca-Cola Buffalo, participate in
the Master Trust.
The Plan's trustees are John F. Blitzer III, Katherine W. Fedor,
and William F. Holtz (the Trustees). Each of the Trustees serves
concurrently as an officer of ABARTA: Mr. Blitzer, as Director,
President and CEO; Ms. Fedor, as Secretary; and Mr. Holtz as Vice
President, Treasurer, and Secretary. In addition, two Trustees, Mr.
Holtz and Ms. Fedor, serve as officers for the LLCs, but, if this
exemption is granted, they will not receive compensation from the Plan
as officers of the LLCs following the Contribution.
The Trustees have delegated investment management discretion over
Plan assets to Fidelity, subject to a written investment policy
approved by the Trustees which specifies ranges for asset allocations
(the Investment Policy Statement). The Investment Policy Statement
expressly permits the in-kind contribution of employer real property to
the Plan.
The LLCs
3. ABARTA is the sole member and 100% owner of both Delabarta New
York LLC and Delabarta Pennsylvania LLC. The Applicant represents that
the LLCs do not have any employees and there are no significant costs
associated with ownership, other than a nominal annual administrative
filing fee required by the State of New York, which ABARTA will
continue to pay following the Contribution.
Each LLC owns, as its only asset, a parcel of unencumbered real
property, as well as certain buildings situated on each. The sole asset
of Delabarta Lehigh Valley LLC consists of unencumbered title to
approximately 10.615 acres of land and one improvement thereon, located
at 2150 Industrial Drive Bethlehem, Pennsylvania (the Pennsylvania
Property). Coca-Cola Lehigh Valley purchased the Pennsylvania Property
as a vacant parcel of land in 1980 and subsequently constructed a
116,751-square foot warehouse/distribution facility on the Property in
1981. Currently, the Pennsylvania Property is 100% occupied by Coca-
Cola Lehigh Valley.
The sole asset of Delabarta New York LLC consists of unencumbered
title to approximately 9.21 acres of land and two improvements thereon,
located at 150 and 200 Milens Road in the Town of Tonawanda, New York
(the New York Property). Coca-Cola Buffalo purchased the New York
Property in 1959 and subsequently constructed the two warehouse
facilities in 1960 and 1967. Currently, the New York Property is 100%
occupied by Coca-Cola Buffalo.
Hereinafter, Coca-Cola Lehigh Valley and Coca-Cola Buffalo are
referred to as the Tenants.
The Contribution
4. ABARTA has requested an administrative exemption from the
Department in order to contribute the LLC Interests to the Plan. To
evidence the Contribution, ABARTA and the Plan will enter into a
written transfer agreement (the Transfer Agreement), which will govern
the terms upon which the LLC Interests will be contributed to and held
by the Plan.
As will be stated in the Transfer Agreement, the Independent
Fiduciary must act on behalf of the Plan in connection with the
Contribution, and must negotiate and approve the terms upon which the
Plan will accept the LLC Interests. As also stated in the Transfer
Agreement, the value of the Properties will be determined by the
Independent Fiduciary based upon an appraisal of the Properties
performed by the Independent Appraiser, as of the date of the
Contribution.
The Plan will not pay any commissions, costs or other expenses in
connection with the Contribution, including any fees that are currently
charged, or any fees which are charged in the future, by the
Independent Appraiser or the Independent Fiduciary.
5. In addition to the Contribution and in connection therewith,
ABARTA will make a one-time, cash contribution of $500,000 to the Plan.
Taken together with the appraised fair market value of the Properties
underlying the LLC Interests (see Representations 18 and 19), the
estimated aggregate value of the Contribution amounts to $6,900,000,
and is in excess of ABARTA's 2015 minimum funding obligation under
section 302 of the Act.
The Leases
6. The Plan, through the LLCs, will enter into bondable, triple-net
leases (the Leases) of the Properties with each Tenant. Each Lease will
be substantially identical in all respects, other than the name of the
Tenant, the name of the LLC Landlord,\4\ and the rent amount to be
paid. Each Lease will also have an initial term of 10 years with the
respective Tenant.
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\4\ References to the Plan as the Landlord under the Leases are
meant to include the LLCs which hold title to the Properties.
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The bondable, triple-net lease structure will ensure that all
operating costs related to the Properties, including taxes, insurance,
utilities, and non-capital maintenance, repair, and capital
improvements will be the responsibility of the Tenants. Additionally,
the triple-net lease structure ensures that the rent payable by the
Tenants to the Plan will remain payable under all circumstances, with
the exception of a partial condemnation of the underlying Properties.
The Leases will remain bondable until the earlier of: (a) The date
on which Property or LLC Interest is first transferred to any person or
entity that is not wholly owned by the Plan; (b) the date on which the
Plan sells a controlling interest in the applicable LLC to an entity
that is not wholly owned by the Plan; or (c) the date the Lease or
Lease Renewal terminates by operation of law.
With regard to alterations to the Properties by the Tenants, the
Tenants must secure consent from the Independent Fiduciary prior to
affecting any alteration which would: (a) Diminish the fair market
value or remaining useful life of the Properties; (b) affect the
structure or systems of any building existing on the Properties, or (c)
effect an expansion of any building existing on the Properties.
Further, any amendment to a Lease or Lease Renewal must be
negotiated and approved by the Independent Fiduciary. However, in no
event may an amendment be inconsistent with the terms of this
exemption, if granted. Finally, each Lease or Lease Renewal prohibits
the Plan from transferring a fractional part of its LLC Interests to
ABARTA or a Tenant.
7. Under the Pennsylvania Property Lease, Coca-Cola Lehigh Valley
will pay the Plan a base rental amount of $379,441, due in equal
monthly installments of $31,620. In addition, on the first day of each
Lease Year from and after the second Lease Year, the base rental amount
under the Pennsylvania Property Lease will be increased by an amount
equal to the product of the Base Rent then in effect multiplied by a
2.0% escalator adjustment.\5\ In effect, the Plan will receive an
annualized 9.44% rate of return under such Lease.
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\5\ The annual escalator under the Pennsylvania Property Lease
is based upon a market rent analysis performed by the Independent
Appraiser. The Independent Fiduciary has confirmed that the rental
rate under the Pennsylvania Property Lease is consistent with the
fair market rental value in the Erie, Pennsylvania market.
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Under the New York Property Lease, Coca-Cola Buffalo will pay the
Plan a base rental amount of $348,563, due in equal monthly
installments of $29,047.
[[Page 29700]]
The New York Property Lease does not provide for annual rent
escalations from and after the second lease year.\6\ However, it is
anticipated that this Lease will generate a 13.94% annual rate of
return to the Plan.
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\6\ The absence of an annual rent escalator under the New York
Property Lease is based upon the Independent Appraiser's conclusion
that rent escalators are not prevalent in commercial leases in the
New York Property's market. The Independent Fiduciary has confirmed
that the rental rate under the New York Property Lease is consistent
with the fair market rental value in the Buffalo, New York market.
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8. Over the initial 10 year term of the Leases, the Plan will
receive aggregate rental income totaling $7,640,403.05 ($4,154,773.05
in aggregate income under the Pennsylvania Lease and $3,485,630.00 in
aggregate income under the New York Lease).
The Applicant represents that the rental rates under the Leases
represent fair market value, as (a) they were agreed upon following
arm's length negotiations between the Independent Fiduciary and the
Tenants, and (b) are supported by a market rent analysis performed by
the Independent Appraiser.
The Lease Renewals
9. With respect to each Lease, the Tenant has the right to renew
the term of the Lease for an additional Renewal Term of ten years by
giving the Plan written notice (the Renewal Notice) not later than the
last day of the ninth Lease year. During such time, the Plan will be
represented by the Independent Fiduciary. Within 90 days of its receipt
of the Tenant's Renewal Notice, the Independent Fiduciary will provide
such Tenant with the Independent Fiduciary's determination of the fair
market annual base rent, and the escalation factor which it desires to
be applicable during the Renewal Term. The Independent Fiduciary and
the Tenant will then have thirty days to agree upon a base rent amount
and escalation factor for the purposes of the Renewal Term.\7\ In no
event, however, will the Independent Fiduciary be under any obligation
to agree to a base rent for the first year of the Renewal Term which is
less than the annual base rent in effect during the Lease Year
immediately preceding the commencement of the Renewal Term.
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\7\ In the event the Plan and Tenant are unable to agree upon a
base rent amount and escalation factor, each will appoint an
independent appraiser to determine a fair market base rent amount
and escalation factor.
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The Make Whole Obligation
10. The Lease Agreements and any Lease Renewal Agreement will
include a Make Whole Obligation, whereby each Tenant will ensure that
the Plan receives at least a five percent annualized rate of return in
connection with the Plan's ownership of the LLC Interests. After the
Contribution, as of the earlier of: (i) A Sale Date; or (2) a First
Calculation Date, if (A)(i) the proceeds received from the fair market
value sale of a Property (or LLC interest), in the case of a sale, or
(ii) the current fair market value of the Property (or the LLC
interest) as of the First Calculation Date, in the case in which there
has not been a sale, plus (B) any income generated by the Property
during that period, less (C) any expenses attributable to the Property
(or the LLC Interest) paid by the Plan during that period, is less than
(D) the fair market value of such Property (or the LLC Interest) at the
time of the Contribution, plus (E) an amount equal to a 5% percent rate
of return on such Contributed Value during that period, compounded
annually; then the Tenant must contribute an amount of cash to the Plan
equal to any such difference, within 60 days of the Sale Date or First
Calculation Date;
Additionally, if the Plan continues to hold a Property or LLC
Interest during all or a portion of the three consecutive five year
Lookback Periods that follow the First Calculation Date, with respect
to any of these Lookback Periods, as of the earlier of: (1) A Sale
Date; or (2) a Subsequent Calculation Date, if (A)(i) the proceeds
received from the fair market value sale of a Property (or LLC
interest), in the case of a sale, or (ii) the current fair market value
of the LLC interest as of the applicable Subsequent Calculation Date,
in the case in which there has not been a sale, plus (B) any income
generated by the Property during that period, (C) less any expenses
paid by the Plan during that period regarding the LLC interest or
Property, is less than (D) the fair market value of such LLC Interest
as of the first day of the applicable Lookback Period, plus (E) an
amount equal to a 5% percent rate of return on such Contributed Value
during that period, compounded annually; then the Tenant must
contribute to the Plan an amount of cash equal to any such difference,
within 60 days of the Sale Date or Subsequent Calculation Date; and
The Make Whole Obligation will remain in effect for up to twenty
years, which is the maximum term of this proposed exemption, if
granted, unless the Properties or LLC Interests are sold before then.
The Independent Fiduciary will represent the interests of the Plan with
respect to the Make Whole Obligation, and will ensure that the Plan
receives any amount due under the Make Whole Obligation, within 60 days
of the date that triggers the payment of such amount.
The Indemnification
11. The Lease Agreements provide that each Tenant reimburse the
Plan, and indemnify, defend upon request, and hold harmless the Plan
from any, and against all losses, penalties and court costs related to:
(a) The Tenant's use, repair, management, lease, sublease, maintenance
or operation of a Property; (b) any violation of any applicable
environmental laws, the ADA, and other health and/or safety laws; and
(c) any default by a Tenant under the Lease. Any reimbursement paid to
the Plan by a Tenant in connection with the Tenant's Indemnification,
will be negotiated and approved by the Independent Fiduciary.
The Right of First Offer
12. The Lease Agreements provide a Right of First Offer to the
Tenants, which states that, in the event that the Plan desires to sell
either a Property or an LLC Interest during the initial ten-year Lease
term or during any Lease Renewal period, the Plan must first offer such
Property or LLC Interest to the Tenant at terms the Plan intends to
offer such Property or LLC Interest to an unrelated third party (the
Unrelated Proposed Sale). Any sale of an LLC Interest or Property to
ABARTA pursuant to the Right of First Offer must equal the greater of:
(a) The price negotiated by the Independent Fiduciary, as between the
Plan and the party that is unrelated to ABARTA; or (b) the current fair
market value of the Property, as determined by the Independent
Appraiser, as described herein in Representations 16-19.
If ABARTA does not purchase the Property or LLC Interest under the
same terms as the terms associated with the Unrelated Proposed Sale,
the Plan may sell the Property or LLC Interest to the unrelated third
party within 360 days without triggering a new Right of First Offer.
During the term of the Lease and any Lease Renewal, the Independent
Fiduciary is solely responsible for: (a) determining whether, when, and
under what terms the Plan may prudently sell one or both of: (i) The
LLC Interests; or (ii) the Properties; and (b) approving any such sale
as being in the interest of, and protective of, the Plan. In addition,
the Independent Fiduciary may not implement the Right of First Offer
unless the Independent Fiduciary has first negotiated the terms and
conditions of an Unrelated Proposed Sale.
[[Page 29701]]
Legal Analysis
13. The Act prohibits a wide range of transactions involving a
plan. In this regard, section 406(a)(1)(A) of the Act provides that a
fiduciary with respect to a plan shall not cause a plan to engage in a
transaction if the fiduciary knows or should know that such transaction
constitutes a direct or indirect sale or exchange, or leasing, of any
property between a plan and a party in interest. Section 406(a)(1)(B)
of the Act states that a fiduciary with respect to a plan shall not
cause a plan to engage in a transaction if the fiduciary knows or has
reason to know that such transaction constitutes a direct or indirect
extension of credit between a plan and a party in interest. Section
406(a)(1)(D) of the Act provides that a fiduciary with respect to a
plan shall not cause a plan to engage in a transaction if the fiduciary
knows or should know that such transaction constitutes a direct or
indirect transfer to, or use by or for the benefit of, a party in
interest, of any assets of the plan. Section 406(b)(1) of the Act
prohibits a fiduciary from dealing with the assets of the plan in such
fiduciary's own interest or for such fiduciary's personal account.
Section 406(b)(2) of the Act prohibits a fiduciary from acting in such
fiduciary's individual or other capacity in any transaction involving
the plan on behalf of a party (or from representing a party) whose
interests are adverse to the interests of the Plan, or the interests of
the Plan participants and beneficiaries.
14. The term ``party in interest'' is defined in section 3(14)(A)
and (C) of the Act to include a fiduciary with respect to a plan, and
an employer, any of whose employees are covered by such Plan. In
addition, section 3(14)(G) of the Act defines the term ``party in
interest'' to include any corporation of which 50% or more of the
combined voting power of all classes of stock entitled to vote or the
total value of shares of all classes of stock of such corporation is
owned directly or indirectly, or held by such employer. As fiduciaries
to the Plan, the Trustees are parties in interest with respect to the
Plan pursuant to section 3(14)(A) of the Act. ABARTA, as an employer
whose employees are covered by the Plan, and the Tenants, as wholly-
owned subsidiaries of ABARTA, are parties in interest with respect to
the Plan pursuant to section 3(14)(C) and (G) of the Act, respectively.
If this proposed exemption is granted, the Contribution, the Leases
and the Lease Renewals would violate section 406(a)(1)(A), 406(b)(1)
and (b)(2) of the Act. The Right of First Offer would violate section
406(a)(1)(A), 406(b)(1) and (b)(2) of the Act. A sale back of a
Property or LLC interest by the Plan to ABARTA pursuant to the Right of
First Offer would violate section 406(a)(1)(A) and (D) of the Act, as
well as section 406(b)(1) and (b)(2) of the Act. In addition, the
Indemnification and the Make Whole Obligation would violate section
406(a)(1)(C) of the Act, and section 406(b)(1) and (b)(2) of the Act.
15. In addition to the prohibited transaction provisions described
above, sections 406(a)(1)(E) and 406(a)(2) of the Act prohibit a plan
from acquiring or holding employer real property in violation of
section 407(a) of the Act.\8\ Section 407(a) of the Act provides that a
plan may not acquire or hold employer real property unless such
property is ``qualifying employer real property.'' Section 407(d)(2) of
the Act defines the term ``employer real property'' as real property
that is leased to an employer or to an affiliate of such employer.
Section 407(d)(4) of the Act defines the term ``qualifying employer
real property'' to mean parcels of employer real property: (a) If a
substantial number of the parcels are dispersed geographically; (b) if
each parcel of real property and the improvements thereon are suitable
(or adaptable without excessive cost) for more than one use; and (c) if
the acquisition and retention of such property complies with the
provisions of sections 406 and 407 of the Act. Section 407(a)(2) of the
Act further prohibits a plan from acquiring or holding qualifying
employer real property where ``immediately after such acquisition the
aggregate fair market value of employer securities and employer real
property held by the plan exceeds 10% of the fair market value of the
assets of the plan.''
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\8\ According to the Applicant, the LLC Interests are pass-
through entities, owning 100% of the underlying Properties.
Therefore, the Applicant asserts that the LLC Interests are not
considered securities, or for that matter, ``employer securities''
or ``qualifying employer securities'' under section 407(d)(1)or
section 407(d)(5) of the Act.
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Given that: the acquisition and retention of the Properties by the
Plan would not comply with the provisions of section 406 and 407 of the
Act; and fair market values of the Properties immediately after
acquisition would constitute approximately 18.7% of the fair market
value of the Plan's assets, the Plan's acquisition and holding of the
Properties would violate sections 406(a)(1)(E), 406(a)(2), and 407(a)
of the Act.
The Qualified Independent Appraiser
16. The Independent Fiduciary has retained CBRE, Inc. (CBRE) to
render an opinion as to the fair market value of the Properties. CBRE
is a real estate appraisal firm that provides real estate financial
advisory services and employs personnel with extensive experience
providing valuation and appraisal services for real estate classified
as warehouse/distribution.
Thomas H. Myers, Jr. and John B. Rush of CBRE's Valuation and
Advisory Services prepared the appraisal report for the Pennsylvania
Property (the Pennsylvania Property Appraisal Report) in November,
2014, and will update that report for purposes of this exemption, if
granted. Mr. Myers is a Certified General Real Estate Appraiser in
Pennsylvania and New Jersey, and an Affiliate Member of the Appraisal
Institute (MAI). Mr. Myers has 43 years of relevant real estate
experience, with a primary focus on major industrial properties. Mr.
Rush is a Certified General Real Estate Appraiser in Delaware, New
Jersey, and Pennsylvania, and has over 39 years of relevant real estate
experience, including experience that encompasses a wide variety of
property types including office, retail, and industrial. Mr. Rush also
holds an MAI designation from the Appraisal Institute and a CRE
designation from the Counselors of Real Estate.
Robert J. DiFalco and Joseph V. Ferranti of CBRE's Valuation and
Advisory Services prepared an appraisal report for the New York
Property (the New York Appraisal Report) in November, 2014, and will
update that report for purposes of this exemption, if granted. Mr.
DiFalco is a Certified General Real Estate Appraiser in New York, New
Jersey, and Connecticut and an MAI.
17. As represented by CBRE, each Appraisal Report is self-contained
and intended to comply with the reporting requirements set forth under
Standards Rule 2-2(a) of USPAP. Additionally, CBRE represents that the
intended use of the Appraisal Report is to assist the Independent
Fiduciary appointed to oversee the proposed transactions to comply with
its responsibilities under the Act in connection with the proposed
transactions. Finally, CBRE represents that its fee for appraisal
services provided in connection with the proposed transactions
represents less than 0.5% of its annual revenues in 2014 and 2015,
which are the years it has provided such services.
Pennsylvania Property Appraisal Report
18. In the Pennsylvania Property Appraisal Report, CBRE describes
the Pennsylvania Property as a 10.615 acre parcel of land improved by a
116,751 square foot warehouse/distribution
[[Page 29702]]
facility. CBRE notes that the Property is located in the Lehigh Valley
region, an area with a relatively diverse economic base which protects
the region from the effects of wide swings in the economy. CBRE also
notes that the Pennsylvania Property lies in Bethlehem, which is the
most populous city in the Lehigh Valley, and that the long-term trends
of the region should exert positive influences on the Property's value.
CBRE states that modern warehouse/distribution facilities, like the
Pennsylvania Property, are a desirable commodity in the current
marketplace. As explained by CBRE, this desirability is due to the
general versatility of such facilities and a heightened demand for
just-in-time delivery of products. CBRE also emphasizes that warehouse/
distribution facilities are generally perceived to be a relatively
stable asset class.
Pursuant to analysis based upon the Sales Comparison Approach and
Income Capitalization Approach, CBRE concluded that the fair market
value of the Pennsylvania Property was $4,400,000 as of November 7,
2014, in an appraisal report dated November 10, 2014. In addition,
within its Income Capitalization analysis of the Pennsylvania Property,
CBRE completed a market rent analysis and estimated that a base rental
amount of $3.25 per square foot, or $379,441 per year was appropriate
for the space.
New York Property Appraisal Report
19. In the New York Property Appraisal Report, CBRE describes the
New York Property as a 9.05 acre parcel of land improved by two
adjacent warehouse buildings which cover a combined 107,250 square feet
of space. CBRE notes that the structures are in average overall
condition and that there are no known factors that impact their
marketability. CBRE determined that the New York Property's location in
the Town of Tonawanda in Erie County, New York is suitable for the
Property's current industrial use. In the Appraisal Report, CBRE notes
that the New York Property's location places it in a stable industrial
market, within an extensive transportation network near the United
States-Canada border.
Pursuant to analysis based upon the Sales Comparison Approach and
the Income Capitalization Approach, CBRE concluded that the fair market
value of the New York Property was $2,500,000, as of November 3, 2014,
in an Appraisal Report dated November 4, 2014. In addition, within its
Income Capitalization analysis of the New York Property, CBRE completed
a market rent analysis and estimated that a base rental amount of $3.25
per square foot on a triple-net basis, or $348,563 per year was
appropriate for the space, as of November 4, 2014.
The Qualified Independent Fiduciary
20. For the purposes of the Covered Transactions, the Trustees have
retained Evercore Trust Company (Evercore) to serve as the Independent
Fiduciary for the Plan. Evercore represents that it has provided
independent fiduciary services to employee benefit plans since 1987,
and that it has extensive experience in making and evaluating
investment decisions and with transactions implicating the prohibited
transaction provisions of the Act. Evercore also represents that it has
significant experience with the management and disposition of Plan
assets and transactions involving real estate.
In its Engagement Letter, Evercore represents that it is
independent of and unrelated to ABARTA, and that it does not directly
or indirectly control, is not controlled by, and is not under common
control with ABARTA. Evercore also represents that it will not directly
or indirectly receive any compensation or other consideration for its
own account in connection with the Covered Transactions, except for
fees received in connection with its duties as Independent Fiduciary.
Further, Evercore represents that its annual compensation received as
Independent Fiduciary has been less than 0.5% of its annual revenues in
each of the years it has been working on this engagement.
Evercore states that it will perform the following duties as
Independent Fiduciary of the Plan: (a) Determine whether the Covered
Transactions are in the interest of the Plan and its participants and
beneficiaries; (b) negotiate the terms and conditions of the Covered
Transactions on behalf of the Plan, including the Transfer Agreements,
the Leases, the Lease Renewals, the Make Whole Obligation, the
Indemnification, and the Right of First Offer thereunder, and other
documents which Evercore, together with its legal counsel, deems
necessary and in the Plan's interest to proceed with the proposed
transactions; (c) determine whether and on what terms the Plan should
agree to the Covered Transactions; (d) determine whether the Plan will
enter into the Covered Transactions; (e) determine, together with the
Independent Appraiser, the fair market value of the Properties to be
contributed to the Plan, as well as the fair market rental values of
the Properties under the Leases; and (e) prepare a written report for
submission to the Department in connection with the exemption, if it
determines that the Covered Transactions are in the interest of the
Plan.
Evercore will continue to serve as Independent Fiduciary to the
Plan following the Contribution of the LLC Interests to the Plan. In
this regard, Evercore will: (a) Review, negotiate, and approve the
terms and conditions of such Covered Transactions; (b) ensure, for
purposes of the Contribution, that the Appraisal Reports of the
Properties are consistent with sound principles of valuation, and that
the LLC interests are valued at fair market value as of the date of the
Contribution, as determined by the the Independent Appraiser; (c)
review and examine all aspects of the Properties and the LLC Interests
under the provisions of the Transfer Agreement, and have the right to
terminate such agreement on behalf of the Plan by providing appropriate
written notice to ABARTA; (d) monitor and enforce the Plan's rights and
interests with respect to the Properties under the terms of the Leases,
the Lease Renewals, the Make Whole Obligation, the Indemnification, and
the Right of First Offer, and any other agreements regarding the
Properties or the LLCs; (e) propose, negotiate, and decide whether to
enter into any agreements on behalf of the Plan to amend the Leases;
(f) evaluate and decide whether to grant requests for alterations to
the Properties, to the extent that such alterations would: (i) Diminish
the fair market value or remaining useful life of the Properties; (ii)
affect the structure or systems of any building existing on the
Properties, or (iii) effect an expansion of any building existing on
the Properties; (g) ensure compliance with all of the terms of the
Leases throughout the initial term of such Leases and throughout the
duration of any renewal of such Leases; (h) arrange for appraisals of
the Properties as may be necessary to satisfy the Plan's
responsibilities under ERISA and the terms of this exemption; (i)
manage the disposition of the Properties or the LLC Interests in
connection with the Right of First Offer, and ensure that the Plan does
not transfer any portion of its LLC Interests to a party in interest,
such as ABARTA or the Tenants; (j) determine whether the continued
ownership of the LLC Interests or the Properties is in the interests of
the Plan's participants and beneficiaries and whether, when and on what
terms to seek prudently to sell one or both of the LLCs or to cause the
respective LLCs to sell one or both of the Properties; (k) negotiate
the terms and conditions of, and consummate such sale and disposition,
in the event
[[Page 29703]]
such fiduciary determines to sell one or both of the LLCs or to cause
the respective LLCs to sell or otherwise dispose of one or both
Properties; and (l) monitor and enforce compliance with the conditions
of this exemption, if granted.
To assist with the negotiation of the Leases and Transfer
Agreements, Evercore engaged the law firms of Pillsbury Winthrop Shaw
Pittman LLP (Pillsbury) and Chernow Kapustin LLC (Chernow). The fees
and expenses of Evercore, as well as all fees and expenses of Pillsbury
and Chernow, will be paid by ABARTA.
The Independent Fiduciary Report
21. In the preliminary Independent Fiduciary Report, Evercore
concludes that the Covered Transactions are prudent and in the interest
of the Plan's participants and beneficiaries. In support of this
conclusion, Evercore emphasizes that the Covered Transactions will
immediately improve the Plan's actuarial position, diversify the Plan's
overall portfolio of assets, and reduce the Plan's reliance on future
cash contributions from ABARTA.
Specifically, Evercore notes that, absent receipt by the Plan of
the LLC Interests and a $500,000 cash contribution, and assuming the
Plan's future receipt of required minimum contributions, the Plan's
AFTAP funding percentage would be 80.54% for Plan year 2016 and 83.14%
for Plan year 2017. Evercore concludes that, with the acquisition of
the LLC Interests and the $500,000 cash contribution from ABARTA, the
Plan's projected funding levels will improve, on a MAP-21/HAFTA basis,
to 83.37% for 2016 and 85.27% for 2017.
In further support of this conclusion, Evercore asserts that the
Covered Transactions will improve the diversification of the Plan's
investments. Evercore emphasizes that the Plan currently holds no real
estate, and that its current investments consist entirely of liquid,
marketable equity and fixed income securities. Evercore explains that
the Plan's ownership and leasing of the Properties to creditworthy
tenants will enhance the diversification of its portfolio in view of
the low correlation of returns between real estate and other asset
classes, such as the equity and fixed income securities in which the
Plan's assets are currently invested. Based upon its analysis of the
Plan's current investments, Evercore concludes that adding real estate
exposure to the Plan's asset allocation can be expected to improve the
Plan's overall risk adjusted return.
Evercore asserts that the terms of the Covered Transactions, as set
forth in the Transfer Agreements and Leases, are both reasonable and
consistent with terms negotiated between unrelated parties in a similar
arm's-length transaction. Evercore emphasizes that its own
representatives, as well as expert real estate counsel were directly
involved in negotiations with ABARTA regarding the terms of the
Transfer Agreements and the Leases. Evercore also emphasizes that the
bondable structure of the Leases is advantageous to the Plan, as it (a)
provides additional assurances that rent due under the Leases will be
paid to the Plan; and (b) relieves the Plan of any obligation to expend
Plan assets on the Properties for any purpose, including repairs and
capital improvements.
Evercore concludes that the Covered Transactions do not place any
financial burden on the Tenants. Evercore notes that the annual rent of
$379,441 under the Pennsylvania Property Lease represents only 12.6% of
the $3.0 million average EBITDA generated by Coca-Cola Lehigh Valley,
and that the annual rent of $348,563 under the New York Lease
represents only 13.9% of the $2.5 million average EBITDA generated by
Coca-Cola Buffalo.
Evercore concludes that the rental rates and escalator clauses
under the Leases are consistent with the Independent Appraiser's
determination of fair market rental value in the Properties' respective
markets. In this regard, Evercore asserts that the bondable structure
of the Leases make them more marketable and financeable than a
standard, non-bondable lease. With respect to the New York Lease,
Evercore states that the bondable lease structure serves to mitigate
the absence of an escalator clause.
Finally, Evercore concludes that there is no marketability
limitation attributable to the LLC Interests, other than as provided
generally by applicable law. In this regard, Evercore asserts that the
Right of First Offer will not impair the Plan's ability to sell the LLC
Interests or the Properties at fair market value. Evercore cites to the
fact that the Right of First Offer is exercisable only at either: (a)
Each Property's fair market value; or (b) the value of an unsolicited
offer from an unrelated party. Evercore also emphasizes that ABARTA has
agreed that if it declines to exercise the Right of First Offer and the
Plan proceeds with a sale to an unrelated party, the purchaser will not
have any Right of First Offer obligation with respect to ABARTA.
Environmental Assessments of the Properties
22. The Independent Fiduciary retained CBRE to render a Limited
Subsurface Environmental Site Assessment Reports for the Properties.
CBRE conducted a Phase II Limited Subsurface Environmental Site
Assessment of the Pennsylvania Property on January 5, 2015 (the
Pennsylvania Assessment). To complete the Pennsylvania Assessment, CBRE
engaged EnviroProbe Service, Inc., a Pennsylvania-licensed drilling
contractor, to collect seven soil borings from the Pennsylvania
Property. Once collected, CBRE submitted the soil samples to
TestAmerica Laboratories, Inc. for an analysis of volatile organic
compounds (VOCs) and semi-volatile organic compounds (SVOCs). Following
its analysis, TestAmerica, Inc. concluded that no concentrations of
VOCs or SVOCs were detectable at concentrations exceeding the most
stringent soil standards established by the Pennsylvania Department of
Environmental Protection. At the conclusion of the Pennsylvania
Assessment, CBRE notes that no further assessment, remediation, or
reporting to the state of Pennsylvania is recommended.
On December 29, 2014, CBRE performed a Phase I Environmental Site
Assessment of the New York Property (the New York Assessment). To
complete the New York Assessment, CBRE engaged Nature's Way
Environmental, a New York-licensed drilling contractor, to collect five
soil borings from the Pennsylvania Property. Once collected, CBRE
submitted the soil samples to ESC Lab Sciences, a New York-certified
laboratory, for an analysis of VOCs and SVOCs. Following its analysis,
ESC Lab Sciences concluded that concentrations of both VOCs and SVOCs
were well below the commercial and industrial soil cleanup objectives
promulgated by the New York State Department of Environmental
Conservation. At the conclusion of the New York Assessment, CBRE states
that no further assessment, remediation, or reporting to the state of
New York is recommended.
Statutory Findings
23. The Applicant represents that Covered Transactions are
administratively feasible because they will be carried out under the
supervision and direction of the Independent Fiduciary. The Applicant
emphasizes that the Independent Fiduciary will represent the Plan in
all aspects of the transactions, including
[[Page 29704]]
with respect to the Contribution of the LLC Interests, as well as all
aspects of the Leases, including the ROFO and any renewal of the
Leases.
The Applicant represents that the Covered Transactions are in the
interest of the Plan and its participants and beneficiaries and are
protective of their rights. In this regard, the Applicant emphasizes
that the Contribution, which is well in excess of ABARTA's minimum
required contribution amount, will significantly improve the Plan's
funding status, as well as reduce the Plan's reliance on future cash
contributions from ABARTA. Additionally, the Applicant emphasizes that
the Plan will receive valuable, appreciating real property assets that
will produce a steady stream of future income for the Plan.
24. The Applicant also represents that, in the event the exemption
is denied, the Plan and its Participants will incur certain hardships.
The Applicant asserts that a denial of the proposed exemption would
cause the Plan to forego the benefit of a voluntary contribution that
is in excess of the minimum required amount, and as such, would leave
the Plan at a less-advantageous funding level. The Applicant further
represents that a denial of the proposed exemption would deprive the
Plan of two appreciating real property assets which produce a steady
stream of reliable rental income.
Summary
25. In summary, it is represented that the Covered Transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Independent Fiduciary will negotiate the terms and
conditions of the Contribution, and approve the Contribution as being
in the interest of the Plan;
(b) The LLC Interests will be contributed to the Plan at their
current fair market value, as determined by the Independent Fiduciary
following its review of the Appraisal Report that has been prepared by
the Independent Appraiser;
(c) On the date of the Contribution, the aggregate contributed
value of the LLC Interests will be no less than the current fair market
value of the Properties underlying the LLC Interests, as verified by
the Independent Fiduciary;
(d) On the date of the Contribution, ABARTA will contribute to the
Plan a cash amount that is no less than $500,000;
(e) Immediately following the Contribution, the aggregate fair
market value of employer real property and employer securities held by
the Plan will represent less than 20% of the Plan's assets;
(f) As long as the Properties and/or LLC Interests are owned by the
Plan, the Properties will not be altered in any way that would: (i)
Diminish their fair market value or remaining useful life; (ii) affect
the structure or systems of any building existing on the Properties; or
(iii) affect an expansion of any building existing on the Properties,
without the prior written approval of the Independent Fiduciary;
(g) Following the Contribution, the Plan will not transfer a
portion of its ownership interests in the LLCs or in the Properties to
a party in interest to the Plan;
(h) The Independent Fiduciary will negotiate the terms and
conditions of the each Lease and Lease Renewal, and approve the Plan's
entering into each Lease and Lease Renewal, as being in the interest
of, and protective of, the Plan;
(i) Each Lease and Lease Renewal will remain, at all times, a
bondable triple net lease, such that all costs attributable to a
Property (including, among other things, taxes, insurance, utilities,
and non-capital maintenance, repair, and capital improvements) are the
responsibility of the Tenant, until the earlier of: (i) The date on
which the Property or LLC Interest is first transferred to any person
or entity that is not wholly-owned by the Plan; (ii) the date on which
the Plan sells a controlling interest in the LLC to an entity that is
not wholly-owned by the Plan; or (iii) the date the Lease or Lease
Renewal terminates by operation of law;
(k) Any amendment to a Lease or Lease Renewal will be negotiated
and approved by the Independent Fiduciary; however, in no event will
any amendment be inconsistent with the terms of this exemption, if
granted;
(l) For each Lease Renewal, all provisions of the Lease on which
the Lease Renewal is based, with the exception of the specific rent
amount and any escalator provision, will remain in effect;
(m) After the Contribution, as of the earlier of: (i) A Sale Date;
or (ii) a First Calculation Date, if (A)(1) the current fair market
value of a Property (or LLC interest), in the case of a sale, or (2)
the current fair market value of the Property (or the LLC interest) as
of the First Calculation Date, in the case in which there has not been
a sale, plus (B) any income generated by the Property during that
period, less (C) any expenses attributable to the Property (or the LLC
Interest) paid by the Plan during that period, is less than (D) the
fair market value of such Property (or the LLC Interest) at the time of
the Contribution, plus (E) an amount equal to a 5% percent rate of
return on such Contributed Value during that period, compounded
annually; then the Tenant will contribute an amount of cash to the Plan
equal to any such difference, within 60 days of the Sale Date or First
Calculation Date;
(n) If the Plan continues to hold a Property or LLC Interest during
all or a portion of any of the three consecutive Lookback Periods,
within 60 days of the earlier of: (i) A Sale Date; or (ii) a Subsequent
Calculation Date, if (A)(1) the proceeds received from the fair market
value sale of a Property (or LLC interest), in the case of a sale, or
(2) the current fair market value of the LLC interest as of the
applicable Subsequent Calculation Date, in the case in which there has
not been a sale, plus (B) any income generated by the Property during
that period, (C) less any expenses paid by the Plan during that period
regarding the LLC interest or Property, is less than (D) the fair
market value of such LLC Interest as of the first day of the applicable
Lookback Period, plus (E) an amount equal to a 5% percent rate of
return on such Contributed Value during that period, compounded
annually; then the Tenant will contribute to the Plan an amount of cash
equal to any such difference, within 60 days of the Sale Date or
Subsequent Calculation Date;
(o) The Plan will receive the full amount that the Plan may be due
under the Make Whole Obligation within 60 days of the applicable Sale
Date, Calculation Date, or Subsequent Calculation Date, as verified by
the Independent Fiduciary;
(p) In connection with each Lease and Lease Renewal, and as set
forth in writing therein, the applicable Tenant will indemnify, defend
upon request, and hold the Plan harmless from any, and against all,
losses, penalties and court costs related to: (i) The Tenant's use,
repair, management, lease, sublease, maintenance or operation of a
Property, (ii) any violation of any applicable environmental laws, the
ADA, and other health and/or safety laws; and (iii) any default by the
Tenant under the Lease or Lease Renewal;
(q) Any amount owed the Plan in connection with a Tenant's
Indemnification of the Plan, as described in the preceding paragraph,
will be negotiated and approved by the Independent Fiduciary, and will
be paid to the Plan within the timeframe set forth by the Independent
Fiduciary;
[[Page 29705]]
(r) During the term of the Lease and any Lease Renewal, the
Independent Fiduciary will be solely responsible for determining
whether, when, and under what terms the Plan may prudently sell one or
both of: (i) The LLCs; or (ii) the Properties;
(s) During the term of the Lease and any Lease Renewal, the
Independent Fiduciary will approve any sale by the Plan of one or both
of: (i) The Properties; or (ii) the LLC, as being in the interest of,
and protective of, the Plan;
(t) The Independent Fiduciary will not implement the Right of First
Offer unless the Independent Fiduciary has first negotiated the terms
and conditions of a proposed sale of an LLC Interest (or a Property) to
a party that is unrelated to ABARTA or any of its affiliates;
(u) Any sale of an LLC Interest or Property to ABARTA pursuant to
the Right of First Offer, will equal the greater of: (1) The price
negotiated by the Independent Fiduciary, as between the Plan and the
party that is unrelated to ABARTA; or (2) the current fair market value
of the Property, as determined by the Independent Appraiser;
(v) If ABARTA does not purchase the Property or LLC Interest under
the same terms as the terms associated with the Unrelated Proposed
Sale, the Plan may sell the Property or LLC Interest to the unrelated
third party within 360 days without triggering a new Right of First
Offer;
(w) The Independent Fiduciary will represent the interests of the
Plan for all purposes with respect to the Covered Transactions;
(x) The Independent Fiduciary will: (i) Review, negotiate and
approve the terms and conditions of each Covered Transaction; (ii)
review and approve the terms of the Transfer Agreement that evidences
the Contribution; (iii) monitor and enforce the Plan's rights and
interests with respect to the Properties; (iv) monitor ABARTA's
compliance with the terms of this exemption, including all obligations
set forth under the Leases; and (v) take all steps that are necessary
and proper to protect the Plan in the event of any non-compliance by
ABARTA;
(y) The Plan will does not pay any real estate fees, commissions,
costs or other expenses in connection with the proposed transactions,
including any fees that are currently charged, or any fees which accrue
in the future; and
(z) The terms and conditions of the Covered Transactions will be no
less favorable to the Plan than those obtainable under similar
circumstances when negotiated at arm's-length with unrelated third
parties.
Notice to Interested Persons
The persons who may be interested in the publication in the Federal
Register of the Notice of Proposed Exemption (the Notice) include all
individuals who are participants in the Plan. It is represented that
such interested persons will be notified of the publication of the
Notice by first class mail to such interested person's last known
address within fifteen (15) days of publication of the Notice in the
Federal Register. Such mailing will contain a copy of the Notice, as it
appears in the Federal Register on the date of publication, plus a copy
of the Supplemental Statement, as required, pursuant to 29 CFR
2570.43(b)(2), which will advise all interested persons of their right
to comment on and/or to request a hearing. All written comments or
hearing requests must be received by the Department from interested
persons within 45 days of the publication of this proposed exemption in
the Federal Register.
All comments will be made available to the public. Warning: Do not
include any personally identifiable information (such as name, address,
or other contact information) or confidential business information that
you do not want publicly disclosed. All comments may be posted on the
Internet and can be retrieved by most Internet search engines.
FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department
at (202) 693-8456. (This is not a toll-free number.)
Sears Holdings 401(k) Savings Plan (the Savings Plan) and the Sears
Holdings Puerto Rico Savings Plan (the PR Plan) (collectively, the
Plans), Located in Hoffman Estates, IL
[Exemption Application Nos. D-11846 and D-11847]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act of 1974, as amended (ERISA or the Act), and section 4975(c)(2) of
the Internal Revenue Code of 1986, as amended (the Code), and in
accordance with the procedures set forth in 29 CFR part 2570, subpart B
(76 FR 66637, 66644, October 27, 2011).
Section I. Transactions
(a) If the proposed exemption is granted, the restrictions of
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(E) of the Code,\9\ shall not apply to the acquisition and
holding by the Savings Plan of certain subscription rights (the Rights)
to purchase shares of common stock (the SC Stock) in Sears Canada Inc.
(Sears Canada) in connection with an offering (the Offering) by Sears
Holdings Corporation (Holdings) of shares of SC Stock, provided that
the conditions as set forth, below, in Section II of this proposed
exemption were satisfied for the duration of the acquisition and
holding; and
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\9\ For purposes of this proposed exemption, unless indicated
otherwise, references to section 406 of the Act should be read to
refer as well to the corresponding provisions of section 4975 of the
Code.
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(b) If the proposed exemption is granted, the restrictions of
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act \10\ shall not apply to the acquisition and
holding of the Rights by the PR Plan in connection with the Offering of
the SC Stock by Holdings, provided that the conditions as set forth in
Section II of this proposed exemption were satisfied for the duration
of the acquisition and holding.
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\10\ The Applicant represents that there is no jurisdiction
under Title II of the Act with respect to the PR Plan. Accordingly,
the Department is not providing any exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and holding of the
Rights by the PR Plan.
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Section II. Conditions
(a) The receipt of the Rights by the Plans occurred in connection
with the Offering, in which all shareholders of the common stock of
Holdings (Holdings Stock), including the Plans, were treated in the
same manner;
(b) The acquisition of the Rights by the Plans resulted from an
independent act of Holdings, as a corporate entity;
(c) Each shareholder of Holdings Stock, including each of the
Plans, received the same proportionate number of Rights based on the
number of shares of Holdings Stock held by each such shareholder;
(d) All decisions with regard to the holding and disposition of the
Rights by the Plans were made by a qualified independent fiduciary (the
Independent Fiduciary) within the meaning of 29 CFR 2570.31(j); \11\
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\11\ 29 CFR 2570.31(j) defines a ``qualified independent
fiduciary,'' in relevant part, to mean ``any individual or entity
with appropriate training, experience, and facilities to act on
behalf of the plan regarding the exemption transaction in accordance
with the fiduciary duties and responsibilities prescribed by ERISA,
that is independent of and unrelated to any party in interest
engaging in the exemption transaction and its affiliates;'' in
general, a fiduciary is presumed to be independent ``if the revenues
it receives or is projected to receive, within the current federal
income tax year from parties in interest (and their affiliates)
[with respect] to the transaction are not more than 2% of such
fiduciary's annual revenues based upon its prior income tax year.
Although the presumption does not apply when the aforementioned
percentage exceeds 2%, a fiduciary nonetheless may be considered
independent based upon other facts and circumstances provided that
it receives or is projected to receive revenues that are not more
than 5% within the current federal income tax year from parties in
interest (and their affiliates) [with respect] to the transaction
based upon its prior income tax year.''
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[[Page 29706]]
(e) The Independent Fiduciary determined that it would be in the
interest of the Plans to sell all of the Rights received in the
Offering by the Plans in blind transactions on the NASDAQ Global Select
Market;
(f) No brokerage fees, commissions, subscription fees, or other
charges were paid by the Plans with respect to the acquisition and
holding of the Rights, or were paid to any affiliate of Holdings, Sears
Canada, or the Independent Fiduciary, with respect to the sale of the
Rights.
Section III. Definitions
(a) The term ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such person;
(2) Any officer, director, partner, employee, or relative, as
defined in section 3(15) of the Act, of such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Effective Date: This proposed exemption, if granted, will be
effective for the period beginning October 16, 2014, and ending
November 7, 2014 (the Offering Period).
Summary of Facts and Representations
Background
1. Sears Holdings Corporation (Holdings), is the parent company of
Kmart and Sears, Roebuck, & Co. (Sears Roebuck). Holdings was formed as
a Delaware corporation in 2004 in connection with the merger of Kmart
and Sears Roebuck on March 24, 2005. In August 2014, Sears Holdings
operated a national network of stores with 1,870 full-line and
specialty retail stores in the United States operating through Kmart
and Sears Roebuck as well as full-line and specialty retail stores in
Canada operating through Sears Canada, Inc. (Sears Canada). As of
October 15, 2015, Holdings owned approximately 51% of Sears Canada.
2. Common stock issued by Holdings (Holdings Stock), par value
$0.01 per share, is publicly-traded on the NASDAQ Global Select market
under the symbol, ``SHLD.'' As of October 16, 2014, there were 12,293
shareholders of record and approximately 106,484,024 shares of Holdings
Stock issued and outstanding.
ESL Investments, Inc. and its affiliates (ESL), including Edward S.
Lampert (Mr. Lampert) owned approximately 48.5 percent of the Holdings
Stock, issued and outstanding, as of October 16, 2014. Mr. Lampert is
the Chairman of the Board of Directors and Chief Executive Officer of
Holdings. He is also the Chairman and Chief Executive Officer of ESL.
3. Holdings and certain of its affiliates sponsor the Sears
Holdings Savings Plan (the Savings Plan) and the Sears Holdings Puerto
Rico Savings Plan (the PR Plan) (collectively the Plans). Each Plan is
a participant-directed account plan that permits participants to invest
in equity, fixed income, balanced funds, and an investment fund (the
Stock Fund) comprised of Holdings Stock. The Plans are designed and
operated to comply with the requirements of section 404(c) of the Act.
The Savings Plan and the PR Plan assets are held together within the
Sears Holdings 401(k) Savings Plan Master Trust (the Master Trust),
which also holds the Stock Fund and consequently, shares of Holdings
Stock.\12\ The Plans' participants, therefore, indirectly own shares of
Holdings Stock, through investments in the Stock Fund.
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\12\ State Street Bank and Trust Company serves as the master
trustee and custodian for the Master Trust.
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4. Sears Roebuck and all of its wholly-owned (direct and indirect)
subsidiaries and Sears Holdings Management Corporation (SHMC), a
wholly-owned subsidiary of Holdings, with respect to certain employees,
have adopted the Savings Plan and are employers under that Plan.
As of October 16, 2014 (the Record Date), there were 60,260
participants in the Savings Plan, and the Savings Plan's share of the
total assets of the Master Trust was $2,825,371,014. Also, as of the
Record Date, the Savings Plan's allocable share of the Holdings Stock
held in the Stock Fund under the Master Trust was 1,515,803 shares, and
the approximate percentage of the fair market value of the total assets
of the Savings Plan invested in Holdings Stock was two percent, which
amount constituted approximately one percent of the 106 million shares
of Holdings Stock issued and outstanding.
The Savings Plan is administered by the Sears Holding Corporation
Administrative Committee (the Administrative Committee), whose members
are officers and/or employees of SHMC. The Sears Holdings Corporation
Investment Committee (the Investment Committee), whose members are
officers and/or employees of SHMC, has authority over decisions
relating to the investment of the Savings Plan's assets.
5. The PR Plan was established by Holdings for employees of Sears
Roebuck de Puerto Rico (Sears Roebuck PR) who reside in the
Commonwealth of Puerto Rico. The Applicant represents that the
fiduciaries of the PR Plan have not made an election under section
1022(i)(2) of the Act, whereby such plan would be treated as a trust
created and organized in the United States for purposes of tax
qualification under section 401(a) of the Code. Therefore, according to
the Applicant, there is no jurisdiction under Title II of the Act.
There is, however, jurisdiction under Title I of the Act.
As of December 31, 2014, there were 7,550 participants in the PR
Plan. As of the Record Date there were 1,765 participants in the PR
Plan with account balances, and the PR Plan's share of the total assets
of the Master Trust was $17,023,422. Also, as of the Record Date, the
PR Plan's allocable share of the Holdings Stock held in the Stock Fund
under the Master Trust was 46,880 shares, and the approximate
percentage of the fair market value of the total assets of the PR Plan
invested in Holdings Stock was eight percent, which amount constituted
less than one tenth of one percent of the 106 million shares of
Holdings Stock issued and outstanding.
The PR Plan is administered by the Administrative Committee, and
the Investment Committee makes investment decisions for the PR Plan.
Banco Popular de Puerto Rico serves as the trustee of the PR Plan.
Sears Canada
6. Sears Canada was incorporated in Canada in 1952 and its
headquarters are in Toronto, Ontario. It is a multi-format retailer
and, as of October 14, 2014, had a total network of 113 full-line
department stores, 307 specialty stores, 1,378 catalogue merchandise
pick-up locations, and 96 Sears Travel offices.
[[Page 29707]]
As of October 16, 2014, approximately 51% of SC Stock was held by
Holdings. Prior to the Offering, SC Stock traded on the Canadian
Toronto Stock Exchange (TSX) under the symbol ``SCC'' and, as of
October 8, 2014, it was also listed and trading on the U.S. NASDAQ
under the symbol ``SRSC.''
The Offering
7. On October 2, 2014, Holdings announced its intent to conduct a
rights offering to shareholders (the Offering) as a means of disposing
of a non-core asset (its Sears Canada holdings) and raising substantial
cash proceeds for Holdings. Furthermore, in the opinion of Holdings,
the Offering gave shareholders of Holdings Stock the ability to avoid
dilution by retaining their ownership percentage in Holdings and in
Sears Canada. On October 15, 2014, Holdings issued the final prospectus
describing the Offering to shareholders of record, including the Plans,
as of the Record Date.
Under the terms of the Offering, on October 16, 2014, all
shareholders of record of Holdings Stock, including the Plans,
automatically received one Right for each whole share of Holdings Stock
held by each such shareholder. The Applicant represents that the Master
Trust (the Trust) acquired 1,562,683 Rights through the Offering.
8. Each Right permitted the holder thereof to purchase 0.375643
shares of SC Stock from Holdings at a subscription price of $9.50 per
whole share.\13\ Each Right also contained an over-subscription
privilege permitting the holder to subscribe for additional shares of
SC Stock, up to the number of shares of SC Stock that were not
subscribed for by the other holders of the Rights. The Plans were not
eligible to participate in the over-subscription privilege because a
qualified, independent fiduciary acting on behalf of the Plans, sold
the Rights received by the Plans, as discussed more fully below.
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\13\ The subscription price was determined by Holdings and is
the U.S. dollar equivalent of the closing price of Sears Canada
Stock on the TSX on September 26, 2014, the last trading day before
Holdings requested Sears Canada's cooperation with the filing of a
prospectus qualifying the shares deliverable upon exercise of the
Rights.
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9. All shareholders of Holdings Stock held the Rights until such
Rights expired, were exercised, or were sold. With regard to the
exercise of the Rights, the Applicant represents that the Rights could
only be exercised in whole numbers. Each shareholder of Holdings Stock
needed to have at least three Rights to purchase a share of SC Stock,
because only whole shares could be purchased by the exercise of the
Rights. Fractional shares or cash in lieu of fractional shares were not
issued in connection with the Offering.
10. With regard to the sale of the Rights, the Applicant represents
that the Rights were transferable. Further, the Applicant represents
that the Rights were traded on the NASDAQ Global Select Market under
the symbol, ``SHLDR.'' The allocation of the Rights to shareholders was
handled by Depository Trust Company (DTC). The Applicant represents
that the public trading of Rights (the Trading Period) began on October
16, 2014, and continued until the close of business on November 4,
2014, the third business day prior to the close of the Offering. The
Applicant further represents that this deadline applied uniformly to
all holders of the Rights.
11. While the Plans generally permit participants to direct the
investment of their own accounts, including their investments in
Holdings Stock, all decisions regarding the holding and disposition of
the Rights by each Plan were made, in accordance with the Plan
provisions, by a qualified independent fiduciary acting solely in the
interest of Plan participants.\14\ Participants in the Plans who were
invested in Holdings Stock as of the Record Date were notified of the
Offering, the engagement of the independent fiduciary, the fact that
the Rights would be held in the Stock Fund, that the independent
fiduciary would determine whether the Rights should be exercised or
sold, and the means by which a participant could obtain more
information. Holdings also communicated generally with employees
regarding the Offering and with the public through public releases at
www.searsholdings.com.
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\14\ Each of the Plans was amended to: (i) Permit the Plan to
temporarily acquire and hold the Rights (and any Sears Canada stock
acquired through the exercise of the Rights) pending their orderly
disposition; (ii) confirm that participants were not entitled to
direct the holding, exercise, sale, or other disposition of the
Rights received by the Plan; and (iii) authorize the designated
independent fiduciary to exercise discretionary authority with
respect to the holding, exercise, sale, or other disposition of the
Rights and any shares of Sears Canada stock acquired through the
exercise of the Rights.
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12. The Offering closed at 5 p.m. eastern standard time on November
7, 2014. The Applicant represents that 40,000,000 shares of SC Stock
were subscribed for by shareholders or their transferees at a price of
$9.50 per whole share. During the Trading Period, the price of the SC
Stock on the NASDAQ ranged from $9.06 to $10.00 with a volume-weighted
average price (VWAP) of $9.75.
Following the Offering, Holdings' interest in Sears Canada was
reduced to approximately 11.7 percent. Accordingly, the Applicant
states that following the closing of the Offering, Sears Canada became
independent of Holdings. The Applicant represents that the gross
proceeds payable to and received by Holdings from the sale of the SC
Stock pursuant to the Offering, net of any selling expenses, was
approximately $380 million.
The Independent Fiduciary
13. Fiduciary Counselors Inc. (FCI) was retained by the Investment
Committee pursuant to an agreement (the Agreement), dated October 16,
2014, to act as the independent fiduciary on behalf of the Plans, in
connection with the Offering and an exemption application. Pursuant to
the terms of the Agreement, FCI's responsibilities were to determine
whether or not and when to exercise or sell the Rights received by each
Plan in the Offering.\15\
---------------------------------------------------------------------------
\15\ Because the Rights were automatically issued to all
shareholders including the Plans and there was no option to decline
them, the independent fiduciary was not asked to determine whether
the Plans should acquire the Rights.
---------------------------------------------------------------------------
The Applicant represents that hiring an independent fiduciary to
manage the holding and disposition of the Rights was appropriate in
this case for the following reasons: (i) There would have been a
significant cost to developing and implementing a process under each
Plan to administer a pass-through of the Rights to participants; (ii)
It was not practicable to initiate and implement a pass-through of the
Rights to participants given the limited notice provided to
shareholders of the Offering and the short subscription period (16
days), because such process would have included establishment of a
``rights fund'' and a Sears Canada fund within each Plan, the design
and testing of procedures for allocating the Rights among participant
accounts, soliciting participant directions on the exercise or sale of
the Rights and identifying the source of funding (e.g., which
investment account is to be liquidated) for each participant who chose
to exercise the Rights, and the short Offering period meant that there
would have been insufficient time to adequately educate participants
regarding their rights and obligations; (iii) There would have been a
loss of value that participants might otherwise have gained, because
participants' unfamiliarity with rights offerings as well as general
participant inertia would have resulted in a significant percentage of
participants allowing their Rights to
[[Page 29708]]
expire without selling or exercising them; (iv) It was not in the
interest of participants to require the Plans to offer and hold for
participant investment a single stock (SC Stock) that had not been
selected by the plan fiduciary as an investment option appropriate for
the Plan; and (v) The Rights are most appropriately viewed as a non-
cash dividend payable to owners of Holdings Stock such as the Plans, so
that the fiduciary of the Stock Fund is the appropriate person to
manage the ``proceeds'' of the Plans' investment in Holdings Stock. The
Applicant represents that, in this case, the independent fiduciary
appointed to manage the Rights took responsibility for realizing the
value in the Rights by selling them. The cash proceeds of that sale
were then reinvested in Holdings Stock pursuant to the terms of the
plan.
The Applicant represents that FCI is qualified to serve as the
independent fiduciary for the Plans in connection with the Offering,
because FCI is a registered investment adviser under the Investment
Advisers Act of 1940, and FCI is an independent company whose primary
focus is providing independent fiduciary services for employee benefit
plans. FCI has served as an independent fiduciary to employee benefit
plans since 2001.
In its ``Report of Independent Fiduciary Regarding Sears Canada
Rights Offering,'' dated February 23, 2015 (The IF Report), FCI
represents and warrants that it is independent and unrelated to
Holdings. FCI further represents that it did not directly or indirectly
receive any compensation or other consideration for its own account in
connection with the Offering, except compensation from Holdings for
performing services described in the Agreement. The percentage of FCI's
2014 revenue derived from any party in interest involved in the subject
transaction or its affiliates was less than five percent of FCI's 2013
revenue.
FCI represents further that it understands and acknowledges its
duties and responsibilities under the Act in acting as a fiduciary on
behalf of the Plans in connection with the Offering. In the IF Report,
FCI represents that it conducted a due diligence process in evaluating
the Offering on behalf of the Plans. This process included numerous
discussions and correspondence with representatives of the Plans and
Holdings, Holdings' counsel, broker-dealers and representatives of the
Plans' trustee enabling FCI to better understand a number of important
elements related to the Offering. In addition, FCI reviewed publicly
available information and information provided by Holdings.
As detailed in the IF Report, with regard to the Offering, FCI
considered the following four options: (i) Continue holding the Rights
within the Stock Fund; (ii) Exercising all of the Rights and acquiring
SC Stock; (iii) Selling a portion of the Rights and using the proceeds
to exercise the remaining Rights to acquire SC Stock; or (iv) Selling
all of the Rights on the NASDAQ Global Select Market at the prevailing
market price. Acting as the independent fiduciary on behalf of the
Plans, FCI chose to sell all of the Rights on the NASDAQ Global Select
Market.
In determining to sell all of the Plans' Rights, FCI represents
that the proceeds from the sale would be invested in Holdings Stock, as
per the governing documents of the Stock Fund. As described in the IF
Report, FCI determined that the benefits of selling the Rights included
simplicity, lower transaction costs, and less exposure to risk than the
options that involved exercising any of the Rights. According to FCI,
this option allowed the Plans to realize the benefits of the Rights in
a timely manner while maintaining maximum exposure to shares of Sears
Holdings within the Stock Fund, consistent with the purpose of the
Stock Fund. FCI understood that the Plans would incur some transactions
costs through this option, estimated at $0.015 to $0.05 per Right
traded. Accordingly, FCI concluded that this sale of the Rights was in
the interest of the Plans and the Plans' participants and beneficiaries
and was protective of such participants and beneficiaries of the Plans.
14. The Trading Period ended on November 4, 2014. According to the
IF Report, over the sixteen-day period that the Rights traded on the
NASDAQ, the volume-weighted average price for the 58,546,218 Rights
traded was $0.1239 according to data reported by Bloomberg. The IF
Report provides that FCI completed the sale of the Plans' 1,562,683
Rights in blind transactions on the NASDAQ Global Select Market between
October 22 and October 31, 2014, realizing an average selling price of
$0.1333 per Right.
According to the Applicant, as a result of the Rights sale, the
total net proceeds generated for the Savings Plan and the PR Plan was
$200,557.36. These proceeds were credited to each Plan and the unit
value of each participant's account balance reflected the addition of
assets credited to the Plan.
15. The Applicant represents that no brokerage fees, commissions,
subscription fees, or other charges were paid by the Plans with respect
to the acquisition and holding of the Rights, or were paid to any
broker affiliated with FCI, Holdings, or Sears Canada in connection
with the sale of the Rights. In this regard, FCI represents that it
selected State Street Global Markets as the broker for the sale of the
Plans' Rights, based on FCI's confidence in the broker's execution
ability and an attractive fee schedule of 0.005 cents per Right traded.
In connection with the sale of the Rights, the Plans paid $7,813.42 in
commissions to independent, third parties and $4.66 in SEC fees.
Requested Relief
16. The Applicant represents that the subject transactions have
already been consummated. In this regard, the Plans acquired the Rights
pursuant to the Offering, and held such Rights until the Rights were
sold by the independent fiduciary. The Applicant states that, because
there was insufficient time between the dates when the Plans acquired
the Rights and when such Rights were sold, to apply for and be granted
an exemption, Holdings was required to request retroactive relief,
effective as of October 16, 2014, the Record Date.
17. Section 406(a)(1)(E) of the Act prohibits a fiduciary from
causing a plan to engage in a transaction, if he knows or should know
that such transaction constitutes a direct or indirect acquisition, on
behalf of a plan, of any employer security or employer real property in
violation of section 407(a). Section 406(a)(2) of the Act prohibits a
fiduciary who has authority or discretion to control or manage the
assets of a plan from permitting a plan to hold any employer security
or employer real property if he knows or should know that holding such
security or real property violates section 407(a). The Applicant
represents that because the Rights are non-qualifying employer
securities, the acquisition and holding of the Rights violated sections
406(a)(1)(E), 406(a)(2), and 407(a) of the Act.
Furthermore, section 406(b)(1) of the Act prohibits a fiduciary
from dealing with the assets of a plan in his own interest or for his
own account. Section 406(b)(2) of the Act prohibits a fiduciary, in his
individual or in any other capacity, from acting in any transaction
involving the plan on behalf of a party (or representing a party) whose
interests are adverse to the interests of the plan or the interests of
its participants or beneficiaries. The Applicant states that, although
Holdings retained an independent fiduciary to
[[Page 29709]]
represent the Plans in connection with the disposition of the Rights,
by causing the participation of the Plans in the Offering, Holdings may
have dealt with the assets of the Plans for its own account, and also
may have acted in a transaction on behalf of itself and the Plans.
Therefore, the Applicant requests an administrative exemption from
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act and section 4975 of the Code by reason of
4975(c)(1)(E) of the Code, with regard to the Savings Plan, and from
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act with regard to the PR Plan.\16\
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\16\ The Applicant represents that there is no jurisdiction
under Title II of the Act with respect to the PR Plan. Accordingly,
the Department is not providing any exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and holding of the
Rights by the PR Plan.
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Statutory Findings
18. The Applicant represents that the requested exemption is
administratively feasible because the acquisition, holding, and sale of
the Rights by the Plans was a one-time transaction which will not
require continued monitoring or other involvement by the Department.
19. The Applicant represents that the transactions which are the
subject of this proposed exemption are in the interest of the Plans,
because the Rights were automatically issued at no cost to all
shareholders of Holdings Stock as of a specified Record Date, including
the Plans. The Plans were then able to realize value through their
sale.
20. The Applicant represents that the transactions were protective
of the Plans and their respective participants and beneficiaries, as
the Plans obtained the Rights as a result of an independent act of
Holdings as a corporate entity. In addition, the acquisition of the
Rights by the Plans occurred on the same terms made available to other
holders of Holdings Stock and the Plans received the same proportionate
number of Rights as other owners of Holdings Stock. The Plans were also
protected in that all decisions regarding the holding and disposition
of the Rights by the Plans were made, in accordance with Plan
provisions, by the independent fiduciary. Furthermore, the independent
fiduciary determined that it would be in the interest of the Plans to
sell all of the Rights received in the Offering by the Plans in blind
transactions on the NASDAQ Global Select Market.
Summary
21. In summary, the Applicant represents that the proposed
exemption satisfies the statutory criteria for an exemption under
section 408(a) of the Act and section 4975(c)(2) of the Code for the
reasons stated above and for the following reasons:
(a) The receipt of the Rights by the Plans occurred in connection
with the Offering, in which all shareholders of Holdings Stock,
including the Plans, were treated in the same manner;
(b) The acquisition of the Rights by the Plans resulted from an
independent act of Holdings, as a corporate entity, and without any
participation on the part of the Plans;
(c) Each shareholder of Holdings Stock, including each of the
Plans, received the same proportionate number of Rights based on the
number of shares of Holdings Stock held by each such shareholder;
(d) All decisions with regard to the holding and disposition of the
Rights by the Plans were made by a qualified, independent fiduciary
within the meaning of 29 CFR 2570.31(j);
(e) The independent fiduciary determined that it would be in the
interest of the Plans to sell all of the Rights received in the
Offering by the Plans in blind transactions on the NASDAQ Global Select
Market; and
(f) No brokerage fees, commissions, subscription fees, or other
charges were paid by the Plans with respect to the acquisition and
holding of the Rights, or were paid to any affiliate of Holdings, Sears
Canada, or the independent fiduciary with respect to the sale of the
Rights.
Notice to Interested Persons
Notice of the proposed exemption will be given to all interested
persons within 22 days of the publication of the notice of proposed
exemption in the Federal Register, by first class U.S. mail to the last
known address of all such individuals. Such notice will contain a copy
of the notice of proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to 29 CFR
2570.43(a)(2). The supplemental statement will inform interested
persons of their right to comment on and to request a hearing with
respect to the pending exemption. Written comments and hearing requests
are due within 52 days of the publication of the notice of proposed
exemption in the Federal Register. All comments will be made available
to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the Internet and can
be retrieved by most Internet search engines.
FOR FURTHER INFORMATION CONTACT: Scott Ness of the Department,
telephone (202) 693-8561. (This is not a toll-free number.)
Sears Holdings 401(k) Savings Plan (the Savings Plan) and the Sears
Holdings Puerto Rico Savings Plan (the PR Plan) (collectively, the
Plans), Located in Hoffman Estates, IL
[Exemption Application Nos. D-11851 and D-11852]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act of 1974, as amended (ERISA or the Act), and section 4975(c)(2) of
the Internal Revenue Code of 1986, as amended (the Code), and in
accordance with the procedures set forth in 29 CFR part 2570, subpart B
(76 FR 66637, 66644, October 27, 2011).
Section I. Transactions
(a) The restrictions of sections 406(a)(1)(E), 406(a)(2),
406(b)(1), 406(b)(2), and 407(a)(1)(A) of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1)(E) of the Code,\17\ shall not apply to the
acquisition and holding of certain subscription rights (the Rights)
issued by Sears Holdings Corporation (Holdings) by the Savings Plan in
connection with an offering (the Offering) by Holdings of unsecured
obligations issued by Holdings (Notes) and warrants to purchase the
common stock of Holdings (Warrants)(together referred to as Units),
provided that the conditions as set forth, below, in Section II of this
proposed exemption were satisfied for the duration of the acquisition
and holding; and
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\17\ For purposes of this proposed exemption, unless indicated
otherwise, references to section 406 of the Act should be read to
refer as well to the corresponding provisions of section 4975 of the
Code.
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(b) The restrictions of sections 406(a)(1)(E), 406(a)(2),
406(b)(1),
[[Page 29710]]
406(b)(2), and 407(a)(1)(A) of the Act \18\ shall not apply to the
acquisition and holding of the Rights by the PR Plan in connection with
the Offering by Holdings, provided that the conditions as set forth in
Section II of this proposed exemption were satisfied for the duration
of the acquisition and holding.
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\18\ The Applicant represents that there is no jurisdiction
under Title II of the Act with respect to the PR Plan. Accordingly,
the Department is not providing any exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and holding of the
Rights by the PR Plan.
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Section II. Conditions
(a) The receipt of the Rights by the Plans occurred in connection
with the Offering, in which all shareholders of the common stock of
Holdings (Holdings Stock), including the Plans, were treated in the
same manner;
(b) The acquisition of the Rights by the Plans resulted from an
independent act of Holdings, as a corporate entity;
(c) Each shareholder of Holdings Stock, including each of the
Plans, received the same proportionate number of Rights based on the
number of shares of Holdings Stock held by each such shareholder;
(d) All decisions with regard to the holding and disposition of the
Rights by the Plans were made by a qualified independent fiduciary (the
Independent Fiduciary) within the meaning of 29 CFR 2570.31(j);
(e) The Independent Fiduciary determined that it would be in the
interest of the Plans to sell all of the Rights received in the
Offering by the Plans in blind transactions on the NASDAQ Global Select
Market;
(f) No brokerage fees, commissions, subscription fees, or other
charges were paid by the Plans with respect to the acquisition and
holding of the Rights, or were paid to any affiliate of Holdings or the
Independent Fiduciary in connection with the sale of the Rights.
Section III. Definitions
(a) The term ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such person;
(2) Any officer, director, partner, employee, or relative, as
defined in section 3(15) of the Act, of such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Effective Date: This proposed exemption, if granted, will be
effective for the period beginning October 30, 2014, and ending
November 18, 2014 (the Offering Period).
Summary of Facts and Representations
Background
1. Sears Holdings Corporation (Holdings), is the parent company of
Kmart and Sears, Roebuck, & Co. (Sears Roebuck). Holdings was formed as
a Delaware corporation in 2004 in connection with the merger of Kmart
and Sears Roebuck on March 24, 2005. By August 2014, Holdings operated
a national network of stores with 1,870 full-line and specialty retail
stores in the United States operating through Kmart and Sears Roebuck.
In October 2014, Holdings completed the spin-off of a substantial
portion of Sears Canada, Inc., which allowed it to dispose of a non-
core asset and raise substantial cash proceeds.
2. Common stock issued by Holdings (Holdings Stock), par value
$0.01 per share, is publicly-traded on the NASDAQ Global Select market
under the symbol, ``SHLD.'' As of October 30, 2014, there were 12,236
shareholders of record and approximately 106.5 million shares of
Holdings Stock issued and outstanding.
3. ESL Investments, Inc. and its affiliates (ESL), including Edward
S. Lampert (Mr. Lampert) owned approximately 48.5 percent of the
Holdings Stock, issued and outstanding, as of October 30, 2014. Mr.
Lampert is the Chairman of the Board of Directors and Chief Executive
Officer of Holdings. He is also the Chairman and Chief Executive
Officer of ESL.
4. Holdings and certain of its affiliates sponsor the Sears
Holdings 401(k) Savings Plan (the Savings Plan) and the Sears Holdings
Puerto Rico Savings Plan (the PR Plan) (collectively the Plans). Each
Plan is a participant-directed account plan that permits participants
to invest in equity, fixed income, balanced funds, and an investment
fund (the Stock Fund) comprised of Holdings Stock. The Plans are
designed and operated to comply with the requirements of section 404(c)
of the Act. The Savings Plan and the PR Plan assets are held together
within the Sears Holdings 401(k) Savings Plan Master Trust (the Master
Trust), which also holds the Stock Fund and consequently, shares of
Holdings Stock.\19\ The Plans' participants, therefore, indirectly own
shares of Holdings Stock through investments in the Stock Fund.
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\19\ State Street Bank and Trust Company serves as the master
trustee and custodian for the Master Trust. As of October 30, 2014,
the Master Trust had approximately $2.95 billion in total assets. As
of October 30, 2014, the Stock Fund within the Master Trust held
1,451,783 shares of Holdings Stock with a fair market value of
$53,338,507.40.
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5. Sears Roebuck and all of its wholly-owned (direct and indirect)
subsidiaries and Sears Holdings Management Corporation (SHMC), a
wholly-owned subsidiary of Holdings, with respect to certain employees,
have adopted the Savings Plan and are employers under that Plan.
6. As of October 30, 2014 (the Record Date), there were 60,260
participants in the Savings Plan, and the Savings Plan's share of the
total assets of the Master Trust was approximately $2.95 billion. Also,
as of the Record Date, the Savings Plan's allocable share of the
Holdings Stock held in the Stock Fund under the Master Trust was
1,411,133 shares, and the approximate percentage of the fair market
value of the total assets of the Savings Plan invested in Holdings
Stock was 1.79 percent, which amount constituted approximately one
percent of the 106.5 million shares of Holdings Stock issued and
outstanding.
7. The Savings Plan is administered by the Sears Holding
Corporation Administrative Committee (the Administrative Committee),
whose members are officers and/or employees of SHMC. The Sears Holdings
Corporation Investment Committee (the Investment Committee), whose
members are officers and/or employees of SHMC, has authority over
decisions relating to the investment of the Savings Plan's assets.
8. The PR Plan was established by Holdings for employees of Sears
Roebuck de Puerto Rico (Sears Roebuck PR) who reside in the
Commonwealth of Puerto Rico. The Applicant represents that the
fiduciaries of the PR Plan have not made an election under section
1022(i)(2) of the Act, whereby such plan would be treated as a trust
created and organized in the United States for purposes of tax
qualification under section 401(a) of the Code. Therefore, according to
the Applicant, there is no jurisdiction under Title II of the Act.
There is, however, jurisdiction under Title I of the Act.
9. As of December 31, 2014, there were 7550 participants in the PR
Plan. As of the Record Date, there were 1,766 participants with account
balances, and the PR Plan's share of the total assets of the Master
Trust was $17,859,181.57. Also, as of the Record Date, the PR Plan's
allocable share of the Holdings Stock held in the Stock Fund under the
Master Trust was 40,650 shares, and the approximate percentage of the
fair
[[Page 29711]]
market value of the total assets of the PR Plan invested in Holdings
Stock was 8.36 percent, which amount constituted 0.04 percent of the
106.5 million shares of Holdings Stock issued and outstanding.
10. The PR Plan is administered by the Administrative Committee,
and the Investment Committee makes investment decisions for the PR
Plan. Banco Popular de Puerto Rico serves as the trustee of the PR
Plan.
The Offering
11. By late October 2014, Holdings had reduced its stake in Sears
Canada, Inc. and raised significant cash through a rights offering. On
October 20, 2014, Holdings announced its intent to conduct an
additional rights offering to shareholders (the Offering) as a means of
further evolving Holdings' capital structure and enhancing its
financial flexibility. On October 20, 2014, Holdings issued a
prospectus describing the Offering to shareholders of record, including
the Plans, as of the Record Date. The prospectus was supplemented on
October 30, 2014.
12. Under the terms of the Offering, on October 30, 2014, each
shareholder of record of Holdings Stock, including the Plans,
automatically received one (1) Right for every 85.1872 shares of
Holdings Stock held by such shareholder. The Applicant represents that
only whole Rights were distributed to shareholders, including the
Plans, and the Master Trust acquired 17,189 Rights through the
Offering. The allocation of the Rights to shareholders was handled by
Depository Trust Company.
13. Each Right permitted the holder thereof to purchase for $500,
one ``Unit,'' consisting of (a) a note issued by Holdings in the
principal amount of $500 (Note),\20\ and (b) 17.5994 warrants
(Warrants), each entitling the holder to purchase one share of Holdings
Stock.\21\ Each Right also contained an over-subscription privilege
permitting the holder to subscribe for additional Units, up to the
number of Units that were not subscribed for by the other holders of
the Rights. The Plans were not eligible to participate in the over-
subscription privilege because a qualified, independent fiduciary
acting on behalf of the Plans, sold the Rights received by the Plans,
as discussed more fully below.
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\20\ The Notes are unsecured obligations and bear interest at a
rate of 8% per annum, which is paid semi-annually. The Notes mature
on December 15, 2019. While the Notes are transferable, they are not
listed on any exchange and can only be sold in a private
transaction. Holdings issued $625 million aggregate original
principal amount of the Notes in the Offering.
\21\ Each Warrant is initially exercisable for one share of
Holdings stock at an exercise price per share of $28.41. Subject to
applicable laws and regulations, the Warrants may be exercised at
any time starting on their date of issuance until 5:00 p.m., New
York City time, on December 15, 2019. The exercise price may be paid
with cash or Notes, provided that Holdings maintains an effective
registration statement for the Holdings Stock issuable upon exercise
of the Warrants. If the exercise of a Right would result in the
delivery of a fractional Warrant, the number of Warrants would be
rounded down to the nearest whole number. The Warrants are
transferable and listed on the Nasdaq Global Select Market under
``SHLDW.''
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14. All shareholders of Holdings Stock held the Rights until such
Rights expired, were exercised, or were sold. With regard to the
exercise of the Rights, the Applicant represents that the Rights could
only be exercised in whole numbers. Furthermore, each shareholder of
Holdings Stock needed to have at least eighty-six Rights to purchase a
Unit, because only whole Units could be purchased through the exercise
of the Rights. Fractional Units or cash in lieu of fractional Units
were not issued in connection with the Offering.
15. With regard to the sale of the Rights, the Applicant represents
that the Rights were transferable and that they traded on the NASDAQ
Global Select Market under the symbol ``SHLDZ.'' The Applicant
represents that the public trading of Rights (the Trading Period) began
on or around October 31, 2014, and continued until the close of
business on November 13, 2014, the third business day prior to the
close of the Offering. The Applicant further represents that this
deadline applied uniformly to all holders of the Rights.
16. While the Plans generally permit participants to direct the
investment of their own accounts, including their investments in
Holdings Stock, all decisions regarding the holding and disposition of
the Rights by each Plan were made, in accordance with the Plan
provisions, by a qualified independent fiduciary acting solely in the
interest of Plan participants.\22\ Participants in the Plans who were
invested in Holdings Stock as of the Record Date were notified of the
Offering, the engagement of the independent fiduciary, the fact that
the Rights would be held in the Stock Fund, that the independent
fiduciary would determine whether the Rights should be exercised or
sold, and the means by which a participant could obtain more
information. Holdings also communicated generally with employees
regarding the Offering and with the public through public releases at
www.searsholdings.com.
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\22\ Each of the Plans was amended as required to: (i) Permit
the Plan to temporarily acquire and hold the Rights (and any Notes
or Warrants acquired through the exercise of the Rights) pending
their orderly disposition; (ii) confirm that participants are not
entitled to direct the holding, exercise, sale or other disposition
of the Rights received by the Plan; and (iii) authorize the
designated independent fiduciary to exercise discretionary authority
with respect to the holding, exercise, sale or other disposition of
the Rights and any Notes or Warrants acquired through the exercise
of the Rights.
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17. The Offering expired at 5 p.m. eastern standard time on
November 18, 2014. The Applicant represents that Holdings issued
1,250,000 Units, including $625 million aggregated principal amount of
Notes and Warrants to purchase 21,999,296 shares of Holdings Stock.
Over the 10-day period that the Rights traded on the Nasdaq, the volume
weighted average price per Right for the 751,041 Rights traded was
$201.1554, according to data reported by Bloomberg. The Applicant
represents that the gross proceeds payable to and received by Holdings
from the sale of the Units pursuant to the Offering, net of any selling
expenses, was approximately $625 million.
The Independent Fiduciary
18. Fiduciary Counselors Inc. (FCI) was retained by the Investment
Committee pursuant to an agreement (the Agreement), dated November 3,
2014, to act as the independent fiduciary on behalf of the Plans, in
connection with the Offering and an exemption application. Pursuant to
the terms of the Agreement, FCI's responsibilities were to determine:
(a) Whether or not and when to exercise or sell the Rights received by
each Plan in the Offering; or (b) if it determined to exercise any of a
Plan's Rights to purchase the Units, to manage the investment in the
Notes and Warrants within that Plan's Stock Fund, and determine when to
liquidate or exercise the Notes and Warrants for the purpose of
reinvesting the proceeds in Holdings Stock.\23\
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\23\ Because the Rights were automatically issued to all
shareholders including the Plans and there was no option to decline
them, the independent fiduciary was not asked to determine whether
the Plans should acquire the Rights.
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19. The Applicant represents that hiring an independent fiduciary
to manage the holding and disposition of the Rights was appropriate in
this case for the following reasons: (a) There would have been a
significant cost to each Plan to develop and implement a process to
administer a pass-through of the Rights to participants; (b) It was not
practicable to initiate and implement a pass-through of the Rights to
participants given the limited notice provided to shareholders of the
Offering and the short subscription period (15
[[Page 29712]]
days); (c) Participants' unfamiliarity with rights offerings as well as
general participant inertia may have resulted in a significant
percentage of participants allowing their Rights to expire without
selling or exercising them; (d) The Notes and Warrants had not been
previously selected by the plan fiduciary as an investment option
appropriate for the Plan; and (5) The Rights are most appropriately
viewed as a non-cash dividend payable to owners of Holdings Stock such
as the Plans, so that the fiduciary of the Stock Fund is the
appropriate person to manage the ``proceeds'' of the Plans' investment
in Holdings Stock. The Applicant represents that, in this case, the
independent fiduciary appointed to manage the Rights took
responsibility for realizing the value in the Rights by selling them.
The cash proceeds of that sale were then reinvested in Holdings Stock
pursuant to the terms of the plan.
20. The Applicant represents that FCI is qualified to serve as the
independent fiduciary for the Plans in connection with the Offering,
because FCI is a registered investment adviser under the Investment
Advisers Act of 1940, and over the past 13 years, FCI has served or is
serving as an independent fiduciary on behalf of employee benefit plans
in connection with more than 14 prohibited transaction exemption
applications, not counting applications involving the Plans.
Additionally, FCI represents that it is an independent company whose
primary focus is providing independent fiduciary services for employee
benefit plans.
21. In its ``Report of Independent Fiduciary Regarding Sears Rights
Offering for Debt and Warrants,'' dated February 23, 2015 (the IF
Report), FCI represents and warrants that it is independent and
unrelated to Holdings. FCI further represents that it did not directly
or indirectly receive any compensation or other consideration for its
own account in connection with the Offering, except compensation from
Holdings for performing services described in the Agreement. The
percentage of FCI's 2014 revenue derived from any party in interest
involved in the subject transaction or its affiliates was less than
five percent of FCI's 2013 revenue.
22. FCI represents further that it understands and acknowledges its
duties and responsibilities under the Act in acting as a fiduciary on
behalf of the Plans in connection with the Offering. In the IF Report,
FCI represents that it conducted a due diligence process in evaluating
the Offering on behalf of the Plans. This process included numerous
discussions and correspondence with representatives of the Plans and
Holdings, Holdings' counsel, broker-dealers, and representatives of the
Plans' trustee, enabling FCI to better understand a number of important
elements related to the Offering. In addition, FCI reviewed publicly
available information and information provided by Holdings.
23. As detailed in the IF Report, with regard to the Offering, FCI
considered the following four (4) options: (a) Continue holding the
Rights within the Stock Fund; (b) Exercising all of the Rights and
acquiring the Notes and Warrants, then sell the Notes or use them to
exercise Warrants, sell or exercise the Warrants, and use any remaining
cash to acquire Holdings Stock in the market; (c) Selling all of the
Rights on the NASDAQ Global Select Market at the prevailing market
price; or (d) Selling a portion of the Rights and using the proceeds to
exercise the remaining Rights, so as to acquire Notes and Warrants
(then sell the Notes or use them to exercise Warrants, then sell or
exercise the Warrants and use any remaining cash to acquire Holdings
Stock in the market). Acting as the independent fiduciary on behalf of
the Plans, FCI chose to sell all of the Rights on the NASDAQ Global
Select Market.
24. In determining to sell all of the Plans' Rights, FCI represents
that the proceeds from the sale would be invested in Holdings Stock, as
per the governing documents of the Stock Fund. As described in the IF
Report, FCI determined that the benefits of selling the Rights included
simplicity, lower transaction costs, and less exposure to risk than the
options that involved exercising any of the Rights. According to FCI,
this option allowed the Plans to realize the benefits of the Rights in
a timely manner at the best available market prices so that cash raised
through the sale could be reinvested in Holdings Stock, consistent with
the purpose and intent of the Stock Fund. FCI understood that the Plans
would incur some transactions costs through this option, estimated at
$0.015 to $0.05 per Right traded. Accordingly, FCI concluded that this
sale of the Rights was in the interest of the Plans and the Plans'
participants and beneficiaries and was protective of such participants
and beneficiaries of the Plans.
25. At FCI's direction, the Plans sold the Rights over a period of
days while trying not to be too high a percentage of the daily volume
so as to avoid putting downward pressure on the price of the Rights.
The Trading Period ended on November 13, 2014. According to the IF
Report, and as noted above, over the ten-day period that the Rights
traded on the NASDAQ, the volume-weighted average price for the 751,041
Rights traded was $201.1554 according to data reported by Bloomberg.
The IF Report provides that FCI completed the sale of the Plans' 17,189
Rights in blind transactions on the NASDAQ Global Select Market between
November 4 and November 7, 2014, realizing an average selling price of
$211.6283 per Right.
26. According to the Applicant, as a result of the Rights sale, the
total net proceeds generated for the Savings Plan and the PR Plan was
$3,637,509.54. These proceeds were credited to each Plan and the unit
value of each participant's account balance reflected the addition of
assets credited to the Plan.
27. The Applicant represents that no brokerage fees, commissions,
subscription fees, or other charges were paid by the Plans with respect
to the acquisition and holding of the Rights, or were paid to any
broker affiliated with FCI or Holdings in connection with the sale of
the Rights. In this regard, FCI represents that it selected State
Street Global Markets as the broker for the sale of the Plans' Rights,
based on FCI's confidence in the broker's execution ability and an
attractive fee schedule of 0.015 cents per Right traded. In connection
with the sale of the Rights, the Plans paid $257.84 in commissions to
independent, third parties and $80.42 in SEC fees.
Requested Relief
28. The Applicant represents that the subject transactions have
already been consummated. In this regard, the Plans acquired the Rights
pursuant to the Offering, and held such Rights until the Rights were
sold by the independent fiduciary. The Applicant states that, because
there was insufficient time before the Plans acquired the Rights to
apply for and be granted an exemption, Holdings was required to request
retroactive relief, effective as of October 30, 2014, the Record Date.
29. Section 406(a)(1)(E) of the Act prohibits a fiduciary from
causing a plan to engage in a transaction, if he knows or should know
that such transaction constitutes a direct or indirect acquisition, on
behalf of a plan, of any employer security or employer real property in
violation of section 407(a). Section 406(a)(2) of the Act prohibits a
fiduciary who has authority or discretion to control or manage the
assets of a plan from permitting a plan to hold any employer security
or employer real property if he knows or should know that holding such
security or real property violates section 407(a).
[[Page 29713]]
The Applicant represents that because the Rights are non-qualifying
employer securities, the acquisition and holding of the Rights violated
sections 406(a)(1)(E), 406(a)(2), and 407(a) of the Act.
30. Furthermore, section 406(b)(1) of the Act prohibits a fiduciary
from dealing with the assets of a plan in his own interest or for his
own account. Section 406(b)(2) of the Act prohibits a fiduciary, in his
individual or in any other capacity, from acting in any transaction
involving the plan on behalf of a party (or representing a party) whose
interests are adverse to the interests of the plan or the interests of
its participants or beneficiaries. The Applicant states that, although
Holdings retained an independent fiduciary to represent the Plans in
connection with the disposition of the Rights, by causing the
participation of the Plans in the Offering, Holdings may have dealt
with the assets of the Plans for its own account, and also may have
acted in a transaction on behalf of itself and the Plans.
31. Therefore, the Applicant requests an administrative exemption
from sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act and section 4975 of the Code by reason of
4975(c)(1)(E) of the Code, with regard to the Savings Plan, and from
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act with regard to the PR Plan.\24\
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\24\ The Applicant represents that there is no jurisdiction
under Title II of the Act with respect to the PR Plan. Accordingly,
the Department is not providing any exemptive relief from section
4975(c)(1)(E) of the Code for the acquisition and holding of the
Rights by the PR Plan.
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Statutory Findings
32. The Applicant represents that the requested exemption is
administratively feasible because the acquisition, holding, and sale of
the Rights by the Plans was a one-time transaction which will not
require continued monitoring or other involvement by the Department.
33. The Applicant represents that the transactions which are the
subject of this proposed exemption are in the interest of the Plans,
because the Rights were automatically issued at no cost to all
shareholders of Holdings Stock as of a specified Record Date, including
the Plans. The Plans were then able to realize value through their
sale.
34. The Applicant represents that the transactions were protective
of the Plans, and their respective participants and beneficiaries, as
the Plans obtained the Rights as a result of an independent act of
Holdings as a corporate entity. In addition, the acquisition of the
Rights by the Plans occurred on the same terms made available to other
holders of Holdings Stock and the Plans received the same proportionate
number of Rights as other owners of Holdings Stock. The Plans were also
protected in that all decisions regarding the holding and disposition
of the Rights by the Plans were made, in accordance with Plan
provisions, by the independent fiduciary. Furthermore, the independent
fiduciary determined that it would be in the interest of the Plans to
sell all of the Rights received in the Offering by the Plans in blind
transactions on the NASDAQ Global Select Market.
Summary
35. In summary, the Applicant represents that the proposed
exemption satisfies the statutory criteria for an exemption under
section 408(a) of the Act and section 4975(c)(2) of the Code for the
reasons stated above and for the following reasons:
(a) The receipt of the Rights by the Plans occurred in connection
with the Offering, in which all shareholders of Holdings Stock,
including the Plans, were treated in the same manner;
(b) The acquisition of the Rights by the Plans resulted from an
independent act of Holdings, as a corporate entity, and without any
participation on the part of the Plans;
(c) Each shareholder of Holdings Stock, including each of the
Plans, received the same proportionate number of Rights based on the
number of shares of Holdings Stock held by each such shareholder;
(d) All decisions with regard to the holding and disposition of the
Rights by the Plans were made by a qualified, independent fiduciary
within the meaning of 29 CFR 2570.31(j);
(e) The independent fiduciary determined that it would be in the
interest of the Plans to sell all of the Rights received in the
Offering by the Plans in blind transactions on the NASDAQ Global Select
Market; and
(f) No brokerage fees, commissions, subscription fees, or other
charges were paid by the Plans with respect to the acquisition and
holding of the Rights, or were paid to any affiliate of Holdings or the
independent fiduciary in connection with the sale of the Rights.
Notice to Interested Persons
Notice of the proposed exemption will be given to all interested
persons within 22 days of the publication of the notice of proposed
exemption in the Federal Register, by first class U.S. mail to the last
known address of all such individuals. Such notice will contain a copy
of the notice of proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to 29 CFR
2570.43(a)(2). The supplemental statement will inform interested
persons of their right to comment on and to request a hearing with
respect to the pending exemption. Written comments and hearing requests
are due within 52 days of the publication of the notice of proposed
exemption in the Federal Register. All comments will be made available
to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the Internet and can
be retrieved by most Internet search engines.
FOR FURTHER INFORMATION CONTACT: Erin S. Hesse of the Department,
telephone (202) 693-8546. (This is not a toll-free number.)
Sears Holdings 401(k) Savings Plan (the Savings Plan) and the Sears
Holdings Puerto Rico Savings Plan (the PR Plan) (together, the Plans)
Located in Hoffman Estates, IL
[Application Nos. D-11871 and D-11872, Respectively]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA), as amended, and
section 4975(c)(2) of the Code, as amended, and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637,
66644, October 27, 2011).
Section I. Transactions
(a) If the proposed exemption is granted, the restrictions of
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(E) of the Code,\25\ shall not apply, effective for the
period beginning June 11, 2015 and ending July 2, 2015, to the
acquisition and holding by the Savings Plan of certain subscription
rights (the Rights)
[[Page 29714]]
to purchase shares of common stock (Seritage Growth Stock) in Seritage
Growth Properties (Seritage Growth), in connection with an offering
(the Offering) by Sears Holdings Corporation (Holdings or the
Applicant) of Seritage Growth Stock, provided that the conditions, as
set forth below in Section II of this proposed exemption were satisfied
for the duration of the acquisition and holding; and
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\25\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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(b) If the proposed exemption is granted, the restrictions of
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act \26\ shall not apply, effective for the period
beginning June 11, 2015, and ending July 2, 2015, to the acquisition
and holding of the Rights by the PR Plan in connection with the
Offering of Seritage Growth Stock by Holdings, provided that the
conditions, as set forth in Section II of this proposed exemption were
satisfied for the duration of the acquisition and holding.
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\26\ The Applicant represents that there is no jurisdiction
under Title II of the Act with respect to the PR Plan because the PR
Plan fiduciaries have not made an election under section 1022(i)(2)
of the Act, whereby the PR Plan would be treated as a trust created
and organized in the United States for purposes of tax qualification
under section 401(a) of the Code. Accordingly, the Department is not
providing exemptive relief from section 4975(c)(1)(E) of the Code
for the acquisition and holding of the Rights by the PR Plan.
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Section II. Conditions
(a) The receipt of the Rights by the Plans occurred in connection
with the Offering, in which all shareholders of the common stock of
Holdings (Holdings Stock), including the Plans, were treated in the
same manner;
(b) The acquisition of the Rights by the Plans resulted solely from
an independent act of Holdings, as a corporate entity;
(c) Each shareholder of Holdings Stock, including each of the
Plans, received the same proportionate number of Rights based on the
number of shares of Holdings Stock held by each such shareholder;
(d) All decisions with regard to the holding and disposition of the
Rights by the Plans were made by a qualified independent fiduciary (the
Independent Fiduciary) within the meaning of 29 CFR 2570.31(j); \27\
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\27\ 29 CFR 2570.31(j) defines a ``qualified independent
fiduciary,'' in relevant part, to mean ``any individual or entity
with appropriate training, experience, and facilities to act on
behalf of the plan regarding the exemption transaction in accordance
with the fiduciary duties and responsibilities prescribed under the
Act, that is independent of and unrelated to any party in interest
engaging in the exemption transaction and its affiliates;'' in
general, a fiduciary is presumed to be independent ``if the revenues
it receives or is projected to receive, within the current federal
income tax year from parties in interest (and their affiliates)
[with respect] to the transaction are not more than 2% of such
fiduciary's annual revenues based upon its prior income tax year.
Although the presumption does not apply when the aforementioned
percentage exceeds 2%, a fiduciary nonetheless may be considered
independent based upon other facts and circumstances provided that
it receives or is projected to receive revenues that are not more
than 5% within the current federal income tax year from parties in
interest (and their affiliates) [with respect] to the transaction
based upon its prior income tax year.''
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(e) The Independent Fiduciary determined that it would be in the
interest of the Plans to sell all of the Rights received in the
Offering by the Plans in blind transactions on the New York Stock
Exchange (NYSE); and
(f) No brokerage fees, commissions, subscription fees, or other
charges were paid by the Plans with respect to the acquisition and
holding of the Rights; or were paid to any affiliate of the Independent
Fiduciary or Holdings, in connection with the sale of the Rights.
Section III. Definitions
(a) The term ``Holdings'' refers to Sears Holdings Corporation and
its affiliates.
(b) The term ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such person;
(2) Any officer, director, partner, employee, or relative, as
defined in section 3(15) of the Act, of such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
for the Offering period, beginning June 11, 2015, and ending July 2,
2015 (the Offering Period).
Summary of Facts and Representations \28\
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\28\ The Summary of Facts and Representations is based solely on
the representations of the Applicant and does not reflect the views
of the Department, unless indicated otherwise.
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The Plans
1. Employees of certain affiliates of Holdings participate in the
Plans. The Plans consist of the Savings Plan and the PR Plan. The Plans
are defined contribution, eligible individual account plans that are
designed and operated to comply with the requirements of section 404(c)
of the Act. The Plans allow participants to purchase units in certain
stock funds which invest in Holdings Stock. In this regard, the Savings
Plan and the PR Plan share a single stock fund (the Stock Fund) within
the Sears Holdings 401(k) Savings Plan Master Trust (the Master Trust)
to hold shares of Holdings Stock. As of June 11, 2015, the Master Trust
held approximately $2.8 billion in total assets. State Street Bank and
Trust Company (State Street) serves as the Master Trustee and Custodian
for the Master Trust.
2. Sears, Roebuck and Co. (Sears Roebuck) and all of its wholly-
owned (direct and indirect) subsidiaries (except Lands' End Inc.
(Lands' End), Sears de Puerto Rico, Inc., Kmart Holding Corporation
(Kmart), and its wholly-owned (direct and indirect) subsidiaries
(excluding employees residing in Puerto Rico), and Sears Holdings
Management Corporation, with respect to certain employees, have adopted
the Savings Plan and are employers under such plan.
As of June 11, 2015, (the Record Date), there were 53,831
participants in the Savings Plan, and the Savings Plan's share of the
total assets of the Master Trust was $2,820,235,014. Also, as of the
Record Date, the Savings Plan's allocable portion of Holdings Stock
held in the Stock Fund on behalf of 14,476 participants under the
Master Trust was 1,286,302.45 shares, which constituted approximately
1.2% of the 106,603,021 shares of Holdings Stock issued and
outstanding. The approximate percentage of the fair market value of the
total assets of the Savings Plan invested in Holdings Stock was 1.3%.
The Savings Plan is administered by the Sears Holding Corporation
Administrative Committee (the Administrative Committee), whose members
are employees of Holdings. The Sears Holdings Corporation Investment
Committee (the Investment Committee), whose members are officers and/or
employees of Holdings and/or its subsidiaries, has authority over
decisions relating to the investment of the Plans' assets.
3. The PR Plan, which is sponsored and maintained by Holdings, was
originally established by Sears Roebuck for employees of Sears Roebuck
de Puerto Rico Inc. (Sears Roebuck de Puerto Rico) and Kmart, who
reside in the Commonwealth of Puerto Rico, upon the merger of the Kmart
Corporation Retirement Savings Plan for Puerto Rico employees with and
into the prior Sears Roebuck de Puerto Rico Savings Plan, as of March
31, 2012. According to the Applicant, the PR Plan has not made an
election under section 1022(i)(2)of the Act, whereby such plan
[[Page 29715]]
would be treated as a trust created and organized in the United States
for purposes of tax qualification under section 401(a) of the Code.
Therefore, according to the Applicant, there is no jurisdiction under
Title II of the Act. There is, however, jurisdiction under Title I of
the Act.
As of the Record Date, there were 1,696 participants in the PR
Plan, and the PR Plan's share of the total assets of the Master Trust
was $17,324,339. Also, as of the Record Date, the PR Plan's allocable
portion of Holdings Stock held in the Stock Fund under the Master Trust
on behalf of 629 participants was 39,782,55 shares, which constituted
approximately 0.04% of the 106,603,021 shares of Holdings Stock issued
and outstanding, on June 11, 2015. The approximate percentage of the
fair market value of the total assets of the PR Plan invested in
Holdings Stock was 6.5%,
The PR Plan is administered by the Administrative Committee, and
the Investment Committee makes investment decisions for such plan.
Banco Popular de Puerto Rico serves as the PR Plan trustee.
Holdings
4. Holdings, the sponsor of each of the Plans, is a retail merchant
with full-line and specialty retail stores in the United States, Guam,
Puerto Rico, the U.S. Virgin Islands, and Canada. Holdings was formed
as a Delaware corporation in 2004 in connection with the merger of
Kmart and Sears Roebuck, which took place on March 24, 2005. Holdings
is the parent company of Kmart Holding Company and Sears Roebuck. The
principal executive office of Holdings is located in Hoffman Estates,
Illinois. According to the Form 10-K for the fiscal year ending January
31, 2015, Holdings and its subsidiaries had total assets of
approximately $11.3 billion. Also as of January 31, 2015, Holdings and
its subsidiaries employed approximately 196,000 employees.
Holdings Stock/Ownership
5. Common stock issued by Holdings (i.e., Holdings Stock), with a
par value $0.01 per share, is publicly-traded on the NASDAQ Global
Select Market under the symbol, ``SHLD.'' There were 11,659
shareholders of record, as of June 11, 2015.
ESL Investments, Inc. and its affiliates, (ESL), including Edward
S. Lampert (Mr. Lampert) owned approximately 53.2% of Holdings Stock
issued and outstanding as of June 9, 2015. Mr. Lampert is the Chairman
of the Board of Directors and Chief Executive Officer of Holdings. He
is also the Chairman and Chief Executive Officer of ESL.
Seritage Growth
6. Seritage Growth is a publicly traded, self-administered, self-
managed real estate investment trust that is primarily engaged in the
real property business through its investment in its operating
partnership, Seritage Growth Properties, L.P. Seritage Growth's
portfolio contains 235 wholly-owned properties and 31 joint venture
properties, consisting of approximately 42 million square feet of
building space, which is broadly diversified by location across 49
states and Puerto Rico. Pursuant to a master lease, 224 of Seritage
Growth's wholly-owned properties are leased to Holdings and are
operated under either the Sears Roebuck or K-Mart brand. The master
lease provides Seritage with rights to recapture certain space from
Sears Holdings at each property.
Prior to the Offering described below, Seritage Growth Stock was
owned exclusively by Benjamin Schall, the Chief Executive Officer of
Seritage Growth. Immediately following the Offering, ESL owned 4% of
Seritage Growth Stock, 100% of Seritage Growth's Class B non-economic
shares, 9.8% of Seritage Growth's voting power, 43.5% of Seritage
Growth (Operating Partnership) units, and 45.3% of the consolidated
economics of Seritage Growth and the Operating Partnership.\29\
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\29\ To clarify the relationship between Seritage Growth and the
Operating Partnership, the Applicant represents that Seritage Growth
is the general partner of the Operating Partnership and owns the
majority of the Operating Partnership units.
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The Offering
7. On April 1, 2015, Holdings announced its intention to conduct a
Rights Offering of 53,298,899 shares of Seritage Growth Stock to
Holdings shareholders. Holdings issued a prospectus describing the
Offering of certain subscription Rights to shareholders of record,
including the Master Trust, as of June 11, 2015, the Record Date. The
Holdings Board of Directors determined that the Offering was in the
best interest of Holdings and its stockholders. According to the
Applicant, the purpose of the Offering was to allow Seritage Growth to
purchase a portfolio of Holdings real properties from Holdings using
the proceeds obtained from the Offering.
Under the terms of the Offering, all shareholders of Holdings Stock
automatically received the Rights, at no charge. Specifically, each
shareholder as of the Record Date, received one Right for every whole
share of Holdings Stock it held. Each Right entitled the holder to
purchase one half of one share of Seritage Growth Stock at the
subscription price of $29.58 per whole share. According to the
Applicant, the Rights were distributed as practicable as possible after
the June 11, 2015 Record Date.
8. Each Right also contained an over-subscription privilege
permitting the holder to subscribe for additional Seritage Growth
Stock, up to the number of common shares that were not subscribed for
by the other holders of the Rights. The Plans were not eligible to
participate in the over-subscription privilege because the Independent
Fiduciary sold the Rights received by the Plan, as discussed more fully
below.
9. All shareholders of Holdings Stock held the Rights until such
Rights expired, were exercised, or were sold. A shareholder had the
right to exercise some, all, or none of its Rights. However, its
election to exercise the Rights had to be received by the subscription
agent, Computershare Trust Company, N.A., by July 2, 2015. The election
to exercise any of the Rights was irrevocable.
All shareholders of Holdings Stock held the Rights until such
Rights expired, were exercised, or were sold. Each shareholder of the
Holdings Stock needed to have at least two Rights to purchase one whole
share of Seritage Growth Stock, because only whole shares could be
purchased by the exercise of the Rights. Fractional shares or cash in
lieu of fractional shares were not issued in connection with the
Offering. Fractional shares of the Seritage Growth Stock resulting from
the exercise of basic Rights, as to any holder of such Rights were
rounded down to the nearest whole number.
10. With regard to the sale of the Rights, the Applicant represents
that the Rights were transferable. The Applicant also represents that
the Rights began to trade on the NYSE under the symbol ``SRGRT'' on or
around June 12, 2015, and continued to trade until the trading deadline
at the close of business on June 26, 2015. Further, the Applicant
explains that the trading deadline applied uniformly to all holders of
the Rights.
11. The Offering expired at 5 p.m. New York City time on July 2,
2015. The Applicant represents that the Offering was oversubscribed and
all of the Rights were exercised at a price of U.S. $29.58 per share of
Seritage Growth Stock. Accordingly, in connection with the Offering,
Seritage Growth offered and issued up to 106,603,021 Rights to
[[Page 29716]]
purchase up to 53,298,899 shares of Seritage Growth Stock.
12. All of the gross proceeds from the exercise of the Rights to
purchase Seritage Growth Stock, approximately $1,576,581,444, net of
any selling expenses, were payable to and received by Seritage Growth.
The Applicant asserts that the proceeds were or will be used by
Seritage Growth to purchase a portfolio of real properties from
Holdings.
13. Based on the ratio of one Right for each share of Holdings
Stock held, the Applicant explains that the Master Trust acquired
1,326,085 Rights as a result of the Offering. While the Plans generally
permit participants to direct the investment of their own accounts,
including their investments in Holdings Stock, the Applicant represents
that all decisions regarding the holding and disposition of the Rights
by each Plan were made, in accordance with the Plan provisions, by the
Independent Fiduciary acting solely in the interest of Plan
participants. According to the Applicant, participants in the Plans who
were invested in Holdings Stock as of the Record Date were notified of
the Offering, the engagement of the Independent Fiduciary, the fact
that the Rights would be held in the Stock Fund, that the Independent
Fiduciary would determine whether the Rights should be exercised or
sold, and the means by which a participant could obtain more
information. The Applicant further represents that Holdings
communicated generally with employees regarding the Offering and with
the public through public releases at www.searsholdings.com.
Role of the Independent Fiduciary
14. Evercore Trust Company, N.A. (Evercore) was retained by the
Investment Committee, pursuant to an agreement (the Agreement) dated
June 5, 2015, to act as the Independent Fiduciary on behalf of the
Plans, in connection with the Offering and with the application for
exemption submitted to the Department. Pursuant to the terms of the
Agreement, Evercore's responsibilities were: (a) To determine whether
and when to exercise or sell each of the Plan's Rights; and (b) if it
determined to exercise any of a Plan's Rights to purchase Seritage
Growth Stock, to manage the investment within that Plan's Stock Fund,
and determine when to liquidate or exercise the shares for the purpose
of reinvesting the proceeds in Holdings Stock.
The Applicant represents that hiring an Independent Fiduciary to
manage the holding and disposition of the Rights was appropriate in
this case for the following reasons: (a) There would have been a
significant cost to develop and implement a process under each Plan to
administer the pass-through of the Rights to participants; (b) it was
not practicable to initiate and implement a pass-through of the Rights
to participants given the limited notice provided to shareholders of
the Offering and the short subscription period (21 days), because such
process would have included the establishment of a ``rights fund'' and
a Seritage Growth fund within each Plan, the design and testing of
procedures for allocating the Rights among participant accounts,
soliciting participant directions on the exercise or sale of the Rights
and identifying the source of funding (e.g., which investment account
is to be liquidated) for each participant who chose to exercise the
Rights, and the short Offering Period meant that there would have been
insufficient time to adequately educate participants regarding their
rights and obligations; (c) there would have been a loss of value that
participants might otherwise have gained, because participants'
unfamiliarity with rights offerings as well as general participant
inertia would have resulted in a significant percentage of participants
allowing their Rights to expire without selling or exercising them; (d)
it was not in the interest of participants to require the Plans to
offer and hold for participant investment a single stock (i.e.,
Seritage Growth Stock) that had not been selected by the plan fiduciary
as an investment option appropriate for the Plans; and (e) the Rights
are most appropriately viewed as a non-cash dividend payable to owners
of Holdings Stock, such as the Plans, so that the fiduciary of the
Stock Fund is the appropriate person to manage the ``proceeds'' of the
Plans' investment in Holdings Stock. The Applicant represents that, in
this case, the Independent Fiduciary appointed to manage the Rights on
behalf of the Plans took responsibility for realizing the value in the
Rights by selling them. The cash proceeds of the sale were then
reinvested in Holdings Stock pursuant to the terms of the Plans.
In the Agreement, Evercore represents that it is qualified to serve
as the Independent Fiduciary for the Plans in connection with the
Offering because it is a national trust bank chartered by the Office of
the Comptroller of the Currency. Evercore states that it has provided
specialized investment management, independent fiduciary, and trustee
services to employee benefit plans since 1987. Evercore also represents
that it has served or is serving as an independent fiduciary on behalf
of employee benefit plans in connection with more than 50 prohibited
transaction exemption applications that have been filed with the
Department.
In the Agreement, Evercore further represents that it is
independent and unrelated to Holdings, and that it did not directly or
indirectly receive any compensation or other consideration for its own
account in connection with the Offering, except compensation from
Holdings for performing services described in the Agreement. According
to the Agreement, Evercore states that the gross revenue it received
(or expected to receive) in 2015 that was derived from any party in
interest or an affiliate of such party in interest involved in the
Seritage Growth transaction, would represent less than 2% its 2014
gross revenue. Also, in the Agreement, Evercore represents that it
understood and acknowledged its duties and responsibilities under the
Act in acting as a fiduciary on behalf of the Plans in connection with
the Offering.
In addition, Evercore represents that it conducted a due diligence
process in evaluating the Offering on behalf of the Plans. This process
included discussions and correspondence with representatives of the
Plans, Holdings, Holdings' counsel, broker-dealers, and representatives
of the trustee of the Master Trust, enabling Evercore to improve
certain elements related to the Offering. Evercore also states that it
reviewed publicly available information and information provided by
Holdings.
With regard to the Offering, Evercore explains that it considered
four options on behalf of the Plans: (a) To continue holding the Rights
within the Stock Fund; (b) to exercise all of the Rights to acquire
Seritage Growth Stock; (c) to sell all of the Rights on the NYSE at the
prevailing market price; or (d) to sell a portion of the Rights and use
the proceeds to exercise the remaining Rights to acquire Seritage
Growth Stock.
In determining to sell all of the Plans' Rights, Evercore
represents that the proceeds from the sale would be invested in
Holdings Stock, in accordance with the governing documents of the Stock
Fund. Evercore reasoned that, although the Plans would incur some
transaction costs by selling the Rights, estimated at $0.01 per Right
traded, plus a similar expense in connection with the reinvestment of
the proceeds into shares of Holdings Stock, the benefits of selling the
Rights included the fact that the proceeds could be quickly redeployed
into shares of Holdings Stock, lower transaction costs, and less
exposure to risk than the
[[Page 29717]]
options that involved exercising any of the Rights. Accordingly,
Evercore concluded that the sale of the Rights was in the interest of
the Plans and the Plans' participants and beneficiaries and was
protective of such participants and beneficiaries of the Plans.
15. As a result of the sale of 1,326,085 Rights that were acquired
by the Master Trust during the Offering, the total net proceeds
generated for the Savings Plan and the PR Plan was $4,106,921.19. These
proceeds were credited to the Stock Fund, and thus, to each Plan. The
unit value of each participant's account balance in each Plan reflected
the addition of the proceeds to the Stock Fund (as applicable).
The trading period for the sale of the Rights on the NYSE ended on
June 26, 2015. Evercore sold the Plans' 1,326,085 Rights in blind
transactions on the NYSE between June 16 and June 19, 2015, realizing
an average selling price of $3.10 per Right. According to the
Applicant, the volume-weighted average price for a total of 46,699,673
Rights that were sold during the trading period was $3.66, according to
data reported by Factset.
16. Evercore represents that, as noted in the Independent Fiduciary
Report, its goal in selling the Rights was to dispose of them in a
timely manner at the best available market prices so that cash raised
through the sale could be reinvested in shares of Holdings Stock as
soon as possible and at the discretion of State Street, the Master
Trustee and Custodian of the Master Trust. This, according to Evercore
was consistent with the purpose and intent of the Stock Fund.
Evercore explains that it also believed it was prudent to take
advantage of available liquidity early in the Offering Period, given
the typical decline in trading volume experienced over the course of a
rights offering period. Evercore states that it promptly began to sell
the Rights once it was informed that the Rights had been delivered to
the Stock Fund account. The liquidation lasted four days, beginning on
June 16, 2015, and ending on June 19, 2015. The Rights continued to
trade over five more days (June 22 to June 26), during which time the
price of the Rights rose. This rise in price, Evercore asserts, was
entirely unpredictable beforehand. Waiting for such a potential
outcome, Evercore explains, would have been at odds with its goal of
promptly realizing and reallocating proceeds, and further would have
exposed the Plans to the risk of a significant decline in the price of
the Rights over the course of the offering period.
17. In the opinion of Evercore, the actions outlined above in which
it was engaged on behalf of the Plans, were in the interest of the
Plans and the Plans' participants and beneficiaries, and were
protective of the rights of such participants and beneficiaries of the
Plans.
18. No brokerage fees, commissions, subscription fees, or other
charges were paid by the Plans with respect to the acquisition and
holding of the Rights, or were paid to any broker affiliated with
Evercore, or Holdings, in connection with the sale of the Rights. In
this regard, it is represented that Evercore selected State Street
Global Markets to execute the trades for the sale of the Rights issued
to the Master Trust, based on Evercore's confidence in that broker's
execution ability and an attractive fee schedule of 0.01 cent per Right
traded. In connection with the sale of the Rights, the Plans (through
the Master Trust) paid $13,260.85 in commissions and $75.83 in SEC
fees.\30\
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\30\ The Applicant represents that the brokerage services and
the fees that were received by State Street Global Markets in
connection with the sale of the Rights by the Plans, are exempt
under section 408(b)(2) of the Act. The Department, herein, is not
providing any relief for the receipt of any commissions, fees, or
expenses in connection with the sale of the Rights in blind
transactions to unrelated third parties on the NYSE, beyond that
provided pursuant to section 408(b)(2) of the Act. In this regard,
the Department is not opining as to whether the conditions as set
forth in section 408(b)(2) of the Act and the Department's
regulations, pursuant to 29 CFR 2550.408(b)(2) have been satisfied.
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Requested Relief
19. The application was filed by Holdings on behalf of itself and
its affiliates. In this regard, Holdings has requested an exemption for
the acquisition and holding of the Rights by the Plans in connection
with the Offering of Seritage Growth Stock by Holdings. The Applicant
represents that the subject transactions have already been consummated.
In this regard, the Plans acquired the Rights pursuant to the Offering,
and held such Rights until they were sold by the Independent Fiduciary.
The Applicant states that, because there was insufficient time between
the dates the Plans acquired the Rights and when the Rights were sold
to apply for and be granted an administrative exemption by the
Department, Holdings requested retroactive exemptive relief for the
period June 11, 2015, through July 2, 2015.
20. Section 406(a)(1)(E) of the Act prohibits a fiduciary from
causing a plan to engage in a transaction, if he knows or should know
that such transaction constitutes a direct or indirect acquisition, on
behalf of a plan, of any employer security or employer real property in
violation of section 407(a). Section 406(a)(2) of the Act prohibits a
fiduciary who has authority or discretion to control or manage the
assets of a plan from permitting a plan to hold any employer security
or employer real property if he knows or should know that holding such
security or real property violates section 407(a). The Applicant
represents that because the Rights are non-qualifying employer
securities, the acquisition and holding of the Rights by the Plans
violated sections 406(a)(1)(E), 406(a)(2), and 407(a) of the Act.
Furthermore, section 406(b)(1) of the Act prohibits a fiduciary
from dealing with the assets of a plan in his own interest or for his
own account. Section 406(b)(2) of the Act prohibits a fiduciary, in his
individual or in any other capacity, from acting in any transaction
involving the plan on behalf of a party (or representing a party) whose
interests are adverse to the interests of the plan or the interests of
its participants or beneficiaries. The Applicant states that, although
Holdings retained the Independent Fiduciary to represent the Plans in
connection with the disposition of the Rights, by causing the
participation of the Plans in the Offering, Holdings may have dealt
with the assets of the Plans for its own account, and also may have
acted in a transaction on behalf of itself and the Plans.
Therefore, the Applicant requests an administrative exemption from
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act and section 4975 of the Code by reason of
4975(c)(1)(E) of the Code, with regard to the Savings Plan, and from
sections 406(a)(1)(E), 406(a)(2), 406(b)(1), 406(b)(2), and
407(a)(1)(A) of the Act with regard to the PR Plan.
Statutory Findings
21. The Applicant represents that the proposed transactions are
administratively feasible because the acquisition and holding of the
Rights by the Plans were one-time transactions that involved an
automatic distribution of the Rights to all shareholders, that would
not require any continuing oversight by the Department.
The Applicant also represents that the subject transactions were in
the interest of the Plans and their respective participants and
beneficiaries, because the Rights were automatically issued at no cost
to the shareholders of Holdings Stock, including the Plans, as of the
Record Date.
[[Page 29718]]
Finally, the Applicant represents that the transactions were
protective of the rights of the participants and beneficiaries of the
respective Plans because the Plans obtained the Rights as a result of
an independent act of Holdings as a corporate entity. In addition, the
acquisition of the Rights by the Plans occurred on the same terms made
available to other holders of Holdings Stock, and the Plans received
the same proportionate number of Rights as other owners of Holdings
Stock. The Plans were also protected in that all decisions regarding
the holding and disposition of the Rights by the Plans were made, in
accordance with Plan provisions, by the Independent Fiduciary.
Furthermore, the Applicant represents that the Independent Fiduciary
determined that it would be in the interest of the Plans to sell all of
the Rights received in the Offering by the Plans in blind transactions
on the NYSE.
Summary
22. In summary, Holdings represents that the subject transactions
satisfy the statutory criteria for an exemption under of section 408(a)
of the Act because:
(a) The receipt of the Rights by the Plans occurred in connection
with the Offering in which all shareholders of Holdings Stock,
including the Plans, were treated in the same manner;
(b) The acquisition of the Rights by the Plans resulted solely from
an independent act of Holdings, as a corporate entity;
(c) Each shareholder of Holdings Stock, including each of the
Plans, received the same proportionate number of Rights based on the
number of shares of Holdings Stock held by each such shareholder;
(d) All decisions with regard to the holding and disposition of the
Rights by the Plans were made by the Independent Fiduciary on behalf of
the Plans;
(e) The Independent Fiduciary determined that it would be in the
interest of the Plans to sell all of the Rights received in the
Offering by the Plans in blind transactions on the NYSE;
(f) No brokerage fees, commissions, subscription fees, or other
charges were paid by the Plans with respect to the acquisition and
holding of the Rights; or were paid to any broker affiliated with the
Independent Fiduciary or Holdings, in connection with the sale of the
Rights; and
(g) The acquisition of the Rights by the Plans occurred on the same
terms made available to other shareholders of Holdings Stock.
Notice to Interested Persons
The persons who may be interested in the publication in the Federal
Register of the Notice of Proposed Exemption (the Notice) include all
participants whose accounts in the Plans were invested on the Record
Date through the Master Trust in the Stock Fund which held the Holdings
Stock.
It is represented that all such interested persons will be notified
of the publication of the Notice by first class mail, to each such
interested person's last known address within 22 days of publication of
the Notice in the Federal Register. Such mailing will contain a copy of
the Notice, as it appears in the Federal Register on the date of
publication, plus a copy of the Supplemental Statement, as required,
pursuant to 29 CFR 2570.43(a)(2), which will advise all interested
persons of their right to comment and to request a hearing. A11 written
comments and/or requests for a hearing must be received by the
Department from interested persons within 52 days of the publication of
this proposed exemption in the Federal Register.
All comments will be made available to the public.
Warning: Do not include any personally identifiable information
(such as name, address, or other contact information) or confidential
business information that you do not want publicly disclosed. All
comments may be posted on the Internet and can be retrieved by most
Internet search engines.
FOR FURTHER INFORMATION CONTACT: Ms. Blessed Chuksorji-Keefe of the
Department, telephone (202) 693-8567. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 6th day of May, 2016.
Lyssa E. Hall,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2016-11115 Filed 5-11-16; 8:45 am]
BILLING CODE 4510-29-P