Recent court filings in an Ohio shareholder lawsuit are raising fresh questions about whether former Big Lots Inc. officers and directors contributed to the retailer’s September 2024 Chapter 11 bankruptcy by approving a massive stock buyback — and whether they could face liability for breaching their fiduciary duties to shareholders.
The filings come in a case originally brought in April 2021 by Big Lots shareholder, the Corpus Christi Firefighters’ Retirement System (CCFRS), against shareholder activists Ancora Holdings Inc. and Macellum Advisors. The pension fund alleged that several entities tied to Ancora and Macellum violated Ohio’s anti-greenmail statute by launching a proxy contest in 2020 to elect new directors to Big Lots’ board.
Ohio’s anti-greenmail statute, which has never before been used to challenge shareholder activism, was enacted in the 1980s to deter investors from using hostile tactics to pressure companies into buying back shares at inflated prices.
The trial court previously ruled the defendants did not engage in manipulative practices and therefore did not violate the statute.
Now, after the case was remanded on a limited basis in May back to the trial court to determine whether CCFRS even had standing to bring the case in April 2021, Big Lots itself is trying to intervene in the case. Its recent filings, however, appear to contradict prior sworn statements it made when commencing its bankruptcy in Delaware federal court last year.
For instance, when filing for Chapter 11 protection in Delaware last September, Big Lots blamed “macroeconomic and industry-specific headwinds,” such as inflation, supply chain disruptions, increased competition, and the collapse of a major supplier, despite years of poor performance.
“Over the last several years, Big Lots, like many retailers, has been forced to contend with numerous significant macroeconomic and industry-specific headwinds that have strained its business and resources, and ultimately led [Big Lots] to seek Chapter 11 relief.”
Specifically, Big Lots in its initial filing cited a multitude of factors that allegedly caused the bankruptcy, including a marked shift by consumers toward e-commerce; increased competition from supermarket retailers, convenience stores, national general merchandisers, and discount retailers; disruptions caused by the COVID-19 pandemic; a shifting interest rate environment; a less dependable supply chain ecosystem and resulting increases in operating costs; the difficulty of operating in an inflationary macroeconomic environment; and its largest supplier, United Furniture Industries Inc., ceasing business operations in 2022.
Nowhere in that initial filing in the Delaware bankruptcy court — or in any filing in the bankruptcy court since then — has Big Lots stated that its bankruptcy was caused by the proxy contest in 2020 or by the decision of its officers and directors to engage in a series of “stock buyback” transactions in 2020 and 2021.
The majority of stock buybacks occurred throughout 2021, when Big Lots repurchased approximately 7.7 million of its own shares for approximately $417.7 million.
Now, in its Ohio court filing, Big Lots has shifted its narrative, claiming the bankruptcy was caused “in no small part” by a 2021 decision by its then-officers and directors to repurchase about 7.7 million shares for $417.7 million.
This explanation was never mentioned in the company’s bankruptcy filings, which made no reference to the buyback or the Ohio defendants.
If the buyback is found to have contributed to the bankruptcy, then the former executives — including ex-CEO Bruce Thorn and Chief Legal Officer Ronald Robins — could face legal action for alleged breaches of fiduciary duty to Big Lots shareholders.
Currently, the Big Lots Creditors’ Committee is weighing potential claims against former leadership.
In the new filing in Ohio, Big Lots lawyers also attempt to blame the bankruptcy on the defendants, Ancora and Macellum, writing that they caused Big Lots to pursue “short-term, transient share price-increases” through the stock buyback.
But as the defendants’ lawyers pointed out in their response filing, defendants’ proxy contest ended in April 2020, long before Big Lots began the stock buyback.
In fact, when Big Lots repurchased most of its shares in 2021, the defendants no longer had any affiliated individuals serving on the Big Lots board, had sold almost all of their shares, and had no involvement in Big Lots’ management and operation, according to the filings.
When asked in a previous court appearance whether the defendants’ conduct had anything to do with the bankruptcy, Big Lots lawyers said no, as noted in the filing.
“Judge Edelstein: Is it your contention that those actions caused the bankruptcy proceedings though? I thought I saw that at one point and it was contested on the other side.
“Big Lots Counsel: No, your Honor. . . . [T]he bankruptcy causation is not an issue here.”
Separate from the new claims about the bankruptcy, the defendants also argued in their recent filing that Big Lots should not be permitted to intervene in the case.
Among other things, the defendants argued that the trial court’s only function on remand is to determine whether CCFRS originally had standing to bring the case in April 2021, when it was originally filed.
The previous trial judge, Judge Daniel Hawkins, had expressed “doubts” about whether CCFRS had standing, but “presumed” it did before finding that the defendants did not engage in any manipulative practice.
On appeal, the Tenth District Court of Appeals remanded the case to the trial court to formally decide the question of standing.
Judge Hawkins, who has since been elected to the Ohio Supreme Court, was replaced by Judge Richard D. Brown as the new trial judge. Brown is expected to decide the question of standing.
If the trial court determines that the pension fund lacked standing, it will be another blow to the plaintiff’s attempt to move its claim forward.
In either event, after the standing issue is addressed, the case will likely return to the appeals court for further review.
A ruling in favor of the plaintiffs could significantly broaden the reach of Ohio’s anti-greenmail statute, potentially discouraging activist investors from engaging with Ohio corporations. (Though in a proactive attempt to avoid those negative consequences, in December 2024 the Ohio legislature amended the anti-greenmail statute to essentially codify the trial court ruling that the statute does not apply to the lawful exercise of shareholder rights.)
Conversely, a ruling for the defense would reaffirm shareholder advocacy as a lawful and essential part of corporate governance.