Kmart Holders Take a Small Step Toward Recovery - TheStreet

Kmart

(KM)

shareholders may get a seat at the table, but whether their voices will be heard is another question.

Officials in Chicago overseeing Kmart's bankruptcy proceedings agreed to the formation of an equity committee to represent shareholders' rights, lawyers announced Tuesday. Such representation is rare in bankruptcy cases, experts say, and the step appears to be a positive sign for shareholders hoping to get some value for their stock.

The formation of such a committee signals that there is at least a chance of shareholders walking away with something in their pockets, experts said. However slim the chances are that they'll recover significant value, Kmart shareholders appear to have benefited from a post-Enron environment in which protecting shareholder interests has taken on increased prominence. Indeed, the

Securities and Exchange Commission

filed a brief in support of the creation of an equity committee with the bankruptcy court in Chicago.

"Equity committees should be formed only when there is going to be some return, or possibility of return, to equity," says Christopher Bayley, a partner at the law firm Snell & Wilmer who specializes in bankruptcy law. Bayley has worked on several cases in which equity committees have been established; he says in some cases stockholders got something, but in others they didn't. "There is a chance," he says.

An equity committee gives shareholders the right to hire outside counsel and investment bankers, all paid for by the bankruptcy estate, Bayley says.

"Kmart shareholders will now have a formal voice in Kmart's Chapter 11 proceedings and have a right to representation by third-party professionals," says Randall L. Klein, principal with Goldberg Kohn, a Chicago law firm that was hired by Ronald Burkle, a large investor in Kmart.

Others aren't so optimistic. They stress that equityholders usually don't get much in bankruptcy proceedings because creditors take priority. "Equity committees are rare, and they rarely have power," says Chris Stuttard, editor of BankruptcyData.com. For this reason, most Wall Street analysts dropped coverage of Kmart after it filed for Chapter 11 in January.

Nevertheless, the stock has stayed above $1 -- the threshold for delisting from the

New York Stock Exchange

. The stock lately traded at $1.10, down a penny.

Troy, Mich.-based Kmart has said it hopes to emerge from bankruptcy in 2003, but thus far has only stumbled. The company has shut stores and reorganized management, two steps that Wall Street says are necessary. But sales continue to fall, pressuring the new management to take more radical steps.

Notably, Kmart has also come under scrutiny by securities regulators and the FBI. In January the SEC opened a probe of Kmart's accounting after the company received an anonymous letter questioning its accounting practices. This later forced Kmart to announce that it would have to restate its 2001 financials.

More recently, the FBI confirmed it had opened a criminal investigation of Kmart, according to published reports.

Kmart lost $2.42 billion last year, nearly 10 times the $244 million loss in 2000. Kmart has struggled to compete with the likes of

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

, and a dismal holiday season -- in which the company lost market share to its rivals -- was the last straw, triggering the company's spiral into bankruptcy.