| RELATED PARTIES | 17. RELATED PARTIES In January 2020, the Company’s trusts completed the purchase of a $ 30 million participation in a new $ 70 million debt facility issued by a discount shoe retailer (the “Shoe Retailer”). Funds and accounts affiliated with Axar also invested $ 20 million in this facility. The investment was initially proposed by the Chairman of the Board, Mr. Axelrod. The investment was reviewed and approved in December 2019 in accordance with the Partnership’s governance policies in place at that time. At the time of the investment, the funds and accounts affiliated with Axar owned approximately 30 % of the equity of the Shoe Retailer, and Mr. Axelrod served on the Shoe Retailer’s board of directors. The Company’s investment in the Shoe Retailer represented approximately 4 % of the total fair market value of the Company’s trust assets when the investment was made. As of December 31, 2021, Axar beneficially owned 74.9 % of the Company’s outstanding common stock, which constituted a majority of the Company’s outstanding common stock. As a result, the Company is a “controlled company” within the meaning of NYSE corporate governance standards. On February 1, 2021, Cornerstone Trust Management Services LLC (“Cornerstone”), a wholly-owned subsidiary of the Company, entered into a Subadvisor Agreement (the “Agreement”) with Axar. The sole member of Axar’s general partner is Andrew M. Axelrod, who serves as the Chairman of the Company’s Board of Directors. In connection with the execution of the Agreement, Mr. Axelrod resigned as a member of the Trust and Compliance Committee (the “Trust Committee”) of the Board. Pursuant to the charter of the Trust Committee, the retention of Axar as a subadvisor and the Agreement were first reviewed and approved by the Trust Committee, subject to the condition that the retention of Axar and the Agreement also be approved by a Board committee comprised exclusively of independent directors. Given the Axar relationship, the Board appointed a special committee to review the retention of Axar and the Agreement, which subsequently also approved the retention of Axar and the terms of the Agreement. Both the Trust Committee and the special committee concluded that Axar had the appropriate experience and performance record that would assist Cornerstone in performing its investment advisory obligations for the Company, that the retention of Axar would provide back-office operational efficiencies to Cornerstone and that the financial terms were at least as favorable to Cornerstone as the terms that would be available from other unaffiliated subadvisors, if not more favorable. Under the terms of the Agreement, Axar agreed to provide the following services with respect to the assets held in the Company’s merchandise and perpetual care trust (the “Trusts”) and certain pooled investment vehicles administered by the trustee of the Trusts (the “Trustee”) in which certain of the Trusts participate or invest (collectively, the “Investment Assets”): • Advise Cornerstone with respect to the allocation and investment of the Investment Assets on a non-discretionary basis, including providing advice concerning portfolio allocation among investment strategies; • Oversee other subcontractors or external managers engaged by Cornerstone to provide advice with respect to the Investment Assets; • Provide quarterly investment performance reports to and meet on a quarterly basis with the Trust Committee; • As requested by Cornerstone from time to time, perform the tasks and responsibilities delegated by the Trust Committee to Cornerstone under the Company’s investment policy statement; and • As requested by Cornerstone, assist Cornerstone in performing its duties by providing general back office and administrative support to Cornerstone and, at Cornerstone’s reasonable request, the Trustee. Under the Agreement, Axar is entitled to a quarterly fee equal to 0.0125 % of the value of the Investment Assets through December 31, 2021 and, thereafter, a quarterly fee equal to 0.025 % of the value of the Investment Assets. In each case, the value of the Investment Assets will be determined by the Trustee. During the year ended December 31, 2021 , the Company incurred fees of $ 384,000 due to Axar. Mr. Axelrod also serves at the discretion of the Trusts as a director of a children’s retailer in which the Trusts hold an equity interest, for which he receives annual director fees from that company of $ 80,000 . Mr. Axelrod also serves as director of a Nevada company in which the Trusts hold an equity interest, for which he receives annual director fees from that company of $ 75,000 . In addition, he and an additional Axar employee serve as directors of the Shoe Retailer, for which each of them receives annual director fees from the Shoe Retailer of $ 100,000 . The initial term of the Agreement is through December 31, 2021 and it automatically renews for an unlimited number of one-year terms thereafter, provided that either party may terminate the Agreement on 90 days’ prior written notice. The Agreement also includes customary confidentiality and indemnification provisions. On April 13, 2021, the Company reimbursed American Infrastructure Funds LLC (“AIM”), an entity controlled by Robert B. Hellman, Jr., a former Chairman and member of the Company's Board of Directors, $ 0.6 million for certain expenses incurred by AIM in responding to a document production request from the SEC in connection with an SEC investigation of the Company and StoneMor GP that was settled in December 2019. The Company is a party to a Nomination and Director Voting Agreement dated as of September 17, 2018 (as amended on February 4, 2019, June 27, 2019, November 3, 2020 and November 20, 2020, the “DVA”) with Axar, certain funds and managed accounts for which it serves as investment manager and its general partner, Axar GP, LLC (collectively, the “Axar Entities”), StoneMor GP Holdings LLC, a Delaware limited liability company and formerly the sole member of StoneMor GP (“GP Holdings”), and Robert B. Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of American Cemeteries Infrastructure Investors LLC (“ACII” and, collectively with GP Holdings, the “ACII Entities”). Under the DVA, and subject to certain conditions and exceptions, the Axar Entities and their affiliates are prohibited from acquiring additional shares of the Company’s Common Stock. On April 13, 2021, the Axar Entities, the ACII Entities and the Company entered into a letter agreement (the “Waiver”) pursuant to which the Axar Entities were permitted to acquire some or all of the shares of the Company’s Common Stock held by ACII and its affiliates in a single privately negotiated transaction and not in the open market. The terms of the Waiver were approved by the Conflicts Committee of the Company’s Board of Directors. The waiver was subject to the following conditions: • any such purchase be consummated on or before May 31, 2021; • the Company, the Axar Entities and the ACII Entities have entered into a further amendment to the DVA to clarify that the standstill period applicable to the Axar Entities will expire on December 31, 2023; • Axar will vote or direct the voting of all shares of the Company’s Common Stock it beneficially owns in favor of amendments to Article VIII of the Company’s Certificate of Incorporation (the “Charter”) relating to amendments of the Company’s Bylaws and Article X of the Charter with respect to any amendment or repeal of Article V, Article VI(c), Article VII(a)-(d), Article VIII, Article X or Article XI of the Charter to increase the required stockholder approval required thereunder from “at least sixty six and two thirds percent (66 2/3%)” to “at least eighty-five percent (85%) (collectively, the “Supermajority Provisions”);” and • pending the effectiveness of such amendment to Article VIII and Article X of the Charter, Axar would not vote or direct the voting of any shares of the Company’s Common Stock in favor of any proposal to which the Supermajority Provisions are applicable unless such proposal has been approved by the Company’s Board of Directors and its Conflicts Committee. As contemplated by the Waiver, on April 13, 2021, the Company, the Axar Entities and the ACII Entities also entered into the Fifth Amendment to the DVA pursuant to which the parties clarified that the standstill period applicable to the Axar Entities thereunder would expire on December 31, 2023. On September 27, 2021, the Company announced that it had received the Letter dated September 22, 2021 from Axar in which Axar expressed an interest in pursuing discussions concerning strategic alternatives that may be beneficial to the Company and its various stakeholders. Axar has engaged Schulte Roth & Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate time. According to the Letter, Axar expected that any such discussions would be conducted with a special committee of the Board, assisted by financial and legal advisors engaged by such committee. The Letter also stated that any transaction involving Axar arising from such discussions would be conditioned upon, among other things, approval of the special committee and the Board, the negotiation and execution of mutually satisfactory definitive agreements and customary terms. The Letter also stated that any transaction structured as a take-private transaction would be subject to a closing condition that the approval of holders of a majority of the outstanding shares not owned by Axar or its affiliates be obtained. On September 26, 2021, the Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J. Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in the discussions contemplated by the Letter, including the authority to engage in discussions concerning and to negotiate the terms and provisions of any strategic alternative the Conflicts Committee determines to be appropriate in connection with such discussions. Under its charter, the Conflicts Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related party transaction, which would include any transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors to assist in such discussions. Following receipt of the Letter and until recently, the Conflicts Committee and its counsel had engaged in discussions with Axar and Axar’s counsel, which evolved to focus on a potential offer by Axar to acquire the shares of the Company that are not owned by Axar or its affiliates. While these negotiations had been productive, the Conflicts Committee and Axar had not come to agreement on any price that Axar would pay for such shares or on certain other terms of any transaction, and there can be no assurance that any agreement would be reached in the future. Negotiations between the Conflicts Committee and Axar were recently tabled in light of the work undertaken by the Conflicts Committee with respect to the independent review of certain investments by our trusts in which Axar had an interest. See the discussion below. The Conflicts Committee may at any time determine to resume such negotiations, but there can be no assurance that even if such negotiations are resumed, any agreement with respect to a take-private transaction will be executed or that this or any other transaction will be approved or consummated. The Company does not undertake any obligation to provide any updates with respect to these matters except as required under applicable law. On March 9, 2021, our trusts purchased an aggregate of 43,681,528 shares (the “Nevada Company Shares”) of common stock of a Nevada company whose primary assets now consist of cash and tax-related assets (the “Nevada Company”), representing approximately 27 % of the outstanding common stock of the Nevada Company, from three private investment funds (the “Nevada Company Sellers”) for an aggregate cash purchase price of $ 18.0 million. Axar had originally agreed to acquire the Nevada Company Shares pursuant to a Securities Purchase Agreement dated December 31, 2020, among the Nevada Company Sellers and Axar (the “Nevada Company Purchase Agreement”). On February 1, 2021, pursuant to the Subadvisor Agreement described above, Axar recommended to Cornerstone that our trusts purchase the Nevada Company Shares. Pursuant to that recommendation, on February 4, 2021, Axar and our trusts entered into an Assignment and Assumption Agreement (the “Nevada Company Assignment Agreement”), pursuant to which Axar agreed to assign its rights under the Nevada Company Purchase Agreement to our trusts and our trusts agreed to assume Axar’s obligations thereunder. Axar did no t receive any additional consideration from our trusts for this assignment and has represented to us that it did not receive any consideration for this assignment from any other person. The Nevada Company Sellers and Axar entered into the Nevada Company Purchase Agreement while the Subadvisor Agreement was being finalized. Axar has informed us that it entered into the Nevada Company Purchase Agreement with the intention that our trusts would purchase the Nevada Company Shares directly from the Nevada Company Sellers. Axar has represented to Cornerstone that it is not, and at the time it entered into the Nevada Company Purchase Agreement was not, affiliated with any of the Nevada Company Sellers and did not control and was not an affiliate of Nevada Company at the time it executed the Nevada Company Purchase Agreement or when our trusts purchased the Nevada Company Shares. Axar has recently represented to us that, at the time the Nevada Company Purchase Agreement was signed and at all times thereafter until our trusts completed their purchase of the Nevada Company Shares, funds and accounts affiliated with Axar owned approximately 13.8 % of Nevada Company’s outstanding common stock, and that Andrew Axelrod was elected to the board of directors of the Nevada Company on December 31, 2020. However, although Axar as a subadvisor to Cornerstone was obligated to disclose any conflicts of interest with respect to its recommendations, neither of these facts was disclosed to Cornerstone at the time Axar recommended the purchase of the Nevada Company Shares. The Company does not have any interest in the Nevada Company, other than our trusts’ ownership of the Nevada Company Shares. At the time the Nevada Company Assignment Agreement was executed, neither Cornerstone nor our trusts knew of Axar’s stock ownership in Nevada Company or that Mr. Axelrod was on Nevada Company’s board. Consequently, neither the Board’s Trust and Compliance Committee, as required by the Company’s investment policy, nor the Board’s Audit Committee, as required by its charter, had the opportunity to review and to approve or disapprove our trusts’ execution of the Nevada Company Assignment Agreement or their consummation of the purchase of the Nevada Company Shares contemplated thereby. On May 15, 2021, our trusts entered into a Participation Agreement with a real estate investment trust (the “REIT”) relating to a $ 52 million loan made by the REIT to certain real estate developers, which is secured by real property and bore interest at a rate of 15 %. Our trusts’ participation was a $ 26 million investment (the “Real Estate Loan Participation”). We have been informed by Axar that an Axar fund formerly controlled the management company of the REIT, the Cornerstone funds’ co-investor in this transaction, but that the Axar fund sold its interest in the management company on March 31, 2021, before our trusts entered into the Real Estate Loan Participation transaction. Axar has represented to us that Mr. Axelrod served on the REIT’s board, including as chairman of that board, from 2018 through November 2021, at which time he resigned from the REIT’s board. Axar has represented to us that Axar retained a 4.7 % interest in the management company that manages the REIT and is entitled to 8.75 % of any returns after a 6 % return to other investors in the management company. Axar has advised us that, in connection with the sale of Axar’s interest in the management company, Axar is also entitled to a deferred payout of $ 300,000 per annum in the form of a consulting fee from the management company for capital markets and other strategic advice. Although Axar as a subadvisor to Cornerstone was obligated to disclose any conflicts of interest with respect to its recommendations, it did not disclose its relationship with the REIT at the time it recommended this investment to Cornerstone. As a result, at the time our trusts obtained the Real Estate Loan Participation from the REIT, neither Cornerstone nor our trusts recognized that there was an existing relationship between Axar and any entities affiliated with the REIT, and neither the Board’s Trust and Compliance Committee, as required by the Company’s investment policy, nor the Board’s Conflicts Committee, as required by its charter, had the opportunity to review and to approve or disapprove the consummation of such transaction. The loan made by the REIT, including the Real Estate Loan Participation, was repaid in full on December 16, 2021, and our trusts received cash interest payments with respect to the Real Estate Loan Participation in the aggregate amount of $ 2.4 million, representing all interest payable to our trusts under the Real Estate Loan Participation. As of December 31, 2021, our trusts have no ongoing interest in this investment. On May 17, 2021, our trusts entered into a Loan Agreement with a hotel investor and developer and certain of its subsidiaries (collectively, the “Hotel Fund”), which was amended and restated on October 12, 2021 (such agreement, as so amended and restated, the “Hotel Fund Loan Agreement”) and subsequently amended on December 13, 2021 and March 7, 2022. Pursuant to the Hotel Fund Loan Agreement, our trusts provided a $ 33.2 million mezzanine loan to the Hotel Fund on May 19, 2021 as part of a $ 162.2 million loan facility originated by an unaffiliated loan fund. The participation by our trusts was based on the recommendation of Axar under the Subadvisor Agreement. As part of the same transaction, funds and other accounts affiliated with or managed by Axar loaned $ 10.0 million to the Hotel Fund on the same terms as the trusts’ loans, representing the balance of the $ 43.2 million mezzanine loan, and our trusts and the Axar funds and accounts each received an origination fee equal to 4 % of their respective loan amounts. The principal amount of these loans is payable on October 12, 2023, subject to acceleration under the circumstances described in the Hotel Fund Loan Agreement, and bear interest at an adjustable rate equal to one-month LIBOR plus a spread. On February 15, 2022, the administrative agent for the lenders under the Hotel Fund Loan Agreement delivered a reservation of rights letter to the Hotel Fund with respect to the Hotel Fund’s apparent failure to comply with several covenants in the Hotel Fund Loan Agreement, none of which related to payment of amounts due to the lenders. As of March 1, 2022, the interest rate was 18.75 %. Through March 1, 2022, the trusts have received cash interest in the aggregate amount of $ 7.2 million on this loan from an interest and expense reserve account established for that purpose, representing all interest payable to our trusts under the Hotel Fund Loan Agreement. Axar has represented to Cornerstone that it did not own, directly or indirectly, any equity or debt securities of the Hotel Fund prior to making the loan contemplated by the Hotel Fund Loan Agreement and did not control and was not an affiliate of the Hotel Fund. Axar has also advised us that it does not own, directly or indirectly, any equity or debt securities of the Hotel Fund other than through its participation in the mezzanine loan. At the time the trusts’ participation in the Hotel Fund Loan Agreement was being considered by Cornerstone, Axar had provided a draft of the Hotel Fund Loan Agreement to Cornerstone which reflected that funds and other accounts affiliated with or managed by Axar also intended to participate in the loan facility on the same terms and conditions as our trusts, but neither Cornerstone nor our trusts recognized that such participation represented a related party transaction, and Axar has represented to us that it did not recognize that such participation represented a related party transaction. Consequently, neither the Board’s Trust and Compliance Committee, as required by the Company’s investment policy, nor the Board’s Conflicts Committee, as required by its charter, had the opportunity to review and to approve or disapprove the consummation by our trusts of the transactions contemplated by the Hotel Fund Loan Agreement. On September 27, 2021, our trusts entered into an Assignment and Acceptance Agreement (the “Holdco Loan Assignment”) with an insurance holding company (“Holdco”) and Holdco’s then current lender (the “Initial Lender”) pursuant to which the Initial Lender agreed to assign to our trusts all of its rights, duties and obligations under a Loan Agreement dated as of July 9, 2019 between the Initial Lender and Holdco (the “Holdco Loan Agreement”). The Initial Lender had previously declared Holdco in default under the terms of the Holdco Loan Agreement. At the closing of the transactions contemplated by the Holdco Loan Assignment on October 6, 2021, our trusts paid the Initial Lender $ 28.7 million in cash, which equaled the then outstanding principal balance of the loan under the Holdco Loan Agreement (the “Holdco Loan”). The Company was not affiliated with either Holdco or the Initial Lender and Axar has represented to Cornerstone that it did not control and was not an affiliate of either Holdco or the Initial Lender. Also on September 27, 2021, our trusts and Holdco entered into the First Amendment to Loan Agreement (the “Amended Holdco Loan Agreement”) pursuant to which, among other changes, the defaults asserted by the Initial Lender were waived and the interest rate on the Holdco Loan was increased from 10 %, all of which had been payable in kind by increasing the principal balance of the loan, to 15 %, of which 10 % continued to be payable in kind and 5 % was payable in cash. In addition, the Amended Holdco Loan Agreement accelerated the maturity of the Holdco Loan to the earliest of the first anniversary of the closing (subject to a six month extension at the request of Holdco with the consent of our trusts) and the occurrence of certain other events described further below. As of March 1, 2022, the interest rate on the Holdco Loan remained at 15 %. Through March 1, 2022, the trusts have received cash interest in the aggregate amount of $ 0.8 million on the Holdco Loan and additional interest in the form of an increase in the principal balance of the Holdco Loan in the amount of $ 1.2 million, representing all interest payable to our trusts under the Amended Loan Agreement. Also on September 27, 2021, Axar entered into a letter agreement with Holdco (the “Transaction Letter Agreement”) pursuant to which Holdco agreed, in order to induce Axar to enter into the Amended Holdco Loan Agreement, that it would, if requested by Axar, enter into an agreed-upon form of purchase agreement for the sale of the outstanding capital stock of its wholly-owned insurance company subsidiary (the “Holdco Subsidiary”) to Axar for a purchase price of $ 100 million, subject to certain conditions including completion by Axar of a customary due diligence investigation and regulatory approval of the transaction by the state insurance regulator. Recently, Axar advised us that the state insurance regulators had advised Axar that regulatory approval of the transaction between Axar and Holdco would not be granted because the contemplated purchase price included a $ 40 million note to be issued to Holdco, and, as a result, after further negotiations, that Holdco and Axar entered into a purchase agreement dated January 20, 2022, which provided for a cash purchase price of $ 75 million, less the outstanding amounts owed to our trusts under the Amended Holdco Loan Agreement and a fee that remained payable to the Initial Lender. Axar has advised us that the sale to Axar under the purchase agreement remains subject to regulatory approval. Because the Holdco Loan is secured by the stock of the Holdco Subsidiary, the Holdco Loan is required to be repaid in full upon the sale of the stock of the Holdco Subsidiary to Axar or any third party. The Amended Holdco Loan Agreement provides that the Holdco Loan is due and payable on the earliest of (a) October 6, 2022 (subject to a six-month extension as discussed above), (b) an election by Holdco not to proceed with the transaction contemplated by the Transaction Letter Agreement, (c) a breach by Holdco of any of its obligations under the Transaction Letter Agreement or any purchase agreement executed with respect to the sale of Holdco Subsidiary or (d) the consummation of the sale of Holdco Subsidiary to Axar. Also on September 27, 2021, (i) our trusts and Holdco entered into a letter agreement pursuant to which Holdco has paid our trusts a fee of $ 500,000 (the “StoneMor Trusts Fee Letter Agreement”) and (ii) Axar and Holdco entered into an Expense Fee Letter pursuant to which Holdco agreed to pay Axar’s due diligence expenses of up to $ 630,000 (the “Expense Fee Letter Agreement”). Entrance of Holdco into both the Expense Fee Letter Agreement and the StoneMor Trusts Fee Letter Agreement were conditions to the effectiveness of the Amended Holdco Loan Agreement. The Transaction Letter Agreement and the Expense Fee Letter Agreement were referenced in the Amended Holdco Loan Agreement. Although Axar as a subadvisor to Cornerstone was obligated to disclose any conflicts of interest with respect to its recommendations, it did not provide a copy or disclose the terms or provisions of the Transaction Letter Agreement or Expense Fee Letter Agreement to Cornerstone at the time it recommended that our trusts enter into the Holdco Loan Assignment. As a result, at the time the Holdco Loan Assignment and the Amended Holdco Loan Agreement were executed, neither Cornerstone nor our trusts was aware of Axar’s right to acquire Holdco Subsidiary from Holdco. Consequently, neither the Board’s Trust and Compliance Committee, as required by the Company’s investment policy, nor the Board’s Conflicts Committee, as required by its charter, had the opportunity to review and to approve or disapprove the consummation by our trusts of the transactions contemplated by the Holdco Loan Assignment and the Amended Holdco Loan Agreement. Our management identified the Nevada Company and Hotel Fund transactions as related party transactions in February 2022 in connection with the preparation of the Company’s consolidated financial statements for the fiscal year ended December 31, 2021. Upon management’s becoming aware of Axar’s interests in the Nevada Company and Hotel Fund transactions, management reported such interests to the chairs of the Conflicts Committee and the Trust and Compliance Committee, and upon Axar advising the Company of Axar’s involvement in the Holdco transaction, management reported it to the chair of the Conflicts Committee. Upon learning of Axar’s interests in the Nevada Company and Hotel Fund transactions, the Conflicts Committee promptly commenced an independent review of all Axar’s investment recommendations to Cornerstone, including those trust investments in which Axar was involved, and directed its counsel to assist with its review. Axar’s interests in the purchase of the Nevada Company Shares, the Real Estate Loan Participation, the Hotel Fund Transaction, the Holdco transaction and certain other transactions were specifically reviewed and evaluated in March 2022 in connection with such review. As a result of these findings, our management reconsidered the Company’s internal control over financial reporting and disclosure controls and procedures and determined that those controls were not designed and thus did not operate effectively in the prior quarterly periods to allow us to identify related party transactions that were required to be disclosed, which we determined to be a material weakness. For a further discussion of the ineffectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting, see Part II, Item 9A. Controls and Procedures . As part of its plan to remediate this material weakness, Cornerstone now requires specific certifications from Axar with respect to any relationship or affiliation with or security ownership position in any entity in whose securities any of Cornerstone’s subadvisors recommends our trusts invest, as well as specific disclosure by Axar of any participation by Axar in any such investment. Cornerstone also intends to implement additional procedures regarding its review of recommendations by its subadvisors, including a requirement for review and approval by a second officer of Cornerstone of any recommendations for investments over specified amounts. As part of implementing such additional procedures, Cornerstone intends to conduct appropriate training for its employees with respect to these procedures. Based on their respective inquiries regarding the trusts’ investment portfolio and Axar’s investment recommendations with respect thereto, neither our management nor the Conflicts Committee is aware of any other related party transactions that would be required to be reported as “related party transactions” in this Annual Report on Form 10-K. The Conflicts Committee is continuing its independent review of Axar’s investment recommendations to Cornerstone, including those trust investments in which Axar was involved, to determine what additional action may be appropriate for Cornerstone and the Company to take with respect thereto. In December 2021, the Company reimbursed $ 0.2 million on behalf of Andrew Axelrod for certain expenses incurred by Mr. Axelrod in responding to a document production request in the Fried v. Axelrod legal matter discussed above pursuant to the provisions of the Company’s bylaws. See Note 14 Commitments and Contingencies . |
