Kinam-AmendedComplaint
The following Amended Class Action Complaint was filed on November 21, 2003, in the United States District Court for the District of Nevada, Las Vegas, Nevada. For publication here, the original document has been converted to HTML format. While every effort has been made to reproduce it exactly, the official version is the filed document, which should in due course be available in PDF format at the website of Berger & Montague, P.C. (www.bergermontague.com).
[List of Attorneys for Plaintiffs omitted]
UNITED STATES DISTRICT COURT DISTRICT OF NEVADA
________________________________ Robert A. Brown, ) Glenbrook Capital LP, ) George P. Drake, ) CN&L Investment Corp., and ) Andrew D. Kaufman, ) ) Case Nos. CV-S-02-0605-KJD(RJJ) Plaintiffs, ) CV-S-02-0726-KJD(RJJ) ) v. ) ) Kinross Gold U.S.A., Inc., ) Jury Trial Demanded Kinam Gold Inc., ) Kinross Gold Corporation, and ) Robert M. Buchan, ) ) Defendants. ) ________________________________
AMENDED CLASS ACTION COMPLAINT Plaintiffs, individually and on behalf of all other persons similarly situated, by their undersigned attorneys, for their complaint, allege as follows upon personal knowledge as to themselves and their own acts, and upon the investigation made by and through their attorneys, which investigation included, among other things, a review and analysis of public filings with the Securities and Exchange Commission ("SEC"), public documents, analyst reports, news stories and news releases of and concerning Kinross Gold Corporation ("Kinross Gold" or "Kinross"), Kinross Gold U.S.A., Inc. ("Kinross U.S.A."), and Kinam Gold Inc. ("Kinam"), and information available over the Internet.
I. NATURE OF ACTION
1. This is a class action for damages, equitable and declaratory relief arising out of a coercive and illegal issuer tender offer (the "Offer") by Kinross U.S.A., a Nevada corporation, for all 894,600 publicly held and traded shares of the $3.75 Series B Convertible Preferred Stock (the "Preferred") of its affiliate Kinam, also a Nevada corporation. Kinross U.S.A., which owns all the common stock of Kinam, is a wholly-owned subsidiary of Kinross Gold, a Canadian corporation engaged primarily in gold mining.
2. The complaint alleges breaches of the terms of the Preferred, breaches of the elevated fiduciary duties owed by control persons and major stockholders to other stockholders, violations of the best price rule promulgated under § 13(e) of the Securities Exchange Act of 1934 (the "Exchange Act") and of the anti-fraud provisions under that section and § 10(b), violation of § 20(a) of the Exchange Act, violation of Nevada's anti-racketeering law (Nevada Revised Statutes, §§ 207.350-207.520), and violation of New York Stock Exchange Rule 311.03.
II. JURISDICTION AND VENUE
3. Subject matter jurisdiction of all claims under federal law is based on 28 U.S.C. § 1331 (federal question) and 15 U.S.C. § 78aa (violations of the Exchange Act). Supplemental jurisdiction of the claims under common law and state statutes is based on 28 U.S.C. § 1367. Subject matter jurisdiction of all claims is also based on 28 U.S.C. § 1332(a)(3) (diversity, citizens of different states and of a foreign state) since the amount in controversy exceeds $75,000, exclusive of interest and costs.
4. Venue in this district is based on 28 U.S.C. § 1391(b) and (c) with respect to all defendants except Kinross Gold, and § 1391(d) with respect to Kinross Gold. Venue of the claims under the Exchange Act is also based on 15 U.S.C. § 78aa. Many of the acts alleged herein occurred in substantial part in this District.
III. THE PARTIES
5. Plaintiff Robert A. Brown ("Brown") is a citizen and resident of Oak Park, California. At the date of filing of the original Complaint in this action, he held: 11,824 shares of the Preferred in his IRA account (10,329 shares purchased in 2000, 1,171 shares purchased in 2001, and 324 shares purchased in 2002); 14,129 shares in a joint account with his wife (12,100 shares purchased in 2001 and 2,029 shares purchased in 2002); and exercised trading and investment authority over 3,247 shares in his wife's IRA account (847 shares purchased in 2000 and 2,400 shares purchased in 2001). Of these 29,200 shares, none were tendered to the Offer and all remain in the foregoing accounts.
6. Plaintiff Glenbrook Capital LP ("Glenbrook") is a Nevada limited partnership with its principal place of business at 430 Cambridge Avenue, Palo Alto, California. At the date of filing of the original Complaint in this action, Glenbrook held 14,700 shares of the Preferred (9500 shares purchased in 2000, 4700 shares purchased in 2001, and 500 shares purchased in 2002). Of these 14,700 shares, none were tendered to the Offer, but all were subsequently sold to Kinross Gold, reserving to Glenbrook all its rights in this action.
7. Plaintiff George P. Drake ("Drake") is a citizen and resident of Long Beach, California. He purchased 2300 shares of the Preferred in 2001, and tendered all of these shares to the Offer.
8. Plaintiff CN&L Investment Corporation ("CN&L") is a California corporation with its principal place of business at 1622 West 15th Street, Long Beach, California 90813. Plaintiff Drake is the president and sole stockholder of CN&L. CN&L purchased 2000 shares of the Preferred in 2001, and tendered all of these shares to the Offer.
9. Plaintiff Andrew D. Kaufman ("Kaufman") is a citizen and resident of New York, New York. He purchased 15,300 shares of the Preferred at various times prior to the Offer, and tendered 15,290 of these shares to the Offer. Ten were transferred to other ownership.
10. Defendant Kinross U.S.A. is a Nevada corporation with its principal place of business at 802 East Winchester Avenue, Suite 100, Murray, Utah 84107. By a tender offer (the "Offer") made on February 20, 2002, Kinross U.S.A offered to purchase all 894,600 publicly held and traded shares of the $3.75 Series B Convertible Preferred Stock (the"Preferred") of Kinam Gold Inc.
11. Defendant Kinam is a Nevada corporation with its principal place of business at 802 East Winchester Avenue, Suite 100, Murray, Utah 84107. Kinross U.S.A. owns 100% of the common stock of Kinam, over which it exercises complete management control. In 1994 Kinam's predecessor, Amax Gold Inc. ("Amax Gold"), then a Delaware corporation, issued 1,840,000 shares of the Preferred in a registered public offering in the United States.
12. Defendant Kinross Gold is a Canadian corporation with its principal place of business at Scotia Plaza, 52nd Floor, 40 King Street West, Toronto, Ontario, Canada M5H 3Y2. Kinross owns 100% of the common stock of Kinross U.S.A., over which it exercises complete management control. Kinross U.S.A., Kinam and Kinross Gold (collectively, the "Kinross defendants") have multiple common directors and officers and are operated together as a single gold mining enterprise under unified management. As of the date of the Offer, ownership of its major gold mining assets in the United States and elsewhere were vested in Kinam.
13. Defendant Robert M. Buchan ("Buchan") has been the Chairman and Chief Executive Officer of Kinross Corp. at all times relevant hereto.
IV. SIGNIFICANT NON-PARTIES
14. Non-party Franklin Templeton Variable Insurance Products Trust ("Franklin VIP Trust") is a Massachusetts business trust with its principal place of business at One Franklin Parkway, San Mateo, California 94403-1906. Franklin VIP Trust is a registered investment company under the Investment Company Act of 1940, and manages a series of mutual funds (the "Franklin Funds" or "Franklin"). As of June 2001, the Franklin Funds held collectively 800,000 shares of the Preferred, or about 43.5% of the total Preferred shares outstanding. In July 2001, the Franklin Funds exchanged their 800,000 shares for 21,500,000 shares of Kinross common stock.
15. Non-party Raymond James Financial, Inc. ("Raymond James") is an international financial services company with its home office at 880 Carillon Parkway, St. Petersburg, Florida 33716, and branch offices throughout the United States, including at multiple locations in Nevada. Raymond James provided a fairness opinion in connection with the Offer, and in this connection received an indemnity agreement from Kinam "against certain liabilities and expenses, including certain liabilities under the federal securities laws, relating to or arising out of [its] engagement and any related transactions."
V. CLASS ALLEGATIONS
16. Pursuant to Federal Rules of Civil Procedure 23(a) and b(3), plaintiffs Drake, CN&L and Kaufman bring this action on behalf of a class consisting of all persons and entities who tendered their shares of the Preferred pursuant to the Offer (the "Tenderor Class"). Excluded from the Tenderor Class are the defendants, the defendants' officers and directors, affiliates, legal representatives, heirs, predecessors, successors and assigns, and any entity in which any defendant has a controlling interest or of which a defendant is a parent or subsidiary.
17. Similarly, pursuant to Fed R. Civ. P. 23(a) and b(3), plaintiffs Brown and Glenbrook bring this action on behalf of a class consisting of all persons and entities who continued to hold shares of the Preferred after the expiration of the Offer (the "Holder Class"). Excluded from the Holder Class are the defendants, the defendants' officers and directors, affiliates, legal representatives, heirs, predecessors, successors and assigns, and any entity in which any defendant has a controlling interest or of which a defendant is a parent or subsidiary.
18. The members of the Tenderor Class and the Holder Class (collectively, the "Classes") are located in geographically diverse areas and are so numerous that joinder of all members is impracticable. While the exact number of Tenderor Class and Holder Class members is unknown to the plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe there are, at a minimum, hundreds of members of the Tenderor Class and Holder Class, which together represent all 894,600 publicly held shares of the Preferred to which the Offer was addressed.
19. Plaintiffs' claims are typical of the claims of all members of the Tenderor Class and Holder Class, as plaintiffs and members of both classes sustained damages arising out of the defendants' wrongful conduct, as alleged herein. Members of both the Holder Class and the Tenderor Class: (a) are entitled to equal treatment under the terms of the Preferred; (b) stand in the same fiduciary relationship to the Kinross defendants; (c) are entitled to the same elevated fiduciary duties from these defendants; (d) are entitled to the safeguards provided under § 13(e) of the Exchange Act relating to issuer tender offers; (e) are among those for whose protection the Nevada anti-racketeering law has created a civil remedy; and (f) have suffered or will suffer like injuries as a result of the unlawful and fraudulent conduct alleged.
20. Common questions of law and fact exist as to all members of the Tenderor Class and Holder Class, and predominate over any questions affecting solely individual members of either class. Among the questions of law and fact common to the classes are: (a) whether defendants have breached the terms of the Preferred; (b) whether defendants have breached their elevated fiduciary duties as control persons and major stockholders to other holders of the Preferred in the closely held Kinam; (c) whether defendants violated provisions of the Exchange Act as alleged; (d) whether defendants violated Nevada's anti-racketeering law as alleged; (e) whether defendants violated New York Stock Exchange Rule 311.03 as alleged; and (f) the extent of the per share damages suffered by the members of the Tenderor and Holder Classes and the appropriate remedies therefor.
21. Plaintiffs will fairly and adequately protect the interests of the Tenderor Class and Holder Class members and have no interests antagonistic to or in conflict with those of the classes. Collectively, plaintiffs tendered 19,590 shares to the Offer and declined to tender 43,900 shares. Accordingly, the named plaintiffs herein represent a total of 63,490 shares, or just over 7% of the shares covered by the Tenderor and Holder Classes.
22. Plaintiffs have retained competent and experienced counsel and intend to prosecute this action vigorously.
23. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy, since joinder of all members of the Tenderor Class and Holder Class is impracticable. Furthermore, because the damages suffered by many individual class members may be relatively small, the expense and burden of individual litigation make it impossible for the Tenderor Class and Holder Class members individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.
VI. FACTUAL ALLEGATIONS
A. Inception of the Preferred: Amax Gold and the Fort Knox Mine 24. In August 1994, through a registered public offering, Amax Gold, a predecessor of Kinam, issued 1,840,000 shares of the Preferred. The issuance of the Preferred yielded net proceeds of $88.3 million, used primarily to fund the continued development of the Fort Knox gold mine in Alaska.
25. At the time Amax Gold issued the Preferred, the company's Sleeper gold mine in Nevada was in full operation. However, in light of its declining reserve base, Amax Gold required funds to finance new gold mining projects. The Sleeper was closed in 1996. Amax Gold later entered into a joint venture with X-Cal Resources Limited ("X-Cal") to explore and develop a larger area that includes both the original Sleeper mine and contiguous properties acquired by X-Cal. The development of the Fort Knox mine was crucial to the continued success of Amax Gold.
26. The terms of the Preferred, as set forth in Amax Gold's corporate charter, included: liquidation preference, $50; cumulative dividend, $3.75 per year, payable quarterly on February 15, May 15, August 15 and November 15, as and if declared by the board of directors; conversion price, $8.25, equating to 6.061 common shares per share of Preferred; callable at a redemption price declining ratably annually from $52.625 on August 15, 1997, to $50.00 on August 15, 2004, plus accrued and unpaid dividends; 1.4 votes per share when voting together with the common, as called for on all matters except in certain instances requiring a separate class vote, e.g., election of two additional directors when six dividend payments are unpaid.
27. As originally marketed, the terms of the Preferred contained the following provisions:
[C.(1)(second paragraph)] All shares of Series B Convertible Preferred Stock shall rank prior, both as to payment of dividends and as to distributions of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, to all of the Corporation's now or hereafter issued Common Stock.
* * * * * [C.(6)(c)] Class Voting Rights. So long as the Series B Convertible Preferred Stock is outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least 66 2/3 percent of all outstanding shares of Series B Convertible Preferred Stock (unless the vote or consent of a greater percentage is required by applicable law or these Articles of Incorporation, as amended, of the Corporation), voting separately as a class, (i) amend, alter, or repeal (by merger, consolidation, or otherwise) any provision of these Articles of Incorporation, as amended, or the Bylaws of the Corporation, as amended, so as to affect adversely the relative rights, preferences, qualifications, limitations, or restrictions of the Series B Convertible Preferred Stock. . .
28. The foregoing terms of the Preferred are now contained in Article 4 of Kinam's Articles of Incorporation (the "Charter").
29. Shortly after issue, the Preferred was listed on the New York Stock Exchange ("NYSE"), where it traded until August 2001, when its listing was transferred to the American Stock Exchange ("AMEX"), where it continued to trade until it was delisted following the completion of the Offer.
B. Formation of Kinam: Kinross Acquires Amax Gold 30. On or about February 9, 1998, Kinross Gold and Amax Gold, then a 58.8% owned subsidiary of Cyprus Amax Minerals, announced their intention to merge. The companies issued a joint press release stating, in part:
In the merger transaction, approximately US$335 million of Amax Gold debt will be eliminated. This will be accomplished through the following:
the application of about US$100 million of currently available cash from Kinross for repayment of debt;
an infusion of capital and conversion of outstanding inter-company debt into equity totaling US$135 million from Cyprus Amax; and
additional equity capital of approximately US$120 million raised through a Kinross "bought deal" (in Canada) subscription rights offering entered into at the same time as the merger agreement.
31. On the date of the announcement, the price of gold at the London P.M. fix was $300.60 per ounce.
32. In connection with the merger, Kinross issued a Management Proxy Circular dated April 23, 1998 (the "Circular"). (See Exhibit 3 to the Supporting Documents to Memorandum in Support of Defendants' Motion for Judgment on the Pleadings). The Circular contained (at pp. 30-42) detailed summaries of the three separate fairness opinions delivered, respectively, to Kinross by Merrill, Lynch, Pierce, Fenner & Smith Inc. (Circular, Ex. D), to Amax Gold by Salomon Smith Barney (Circular, Ex. E), and to the Special Committee of the Board of Directors of Amax Gold by SBC Warburg Dillon Read Inc. (Circular, Ex. F). All of the investment banks rendering these opinions were internationally recognized financial advisory firms with substantial experience in the mining sector and in mergers and acquisitions generally.
33. As described by Kinross in the Circular, all three of these fairness opinions utilized standard valuation methodologies customary in the gold mining industry then and now, which place heavy emphasis on two fundamental metrics: price (or market capitalization) per reserve ounce of gold and price (or market capitalization) per ounce of annual gold production.
34. Approximately four years later in connection with the three-way merger of Kinross Gold, Echo Bay Mines Ltd. ("Echo Bay") and TVX Gold Inc. ("TVX"), National Bank Financial prepared a similar valuation analysis for Echo Bay, again placing strong emphasis on these same two key metrics. At the time, Kinross held more than 10% of Echo Bay's common shares. See paragraphs 91-95 below.
35. The 1998 valuation prepared by Merrill Lynch contained both a "Selected Publicly Traded Comparable Companies Analysis" and a "Selected Acquisition Transactions Analysis." To compare Amax Gold with its peer group, Merrill Lynch calculated "a range of . . . unlevered values as a multiple of the latest 12 months gold production, 1996 gold reserves and 1996 gold reserves and resources."
36. Similarly, to compare the consideration in the Amax Gold acquisition with prices paid in comparable transactions, Merrill Lynch described its approach as follows:
Multiples of unlevered value of the transactions (consideration offered for the equity plus the book value of debt less the cash and cash equivalents) to the gold production of the acquired businesses for the 12 months preceding the acquisition ranged from $1,160 to $3,546, compared to an implied transaction multiple of $1,201 for Amax. The multiples of the stated gold reserves prior to the acquisition ranged from $122 to $351, compared to an implied transaction multiple of $119 for Amax. The multiples of stated gold reserves plus resources prior to the acquisition announcement ranged from $73 to $274, compared to an implied transaction multiple of $60 for Amax. The multiples of reserve value (defined as stated gold reserves multiplied by the London PM gold fix on the date of announcement) ranged from 0.35 times to 1.22 times, compared to an implied transaction multiple of 0.40 times for Amax. The multiples of reserve cash value (defined as stated gold reserves multiplied by the difference between the London PM gold fix on the date of announcement and cash costs) ranged from 0.82 times to 1.92 times, compared to an implied transaction multiple of 1.14 times for Amax.
37. Under the merger, completed on June 1, 1998, Kinross U.S.A., acquired all the common shares of Amax Gold. As of that date, the price of gold at the London P.M. fix was $288.75 per ounce. Amax Gold was subsequently renamed Kinam as required by the merger agreement.
38. Each common share of Amax Gold was exchanged for 0.8004 of a common share of Kinross Gold, giving the common stockholders of Amax Gold an approximate 50% ownership interest in Kinross (after giving effect to the planned infusion of $135 million). At the time, the common shares of Kinross traded on the Toronto Stock Exchange, where they remain listed, and on the NYSE. They were delisted by the NYSE in August 2001, at which time Kinross obtained a listing on the AMEX.
39. The Preferred, unlike the common stock, was not exchanged or retired during the 1998 merger. Rather, the conversion rate on the Preferred was adjusted pari passu with the exchange ratio for the common. The adjusted conversion rate on the Preferred gave each share of Preferred a conversion price of approximately $10.31 and made it convertible into 4.8512 shares of Kinross common. The merger was not submitted for approval by a class vote of the Preferred.
40. As a result of the merger, Kinam became a closely held corporation in which Kinross U.S.A. holds 100% of the common stock (92,213,988 shares), giving it over 97% of the total voting rights in all matters on which the common and the Preferred vote together.
C. Treatment of the Preferred 41. Since the 1998 merger with Amax Gold, Kinross Gold has exercised complete managerial control over Kinross U.S.A. and Kinam. The Kinross defendants have utilized this power to effectuate an improper and manipulative scheme, through various deceptive means as described more fully herein. Defendants committed numerous manipulative, fraudulent and illegal acts in furtherance of the alleged scheme, including, without limitation, the omission of material information necessary to determine the true value of Kinam and the misrepresentation of the fairness of the Offer price. Defendants committed the violations alleged herein to, among other things, obtain the Preferred at artificially depressed prices, or otherwise eliminate it and, thereby, obtain complete and unencumbered ownership of the Fort Knox mine and Kinam's other gold mining assets. Defendants attempted to accomplish their scheme by artificially rendering Kinam insolvent, eliminating the dividend payable on the Preferred, making Kinross common shares effectively the creditors of the Preferred, and artificially manipulating and depressing the share price of the Preferred.
1. Change in the status of the Preferred
42. Kinross did not inject new equity capital into Kinam as promised in connection with the 1998 merger. Rather, defendants undertook a plan to disadvantage the Preferred by distorting Kinam's financial condition and effectively rendering the Preferred subordinate to the common shares of Kinross. At the time of the merger, Amax Gold carried bank debt of approximately $256 million. Rather than eliminating the debt directly, Kinross advanced $256 million to Kinam to repay the bank debt. Kinross did so in the form of non-interest bearing demand loans with no fixed terms of repayment.
43. The purpose and intent of these actions was to place Kinross Gold and its common stockholders, including the former common stockholders of Amax Gold, in the position of creditors vis-a-vis the Preferred, even though Kinross had merged with Amax and acquired valuable gold mining assets thereby. By manipulating the status of the Preferred relative to the common shares of Kinross, defendants have made the Kinam Preferred subordinate to the common shares Kinross. This improper maneuver had the further intended effect of artificially depressing the share price of the Preferred.
44. Similarly, rather than retire the debt of $92 million owed by Amax Gold to its former corporate parent, Cyprus Amax Minerals, as promised in connection with the 1998 merger, Kinross converted this obligation into a non-interest bearing demand loan from Kinross U.S.A. to Kinam, also with no fixed terms of repayment. Defendant's conduct in connection with debt owed to Cypress Amax further subordinated the Kinam Preferred, this time to Kinross U.S.A.
45. Following the merger, Kinross also took several non-cash charges to write down the balance sheet value of Kinam's assets. Combined with Kinam's high inter-company debt, these write-downs resulted in Kinam's stockholders' equity declining from $274 million at year-end 1997, to $72 million at year-end 1998, to a capital deficiency of $48 million at year-end 1999, and to a capital deficiency of $104 million at year-end 2000.
2. Suspension of the Dividend
46. On July 27, 2000, Kinross issued a press release in which it announced that effective with the August 15 payment, Kinam's board of directors had voted to suspend quarterly dividends on the Preferred. The press release further stated: "This decision has been taken by the board as a cash conservation measure due to the persistence of low gold prices and will be reviewed by the board on a quarterly basis." On that date, the price of gold at the London P.M. fix was $280.80 per ounce. Following this announcement, the price of the Preferred on the NYSE dropped from the mid-20's to under $10 per share.
47. No dividends have been paid on the Preferred since their suspension with the August 2000 payment. In November 2001, with six dividend payments being in arrears, the Preferred voting as a class became entitled under Article 4.C(6)(b) of the Charter to elect two additional directors to Kinam's board of directors. As of the date of this Amended Complaint, 14 dividend payments on the Preferred, amounting cumulatively to $13.125 per share, remain in arrears.
48. In May 2001, pursuant to a vote at a special meeting of Kinam's stockholders but without a separate class vote of the Preferred, Kinross moved Kinam's state of incorporation from Delaware to Nevada. In the Schedule 14C Information Statement, Kinam made the following representation:
Appointment of Receivers
Both Delaware and Nevada allow for stockholders to apply for the appointment of a receiver by a court where the corporation is insolvent. Delaware allows any stockholder, regardless of his or her proportionate stock ownership interest, to apply for such an appointment where the corporation is insolvent. Nevada allows stockholders owning at least ten percent (10%) or more of the outstanding stock entitled to vote to petition for the appointment of a receiver where (i) the corporation is insolvent, (ii) the corporation suspends its ordinary business for want of money to carry on the business, or (iii) if its business has been and is being conducted at a great loss and greatly prejudicial to the interests of its creditors or stockholders.
49. On May 21, 2001, the effective date of the move, the price of gold at the London P.M. fix was $291.25 per ounce.
50. Since the entire Preferred issue represented less than 3% voting control, the move to Nevada foreclosed any possibility that holders of the Preferred might bring a petition to put Kinam into state insolvency proceedings due to the capital deficiency shown on its balance sheet.
51. Kinross used Kinam's capital deficiency to justify the company's failure to pay dividends on the Preferred. The failure to pay dividends on the Preferred had the further intended effect of depressing the share price.
52. Kinross also used the purported capital deficiency as a means to coerce holders of the Preferred into accepting the Offer. For example, in the "Offer to Purchase All Publicly-Held Shares of the $3.75 Series B Convertible Preferred Stock of Kinam Gold, Inc. at $16.00 Per Share" (the "Offer Document"), Kinross stated (at p. 4):
Under Nevada corporate law, which governs Kinam, Kinam is prohibited from paying dividends on the preferred stock if its total assets are less than its total liabilities. This determination can, at the election of Kinam, be based on either its financial statements or a fair valuation of its assets and liabilities. Kinam has not undertaken and does not propose to undertake a valuation of its assets and liabilities for that purpose. Kinam's financial statements as of September 30, 2001, reflect that its total liabilities exceed its total assets by $81.3 million. [A significant portion of the liabilities of Kinam are the obligations to us. See Relationships Between Kinross and Kinam.] Consequently, Kinam would need to generate substantial earnings, or otherwise significantly increase its net assets, before it could resume paying a dividend on the Kinam preferred stock based on its financial statements. Even if Kinam were permitted to pay dividends, it is under no obligation to do so and, at current gold prices, Kinam does not expect to resume the payment of dividends for the foreseeable future. [Bracketed material added by amendment dated March 21, 2002, to the Offer Document.]
53. Kinam was not, as defendants contended, insolvent. A proper valuation of Kinam's assets and liabilities, as permitted under Nevada law and as described in greater detail in section IV.D below, would have revealed that Kinam had substantial positive net value, and that the purported negative valuation of Kinam was, in major measure, attributable to defendants' unjustified manipulations of comparable assets of the respective companies. In addition, the valuation failed to take into account Kinam's substantial gold reserves.
54. Kinam's Schedule 14C Information Statement issued in connection with the company's move to Nevada represented that this move would allow it greater discretion with respect to the payment of dividends (at p. 13):
Dividends
Delaware is more restrictive than Nevada with respect to when dividends may be paid.
* * * * * Nevada law provides that no distribution (including dividends on, or redemption or repurchase of, shares of capital stock) may be made if, after giving effect to such distribution, the corporation would not be able to pay its debts as they become due in the usual course of business, or the corporation's total assets would be less than the sum of its total liabilities plus the amount that would be needed at the time of a liquidation to satisfy the preferential rights of preferred stockholders. Consequently, the company will have greater discretion in making distributions.
55. Since dividends on the Preferred were suspended in August 2000, Kinross has withdrawn cash from Kinam in an amount exceeding that necessary to pay the dividends owing on the Preferred. Although in economic reality these cash withdrawals have amounted to distributions on common equity, Kinross fraudulently labeled them repayments of "advances" (see Offer Document, p. 7) to Kinam, thereby attempting to circumvent its legal obligation to pay dividend arrearages on the Preferred before making any distribution on the common, as required by Article 4.C(2) of the Charter, which states:
No dividends or other distributions, other than dividends payable solely in shares of Common Stock, shall be paid, or declared and set apart for payment in respect of, and no purchase, redemption, or other acquisition for any consideration shall be made by the Corporation of and no sinking fund or other analogous fund payments shall be made in respect of any shares of Common Stock or other capital stock of the Corporation ranking junior as to dividends or as to liquidation rights to the Series B Convertible Preferred Stock ... unless and until all accrued and unpaid dividends on the Series B Convertible Preferred Stock, including the full dividend for the then current dividend period, shall have been paid or declared and set apart for payment and the Corporation is not in default in respect of the optional redemption of any shares of Series B Convertible Preferred Stock.
3. Attempts to Control the Preferred: The Franklin and the Follow-On Transactions
56. On June 12, 2001, Kinross and Kinam issued a joint press release announcing an agreement with Franklin to exchange 800,000 shares or 43.5% of total outstanding shares of the Preferred for 21.5 million of Kinross's common shares. This transaction (hereinafter the "Franklin Transaction") represented a conversion rate of 26.875 shares of Kinross common for each share of Preferred held by Franklin, and at that day's closing price of Kinross common on the NYSE, a value of $25.80 for each share of Preferred. In the five trading days preceding announcement of the Franklin Transaction, the average closing price of the Preferred on the NYSE was $8.025. Accordingly, Franklin received a premium of $17.725 per share, or 221% over the "market" price, which had been artificially depressed by defendants' manipulative scheme.
57. Six days later, on June 18, 2001, Kinross and Kinam announced agreements with two other holders of the Preferred to exchange 2,686,492 of Kinross's common shares for 145,000 shares of the Preferred. Each of these transactions (the "Follow-On" transactions) represented a conversion rate of approximately 18.48 shares of Kinross common for each share of Preferred, and at that day's closing price of Kinross common on the NYSE, a value of $18.29 for each share of Preferred, or a premium of $10.54, or 131%, over the average closing price of the Preferred in the five days preceding the Franklin Transaction.
58. The purpose and effect of the Franklin Transaction and the two Follow-On transactions was to give voting control of the Preferred to Kinross. In total, these three transactions represented approximately 51.4% of the original issue of the Preferred.
59. Notwithstanding the foregoing transactions, Kinross and Kinam refused all requests by other holders of the Preferred to tender, exchange or convert their shares for Kinross common shares at the same or similar rates to the Franklin Transaction or the Follow-On transactions, which all closed in July 2001.
60. Upon obtaining 51.4% of the Preferred, the Kinross defendants did not treat these shares as redeemed by Kinam. Rather, they continued to hold them in Kinross U.S.A. and to treat them as outstanding shares. By this means, defendants were in a position to control any separate class vote of the Preferred under the Charter, including the election of two additional directors under Article 4.C(6)(b), and thus were able to defeat this intended safeguard of the interests of the Preferred.
4. The Cash Tender Offer for the Preferred
61. Following the Franklin Transaction and the Follow-On transactions, the Preferred traded in the range of $10.00 per share before declining to the $8.00 level toward the end of 2001.
62. On January 21, 2002, Kinross management presented to its board of directors a proposal to make the Offer for the outstanding shares of Preferred not held by Kinross. As a result of that meeting, Kinam's board of directors appointed a special committee consisting of its three members who were not employees of Kinam or Kinross to consider the fairness of the Offer. However, all three members of the special committee were and are directors of Kinross and holders of its common shares and options thereon. On or about January 23, 2002, the special committee engaged Raymond James to analyze the Offer and to prepare a fairness opinion.
63. On February 4, 2002, Kinross and Kinam announced that Kinross was considering making a cash tender offer of $16.00 per share for the remaining 894,600 publicly held shares of the Preferred. The Offer was made formally on February 20, with the mailing of a tender offer document (the "Offer Document") to all holders of the Preferred in the United States and the filing of a Schedule TO with the Securities and Exchange Commission as required under § 13(e) of the Exchange Act.
64. As admitted in the Offer Document (at p. 10), neither Kinross nor the special committee made any effort to negotiate the terms of the Offer or to discuss its fairness with any non-affiliated holders of the Preferred, or to arrange for them to obtain advice or assistance from any outside or truly independent person in connection with evaluating the Offer. The Offer Document further stated (at p. 13): "No arrangements have been made to grant the non-affiliated holders of the [Preferred] access to the corporate files of Kinross or Kinam or to obtain counsel or appraisal services at the expense of Kinross or Kinam."
65. The Offer Document made several salient points directed at coercing holders of the Preferred to tender, including but not limited to assertions that:
(A) Following completion of the Offer, Kinam intends and expects to delist the Preferred from the AMEX, and thus to make it a highly illiquid security with no readily available market price;
(B) Following completion of the Offer, Kinam intends and expects to terminate registration of the Preferred under the Exchange Act, and to cease to file annual and periodic financial reports thereunder or to provide equivalent information to any remaining unaffiliated holders;
(C) Following completion of the Offer, Kinam intends and expects to pursue whatever strategies are then available to it to force out, by merger, recapitalization or otherwise, any remaining holders of the Preferred at $16.00 per share or less; and
(D) Kinam does not expect, following completion of the Offer or in the foreseeable future, to resume payment of dividends on the Preferred.
66. The Offer Document disclosed publicly for the first time (at p. 13) that in connection with the Franklin Transaction, there were "extended and acrimonious negotiations . . . in which litigation was threatened," and further (at p. 29) that in or around March 2001 Kinross "agreed to extend any limitation period within which the Franklin Funds may have been permitted to assert a claim against us, Kinam, or any related parties arising from their ownership of [the Preferred]." The Offer Document did not identify or describe the nature of the legal claims or violations of law asserted by Franklin. Nor did it provide details about the terms of the extension of the limitation period or whether it ran to class claims.
67. On March 21, 2002, Kinross announced that approximately 652,000 shares of the Preferred had been tendered to the Offer, and that the closing date on the Offer would be extended from March 20 to March 28, 2002. At the same time, Kinross mailed to holders of the Preferred the "March 21, 2002, Amendment and Supplement to the Kinross Gold Corporation Offer to Purchase All Publicly-Held Shares of the Series B Convertible Preferred Stock of Kinam Gold, Inc. at $16.00 Per Share" (the "Amended Offer Document").
68. The Amended Offer Document republished eleven pages of the original Offer Document but failed separately to identify any of the changes or amendments, among which were:
(A) A statement (at p. 3) that Kinross was "not interested in divesting" its interest in Kinam and therefore "did not consider the sale of Kinam or any other transaction" as an alternative to the Offer, and adding: "We do not currently intend to sell our interest in Kinam in the foreseeable future;"
(B) A section (at pp. 6-9) headed "Fairness of the Offer" that replaced in its entirety the section of the Offer Document with the same heading;
(C) A new section (at pp. 10-11) entitled "Transactions and Agreements Concerning the Shares" that described in greater detail the Franklin Transaction, but failed to reveal either the specific nature of Franklin's threatened legal claims or to state whether they were class-based; and
(D) Two new paragraphs (at p. 11) under "Legal Matters; Regulatory Approvals" describing threatened litigation over the Offer unless certain changes were made thereto, including to the offering price, but failing to mention that this threatened litigation would be a class action.
69. With respect to Kinross's reasons for the Offer, the Amended Offer Document stated (at p. 4):
REASONS FOR AND PURPOSES OF THE TENDER OFFER
Kinross believes that the public trading market for the shares of Kinam stock has been and will continue to be characterized by low prices and low trading volume. As a result of the limited trading volume, significant changes in the trading price can occur with very little market activity. This may make it difficult for holders of any significant amount of Kinam preferred stock to sell their stock at the prices reported by the American Stock Exchange. For these reasons, and because of the factors described below, Kinross is making this tender offer to provide the holders of shares of Kinam preferred stock, other than Kinross, with liquidity for their shares at a price that the special committee has determined to be fair to the non-affiliated holders. As discussed above under the caption Background of the Tender Offer [contained in the Offer Document, pp. 4-6], we decided to proceed with the tender offer at this time as a result of the completion of a public offering of our common shares in Canada on February 12, 2002, that resulted in net proceeds to us of approximately $18.5 million.The following are some of Kinross' reasons and purposes for making the tender offer: (i) strengthen our consolidated balance sheet and future results of operations; (ii) acquire all of the shares of Kinam preferred stock, making Kinam a wholly-owned subsidiary; and (iii) to save costs by terminating the reporting obligations of Kinam under the Exchange Act. Each of these reasons and the effect of the tender offer on Kinross are further discussed below. The effects of the tender offer on Kinam and non-affiliated holders of Kinam preferred shares are discussed under Consequences of the Tender Offer below.
70. Both the Offer Document (at p. 10) and the Amended Offer Document (at p. 6) stated that in light of their obvious conflicts of interest, "[t]he special committee . . . determined that it should remain neutral and did not recommend for, recommend against, or express an opinion with respect to whether the non-affiliated holders should accept the tender offer." However, the Offer Document also stated (at p. 2): "Based on the fairness opinion of Raymond James and the special committee's consideration of a number of other factors, the special committee believes that the offer is fair to the non-affiliated holders." [Emphasis supplied.]
71. Both the Offer Document and the Amended Offer Document incorporated by reference and summarized the fairness opinion performed by Raymond James and included in the Schedule TO. See Exhibit 12 to the Supporting Documents to Memorandum in Support of Defendants' Motion for Judgment on the Pleadings filed October 28, 2002, Docket No. 39. That opinion contained numerous material omissions which rendered both it and the Offer Document, the Schedule TO and the Amended Offer Document materially false and misleading.
72. In particular, the fairness opinion intentionally omitted any evaluation of the value of Kinam's proven and probable in-ground gold reserves. It also omitted any evaluation of Kinam's exploration and development projects, including, without limitation, the company's joint venture with X-Cal that includes the Sleeper gold mine, where X-Cal claims to have identified significant new gold reserves.
73. As discussed in paragraphs 33-36 above relating to the merger of Amax Gold -- now Kinam -- into Kinross in 1998, the most critical and essential valuation metrics in connection with the acquisition of gold mining companies or properties are the price per ounce of contained in-ground gold reserves and the price per ounce of annual gold production, including comparisons thereof to other similar and reasonably contemporaneous deals and transactions. Similarly, gold mining analysts regularly use market capitalization per ounce of gold reserves and per ounce of annual gold production to rate the relative attractiveness of publicly traded gold mining equities. While the intelligent use of both of these key measures requires consideration of other factors (e.g., type of mine, cost of extraction, geographic location, political risk, composition of hedge book, etc.), they are universally recognized as fundamental benchmarks to be considered and reported upon in any competent valuation analysis.
74. Rather than apply either of these measures in its analysis of Kinam, Raymond James applied inappropriate valuation methodologies of marginal utility in the natural resource and extractive sectors, particularly gold mining. In its report to the special committee, Raymond James stated without qualification and without support (at p. 10): "A break up of Kinam through the sale of individual properties would not yield sufficient value to cover the company's liabilities and preferred shares liquidation value." Defendants knew that these methodologies were inappropriate for valuing gold mining properties but (at least) stayed silent in the face of these obvious errors, omitting to correct them.
75. This statement was wholly at odds with what Kinross would soon claim in the merger of itself with two other gold mining companies described in section IV.D below. In that transaction, Kinross asserted as its prime assets these very same properties of Kinam to which Raymond James gave collective negative value. To reach this preposterous result, Raymond James not only ignored the fundamental metrics of price per reserve ounce and price per ounce of annual production, but also employed a discounted cash flow/net asset value analysis using a higher discount rate and lower gold price assumptions than were generally employed for this purpose in the gold mining industry, where discount rates approaching zero and gold prices well above spot are frequently required to yield net asset values per share comparable to market prices per share for publicly traded companies.
76. Contemporaneous acquisitions of gold mining properties comparable to Kinam's were executed at prices per reserve ounce of $176 (acquisition of Getchell Gold Corp. by Placer Dome Inc.), $110 (acquisition of Homestake Mining Co. by Barrick Gold), and $88 (acquisition of Normandy Mining Ltd. by Newmont Mining Corp.). According to a February 13, 2002, press release issued by Kinross, Kinam possessed 4,139,000 contained ounces as of December 31, 2001. At the $110/ounce price put on Homestake's reserves, the value of Kinam's reserves would have exceeded $455 million.
77. As of September 30, 2001, Kinam's property, plant and equipment (i.e., its mining assets) were carried on the balance sheet in its Form 10-Q at $272 million, leaving it with a capital deficiency of $81 million counting as debt rather than equity $235 million of advances from Kinross. Adding $183 million -- the difference between the $455 million valuation of Kinam's gold reserves at $110 per ounce less their $272 million balance sheet valuation -- would not only have eliminated the capital deficiency, but also have left over $100 million for the Preferred even after repaying all $235 million of Kinross's so-called advances. In any event, Kinross's "advances" were categorized as equity, not debt. See paragraphs 30 and 55 above.
78. On April 1, 2002, Kinross announced that a total of 652,992 shares of the Preferred were tendered to the Offer, and that it would purchase all these shares, giving it ownership of 86.9% of the total original issue and leaving 241,608 shares or 13.1% publicly held. Kinross also announced that it would extend the Offer through 5:00 p.m. on April 4, 2002, to permit additional tenders. As of April 17, 2002, Kinross had not made any announcement with respect to whether it received additional tenders.
79. According to the figures in its February 13, 2002, press release announcing its 2001 financial results, Kinross had 335 million common shares outstanding, total proven and probable gold reserves of 5,661,000 ounces, and stockholders' equity of almost $330 million after deduction of $48 million on account of the 894,600 outstanding shares of Preferred. These numbers gave the following approximate calculations: 0.0169 ounces of gold reserves per common share, having a value of $1.86 per share at $110 per ounce; and stockholders' equity of $0.98 per share.
80. Trading at around $1.00 per share in an environment with gold prices below $300/ounce, Kinross was plainly vulnerable to a hostile tender offer, and it adopted a stockholder rights plan or "poison pill" in recognition of this vulnerability. In an interview published in the January 7, 2002, edition of The Wall Street Transcript, defendant Buchan, Chairman and CEO of Kinross, stated:
There is the consolidation in the industry. There have been a number of major transactions occurring in the industry in the last six months, the two most notable ones being Barrick's takeover of Homestake, and the recently announced merger of Franco-Nevada and Normandy into Newmont. This consolidation process, which has three large companies if it all happens, is likely to continue, and companies like Kinross are definitely going to be involved in it.
D. Merger of Kinross, Echo Bay and TVX 81. As of March 21, 2002, the date of the Amended Offer Document, Kinross had already entered into negotiations looking toward a merger of Kinross, Echo Bay and TVX to form what came to be called the "new" Kinross, which today, following completion of the merger, expects to produce around 2 million ounces of gold in 2003, making it the fourth largest primary gold producer in North America and seventh largest in the world. Notwithstanding their obvious materiality to any fair consideration of the Offer, these negotiations and the possibility of such a merger were not disclosed in the Amended Offer Document or otherwise to the holders of the Preferred prior to the scheduled April 28, 2002, expiration of the Offer.
82. In fact, Kinross had commenced considering the possibility of such a combination in January 2002, prior to the date of the original Offer Document. The Management Information Circular dated December 20, 2002, issued by Kinross in connection with the proposed merger (the "Echo Bay/TVX Merger Circular") revealed the relevant chronology (at p. 8):
THE COMBINATION Background to the Combination
Early in January 2002 Kinross, and its financial advisor CIBC World Markets Inc. ("CIBC World Markets"), discussed strategic alternatives in recognition of:
the interests of each of Kinross and Franco-Nevada Mining Corporation ("Franco-Nevada") in Echo Bay's 11% $100 million aggregate principal amount of junior subordinated debentures due 2027 (the "Capital Securities"); and
the pending completion of the business combination of Newmont, Normandy Mining Limited and Franco-Nevada.
In the context of discussions of ways to enhance Kinross shareholder value, Kinross and CIBC World Markets considered possible business combinations that could be achieved following completion of the Newmont business combination and the conversion of the Capital Securities into Echo Bay common shares. As part of this process, and after completion of the Newmont business combination in the first quarter of 2002, senior representatives of Kinross and CIBC World Markets met with senior representatives of Newmont to determine whether Newmont would support a potential transaction involving Echo Bay. Kinross and CIBC World Markets also discussed with Newmont whether, and on what basis, Newmont would consider selling Newmont's approximate 50% non-controlling interest in the TVX Newmont Americas joint venture, which Newmont had recently acquired through the Newmont business combination.
83. The existence of merger negotiations involving Kinross, Echo Bay and TVX was first revealed publicly on March 29, 2002, one day after the March 28 scheduled expiration of the Amended Offer, in an article in The Financial Post, the business section of The National Post, one of Canada's two major national newspapers. An article by Barry Critchley entitled "Kinross, Echo Bay in gold merger talks" reported:
Kinross Gold Corp. and Echo Bay Mines Ltd. are in talks to merge their operations, in a deal that would create the world's 10th biggest gold producer and is aimed at closing in on Vancouver-based Placer Dome Inc., sources said.
A merger would create a producer with a market capitalization of more than $930-million and a production capacity of almost two million ounces a year.
Until recently, TVX Gold Inc. also was a party to the discussions. But it seems that the firm, which raised $75 million earlier this week via a bought deal, has decided to chart its own course.
One gold industry observer said yesterday that a merger of Kinross and Echo Bay is a "50/50 chance," adding that it makes a lot of sense." Echo Bay has mines in Nevada, Washington and Northwest Territories. Kinross has operations in North America and the Russian Far East. The source estimated that any deal is still at least a month away.
None of the parties involved were prepared to comment. The discussions have resulted in at least one key conclusion: If a deal can be struck, Robert Buchan, chairman and chief executive of Kinross, will run the combined operation.
* * * * * Newmont became Echo Bay's largest shareholder yesterday, after agreeing to convert debt to equity, and it has made clear its intentions to divest of non-core assets and minority stakes.
Kinross also converted its Echo Bay debt into equity and is now its second largest shareholder, with an 11.4% stake.
84. As of the date of the Offer and the merger negotiations with Echo Bay and TVX, approximately 75% of Kinross's total annual gold production and a similar percentage of its total attributable proven and probable gold reserves were derived from assets owned by Kinam, including its Fort Knox gold mine, its 54.7% interest in the Kubaka gold mine in Russia, and its 50% interest in the Refugio gold mine in Chile. Because virtually all of Kinross's annual revenue is derived from the sale of newly mined gold, approximately 75% of its total business operations then took place within Kinam.
85. Contrary to the statements in the Amended Offer Document quoted in paragraph 82 above, the true purpose of the Offer was to enhance Kinross's bargaining power and improve the exchange ratio for Kinross common shares in the proposed merger with Echo Bay and TVX. In negotiating and structuring this merger, Kinross needed its flagship asset -- the Fort Knox mine -- to be unencumbered by the claims of the Preferred. Kinam, not Kinross, owned the Fort Knox mine. This fact, combined with the continued presence of the Preferred in the capital structure, diminished Kinross's status in the merger. If Kinross could claim that it owned outright the Fort Knox mine, which was not only the most significant asset of "old" Kinross but also would be the most significant asset of the "new" Kinross, it could claim a greater proportion of the merger assets in exchange for its outsize contribution.
86. Notwithstanding its failure to eliminate the Preferred through the Offer, Kinross misrepresented the true ownership of the Fort Knox mine in the Echo Bay/TVX Merger Circular, where Kinross claimed (at p. A-3):
DESCRIPTION OF BUSINESS AND PROPERTIES The material properties of Kinross are the following:
PROPERTY OWNERSHIP % -------- ----------- Fort Knox Mine(1)...................100%(2) Porcupine Joint Venture(3)...........49% Kubaka Mine(4).....................54.7%Notes:
(1) The True North property is subject to various net smelter return royalties, ranging from 3.5% to 5%. The Ryan Lode project is subject to various net smelter return royalties ranging from 3% to 5% and annual rental payments of $150,000.(2) Kinross holds a 100% interest in the properties forming part of the Fort Knox mine except for the Gil property in which Kinross holds an 80% interest.
(3) The Porcupine Joint Venture was formed pursuant to an agreement with Placer dated July 1, 2002. The Hoyle Pond mine is subject to two tonnage based royalties for which $131,000 was expensed in 2001 and $111,000 was expensed in 2000. A 2% net smelter royalty is payable on production from the Preston, Paymaster and Vedron properties.
(4) The Kubaka mine is subject to royalty and production based taxes which amounted to 11.8% in the year 2001.
87. The ownership of the Fort Knox mine was further misrepresented in Kinross's description of its "Material Properties" in the Echo Bay/TVX Merger Circular, which stated (at p. A-10):
Material Properties
The following properties have been identified as material to Kinross. All production data is presented on a 100% basis with the exception of gold equivalent production, which represents Kinross' proportionate share.
Fort Knox Mine and Area, AlaskaKinross is the owner of the Fort Knox mine. [Emphasis supplied.] The Fort Knox mine includes the main Fort Knox open pit mine, mill, and tailings storage facility, the True North open pit mine, which commenced production in 2001, the Ryan Lode project and an 80% ownership interest in the Gil property that is subject to a joint venture agreement with Teryl Resources Corp ("Teryl"). Kinross' ownership interest in the Fort Knox mine was acquired as a result of the merger (the "Kinam Merger") with Amax Gold Inc. (now Kinam) on June 1, 1998. The Fort Knox mine and True North mine employed approximately 360 people at December 31, 2001. The Fort Knox property has been pledged as security against a syndicated credit facility with a syndicate of lenders led by Bank of Nova Scotia which supports, inter alia, $49.0 million of industrial revenue bonds outstanding as at December 31, 2001.
88. Nowhere does the Echo Bay/TVX Merger Circular reveal that Kinam, not Kinross, is the owner of the Fort Knox mine, or that there are stakeholders in Kinam, i.e., the Preferred, other than Kinross itself.
89. In order to try to effect the elimination of the Preferred before the exchange ratio was set and the other details of the merger settled, Kinross resorted to the coercive tactics described in section IV.C above. Kinross failed in its attempt to acquire greater than 90% of the outstanding shares of the Preferred, the level that would have enabled it to squeeze out the remaining Preferred shareholders. However, claiming ownership of the Fort Knox mine was so important to Kinross that it nevertheless concealed from its merger partners and their shareholders the ownership interest of the Preferred in that key mine as well as in Kinam's other properties.
90. In fact, Kinross felt itself under heavy pressure to complete the merger with Echo Bay and TVX as quickly as possible. In an interview published in the December 23, 2002, edition of The Wall Street Transcript, defendant Buchan stated:
Both TVX and Echo Bay went through a recapitalization where the debt was exchanged for equity. We never had to do that. Their recapitalizations occurred in 2001 and early 2002 and that allowed us to be able to look at acquiring those two companies in this merger without taking on a level of financial stress that would have made it untenable. So it could not have occurred before 2002. If you look forward three years and you do in fact see a secular recovery in the market, you couldn't do it. The market would be more supportive of each of those operations independently because of the leverage that would have existed in the recapitalized company. So as inevitably happened the timing of the merger is a matter of circumstance and opportunity. So I don't believe this transaction could have occurred 12 months ago and I don't think it would be doable 12 months from now.
91. In December 2002, the proposed merger of Kinross, Echo Bay and TVX was submitted to the shareholders of all three companies for approval. At the time, Kinross owned 10.6% of Echo Bay's common shares and Newmont Mining Corp. ("Newmont") owned 43.3%, leaving Echo Bay's public shareholders with 44.2%. Both Kinross and Newmont had entered into lock-up agreements with Echo Bay under which they had agreed to vote in favor of the company's merger into the new Kinross.
92. In connection with this vote, Echo Bay issued a proxy statement (the "Echo Bay Proxy Statement") dated December 20, 2002, which included a detailed summary of the fairness opinion (the "Echo Bay Fairness Opinion") prepared by its investment bankers, National Bank Financial, which opined that the proposed exchange ratio of existing Echo Bay common shares into common shares in the new Kinross was fair to Echo Bay's shareholders.
93. In valuing Kinross, the Echo Bay Fairness Opinion necessarily dealt largely with the assets owned by Kinam, most notably the Fort Knox mine. National Bank Financial used substantially the same methodologies that Merrill Lynch had used in rendering its fairness opinion to Kinross with respect to its merger with Amax Gold, all as indicated in the following excerpt from the Echo Bay Proxy Statement (at pp. 15-19):
The following is a summary of the material procedures and analyses performed by National Bank Financial in assessing the financial fairness of the Echo Bay exchange ratio as of June 10, 2002:
Net Asset Value Analysis
The net asset value approach involves the discounting of an expected stream of future cash flows contained in a life of mine plan using a range of appropriate discount rates. …/…
…National Bank Financial's estimate of free cash flows was based on Echo Bay's, Kinross' and TVX's life of mine projections, after first considering the reasonableness of the underlying assumptions and making certain adjustments to these life of mine plans. In making adjustments to the respective life of mine projections, National Bank Financial performed a range of sensitivity analyses on projected tonnes, grade, capital expenditures, and timing of probable reserves and resources coming into proven reserves, reclamation costs, and on a range of certain general and administrative and operating synergies.
Accretion/Dilution Analysis
National Bank Financial reviewed the results of the Echo Bay financial model and life of mine plan on a stand-alone basis on an earnings, cash flow and net asset value on a per share basis to those resulting from the financial model of the combined company and life of mine plan at gold prices ranging from $275 to $350 per ounce after taking into account the arrangement [Merger] and transactions contemplated thereby. …/…
Comparable Transactions
National Bank Financial reviewed publicly available information on selected acquisition transactions of gold companies and operating properties. National Bank Financial reviewed the following 15 selected transactions in the gold mining industry announced since 1997:
Company Acquisitions (Announced 2000-2002)
ACQUIRER TARGET -------- ------ - Placer Dome Inc. - AurionGold Ltd. - Glamis Gold Ltd. - Francisco Gold Corp. - Meridian Gold Inc. - Brancote Holdings plc - Newmont Mining Corporation - Normandy Mining Limited - Delta Gold Ltd. - Gold Fields Ltd. - Sons of Gwalia Limited - Pacmin Mining Corporation - Barrick Gold Corporation - Homestake Mining Company - Harmony Gold Mining Company Limited - New Hampton Goldfields Limited - Newmont Mining Corporation - Battle Mountain Gold Company
Operating Properties (Announced 1997-2001)ACQUIRER TARGET -------- ------ - Gold Fields Ltd. - WMC Ltd. (Agnew & St. Ives gold operations) - Gold Fields Ltd. - St. Helena Gold Mines Ltd. - AngloGold Limited - Acacia Resources Ltd. - Gold Fields Ltd. - AngloGold Limited (Driefontein Consolidated) - AngloGold Limited - Minorco SA (Gold Assets) - Newmont Mining Corporation - Santa Fe Pacific Gold Corp. (Various Assets)National Bank Financial considered these transactions based on the enterprise value, calculated as equity value plus debt, preferred shares and minority interest less cash and cash equivalents, and the equity value for each of the comparable transactions compared to such acquired companies' reserves and production, where available. National Bank Financial also reviewed premiums paid to shareholders of acquired companies in these transactions as at the date of announcement of the transaction and based on the average trading prices over the preceding 10- to 20-day period. National Bank Financial then applied a range of selected enterprise value multiples from these transactions to the corresponding data of Echo Bay and the combined company. The results of the analysis are set forth below [footnotes omitted]:
COMPARABLE TRANSACTION ECHO BAY AT ECHO BAY AT 0.52X WITH RANGES MARKET* KINROSS AT MARKET** ----------------------- ----------- ---------------------- COMPARABLE TRANSACTIONS LOW HIGH ----------------------- -------- -------- Enterprise Value/Reserves ($/oz.)***... $ 120 $ 150 $ 164 $ 184 Enterprise Value/Production Estimate ($/oz.)...................... $1,000 $1,200 $1,162 $1,302 …/…ComparableTrading Statistics
National Bank Financial compared public market trading statistics of Echo Bay and Kinross to corresponding data of the following 12 selected publicly traded gold companies based in North America and elsewhere:
MID-TIER NORTH AMERICAN SENIOR NORTH AMERICAN AFRICAN ----------------------- --------------------- ------- - Agnico-Eagle Mines Ltd. - Barrick Gold Corporation - AngloGold Limited - Echo Bay Mines Ltd. - Newmont Mining Corporation - Gold Fields Ltd. - Glamis Gold Ltd. - Placer Dome Inc. - Kinross Gold Corporation AUSTRALIAN - Meridian Gold Inc. ---------- - TVX Gold Inc. - Newcrest Mining Ltd.
National Bank Financial examined multiples based on the enterprise value, and the equity value for each of the comparable companies based on reserves, resources, production, cash costs, total costs, earnings, earnings before interest, taxes, depreciation and amortization (EBITDA), cash flow and net asset value at gold prices ranging from $275 to $350 per ounce, where available. National Bank Financial also reviewed industry research reports and analysis on Echo Bay, Kinross and TVX with respect to future gold prices and financial prospects. All multiples were based on closing stock prices as at June 7, 2002. Estimated financial data for the selected companies was based on publicly available research analysts' estimates and public disclosure by the selected companies. National Bank Financial then applied a range of selected multiples to corresponding data of Echo Bay and the combined company. The results of the analysis are set forth below:
COMPARABLE ECHO BAY ECHO BAY AT 0.52X WITH TRANSACTION RANGES AT MARKET* KINROSS AT MARKET** ------------------- ---------- ---------------------- LOW HIGH COMPARABLE TRADING STATISTICS ------- ------- Enterprise Value/Reserves ($/oz.)........ $ 160 $ 180 $ 164 $ 184 Enterprise Value/Resources ($/oz.)***.... $ 150 $ 180 $ 160 $ 179 Enterprise Value/2002 Production Estimate ($/oz.)....................... $1,050 $1,250 $1,162 $1,302 Enterprise Value/EBITDA (LTM)****....... 13.5x 16.0x 15.5x 17.3x Equity Value/2002 Cash Flow Estimate***** 11.0x 13.5x 12.2x 13.7x
Premiums Paid Analysis
National Bank Financial compared the closing prices for Echo Bay common shares and Kinross common shares on the Toronto Stock Exchange on June 7, 2002 resulting in a premium of 12% and also calculated the premiums based on the average closing Kinross share price and the average Echo Bay daily closing prices for the 20 trading day (27%) and 30 trading day (39%) periods ending June 7, 2002. Using the average share price of both Kinross and Echo Bay resulted in a premium of 23% over the 20 trading day average and 24% over the 30 day average.
Contribution Analysis
National Bank Financial reviewed the contribution attributed to each of Echo Bay, Kinross and TVX to the combined company on the basis of their relative estimated net asset value, enterprise value, reserves, estimated 2002 production, equity value, estimated 2002 and 2003 net income and estimated 2002 and 2003 cash flow. The negotiated pro forma ownership positions of the Echo Bay, Kinross and TVX shareholders were then compared to these computations based on a range of gold prices of $275 to $350 per ounce.
…/…
94. The Echo Bay Proxy Statement thus provided Echo Bay shareholders with clear and detailed information regarding the valuation of their shares on a pre- and post-Merger basis. It utilized six separate methodologies in arriving at its conclusion: (1) net asset value analysis; (2) accretion/dilution analysis; (3) comparable transactions analysis; (4) comparable trading statistics; (5) premiums paid analysis; and (6) contribution analysis. Of the six, accretion/dilution analysis and contribution analysis are relevant only to a merger transaction in which shares rather than cash are received as consideration. The remaining four methodologies are relevant both to a merger transaction and to a cash tender offer for shares of a gold mining company. Of these four, three focus closely on the critical attributes of a gold mining company: analysis of value based on gold in the ground, analysis of value based on gold produced each year, and analysis of cash flows from mine plan. The crux of two of these methodologies, the comparable transactions analysis and the comparable trading statistics analysis, involves benchmarking the company against a peer group using as the point of reference a dollar price per ounce of gold attributable to the company: gold in the ground as reserves, gold thought to be in the ground as resources, and gold produced each year. The price per ounce is derived by dividing the valuations (i.e., market capitalization or transaction price paid, as the case may be) of peer group companies by their respective attributable ounces of gold.
95. In the section covering comparable transactions, the Echo Bay Fairness Opinion states the enterprise value per reserve ounce for companies in Echo Bay's peer group as a range, with $120 at the low end and $150 at the high end. In the comparable trading statistics analysis, the peer group enterprise value per reserve ounce has a somewhat higher range, with $160 at the low end and $180 at the high end.
96. As noted in paragraph 76 above, at December 31, 2001, Kinam's gold reserves totaled 4,139,000 ounces. At $120, the low end of the range in the comparable transactions analysis in the Echo Bay Fairness Opinion, the indicated value for Kinam at the time of the Offer would have been approximately $497 million. At $180, the high end of the range in the comparable trading statistics analysis, the indicated value for Kinam would have been just over $745 million. The midpoint of these two indicated values is approximately $621 million.
97. Total liabilities reflected in Kinam's September 30, 2001, balance sheet referred to in the Amended Offer Document, including the $308.4 million in "debt" owed to Kinross, aggregated $439.3 million. Accordingly, a proper valuation analysis of Kinam for holders of the Preferred, like the one soon afterwards performed for the Echo Bay's shareholders, would have shown that Kinam was worth far more than its liabilities. Indeed, a sale of Kinam at a price in the middle of the indicated range would have been far more than sufficient to pay all claims on Kinam, including not just the phony "debt" but also the liquidation preference of $50 per share of Kinam Preferred and all accrued dividends thereon.
98. The valuation disclosure in the Amended Offer Document is contained under the heading "FAIRNESS OF THE OFFER," whose introduction (at p. 6) expressly states that it "supercedes [sic] and replaces in its entirety the discussion of the consideration by the Kinam special committee of the fairness of the offer appearing under the caption Fairness of the Offer in the Offer to Purchase." The Amended Offer Document stated (at pp. 8-9):
Raymond James performed an analysis of Kinam's net asset value based on discounted cash flows. This analysis reflects the going concern value of Kinam. Raymond James concluded that Kinam's net asset value ranged from a negative $116 million to a negative $73.3 million, giving the preferred stock no value under this analysis. See Fairness Opinion of Raymond James; Discounted Cash Flow Analysis. Neither Raymond James nor the special committee formally analyzed the liquidation value of Kinam, since the net asset value analysis indicated that the preferred stock had insufficient asset coverage for a liquidation analysis to be meaningful. The liquidation of mines and mining equipment is difficult, particularly in a liquidation in which the sale of the assets is made under distressed circumstances. In addition, based on the financial statements of Kinam as of September 30, 2001, which reflect the assets and liabilities of Kinam on a historical cost basis adjusted for amortization, depreciation and depletion, the holders of the preferred shares would not be entitled to any payment on liquidation of Kinam since its assets were $81.3 million less than its liabilities. Finally, the liquidation of Kinam was not considered as an alternative to the tender offer and there is no obligation or plans to liquidate Kinam. As set forth above, based on either the financial statements or the net asset value analysis performed by Raymond James, there would not be sufficient assets to pay any amount to the holders of the Kinam preferred stock on a going concern basis or in a liquidation.
99. The foregoing paragraph intentionally concealed the fact that Kinross attributed a much higher valuation on Kinam's assets for purposes of selling the new Kinross to the public shareholders of Echo Bay than it did for purposes of the Offer. The disparity in the valuation of Kinam was motivated by the defendants' scheme to acquire full and unencumbered ownership of those very same assets from the public holders of the Preferred at a price manipulatively depressed to a level that the defendants knew was grossly unfair.
100. The Amended Offer Document principally relied on a discounted cash flow methodology utilized by Raymond James to obtain a "going concern" value for Kinam. "Going concern" is an accounting concept utterly out of place in the context of an issuer tender offer, and in this case it was cited in support of the demonstrably false assertion that Kinam, owner of the Fort Knox mine and more than 4.1 million ounces of total in-ground gold reserves, had a negative net value. Needless to say, this assertion would have come as a quite a surprise to the shareholders of Echo Bay and TVX, and had there been any truth to it, neither company would have entertained any discussions of a merger with Kinross, as the Kinross defendants well knew.
101. The Kinross defendants are highly experienced in the valuation of gold mining companies. Since the formation of Kinross in 1993, they have built the company largely through mergers and acquisitions from a small operation producing 25,000 ounces per year to a major gold producer with annual production of some 2 million ounces. In a March 2000 presentation to investors entitled "Mergers and Acquisitions Case History" and posted at the company's website, Gordon A. McCreary, its Vice President for Investor Relations and Corporate Development, noted that Kinross started life in 1993 as a merger of three companies and by 2000 had been involved in "over a dozen significant transactions," of which by far the most significant was that with Amax Gold in 1998.
102. Defendant Buchan, who holds university level degrees in both mining engineering and mineral economics, has been Kinross's CEO since its formation. Before that, he served for ten years as a mining analyst, four with a leading Canadian brokerage company and six with an institutional boutique, where he specialized in "mining-related research and financing." See biographical notes introducing his interview in The Wall Street Transcript (January 7, 2002).
103. According to Mr. McCreary's March 2000 presentation, Kinross's approach to acquisitions was consistently rooted in the underlying asset value of the target. As he stated: "The most likely candidates are companies with strong assets and weak balance sheets because weak balance sheets can be fixed but weak assets by definition can’t." Kinross's policy was to do deals based on "relative analysis." As he further explained: "You must always be looking for the transaction that is accretive with regard to relevant measures of the day, adjusted appropriately for political risk."
104. The Kinross defendants intentionally refused to utilize the most fundamental "relevant measures of the day" in connection with the Offer because they knew from their own professional experience what the results of a liquidation or comparable transactions analysis similar to that done for the shareholders of Echo Bay would be. This obvious and necessary methodology was omitted precisely because it would have shown, as the numbers recited in paragraphs 76-77 and 96-97 above amply demonstrate, that Kinam had substantial net positive value more than sufficient to cover all its obligations to its Preferred shareholders even after payment of all its alleged intercompany debt, and that this value could readily be realized through one or more fairly negotiated arm's length transactions involving either the entire company or its individual mining properties.
105. The merger of Kinross, Echo Bay and TVX into the new Kinross was effected in early 2003, and shortly thereafter Kinross engaged in a three-for-one reverse stock split, making three shares in the old Kinross equal to one share in the new.
COUNT I BY THE TENDEROR CLASS AND THE HOLDER CLASS AGAINST DEFENDANTS KINROSS, KINROSS U.S.A., AND KINAM FOR BREACH OF CONTRACT 106. All plaintiffs repeat and reallege each of the allegations set forth in the foregoing paragraphs insofar as they are relevant. This claim is asserted against Kinross, Kinross U.S.A., and Kinam.
107. Kinross admits in the Offer Document (at p. 6):
We currently control the business, management and direction of Kinam. All of the members of the board of directors of Kinam, including the members of the special committee, are directors or officers of Kinross. In addition, all of the executive officers of Kinam are executive officers of Kinross. Kinross pays the salaries of all of the executive officers and does not charge Kinam for the management services provided by our directors and officers.
108. As a consequence of the complete unity of management control between and among the Kinross defendants, for purposes of construing the Charter, both at law and in equity, all three should be treated as Kinam and bound by its obligations.
109. Article 4C.(2) of the Charter provides in relevant part:
Dividends paid on shares of Series B Convertible Preferred Stock in an amount less than the total amount of such dividends at the time accumulated and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding.
110. This provision was intended to ensure equal treatment of all holders of the Preferred in the event of partial payments of dividends. Small holders are entitled to the same treatment as big institutional holders. In the June 12, 2001, joint press release by Kinross and Kinam announcing the Franklin Transaction, they expressly stated that the consideration being paid to Franklin included "rights to accrued but unpaid dividends." A similar statement was included in their June 18, 2001, press release announcing the two Follow-On transactions. Accordingly, these transactions constituted unequal and discriminatory payments of dividends in violation of Article 4C.(2) of the Charter.
111. Article 4C.(4)(a) of the Charter provides in relevant part:
In case of the redemption of less than all of the then outstanding Series B Convertible Preferred Stock, the shares of Series B Convertible Preferred Stock to be redeemed shall be redeemed pro rata or by lot or in such other equitable manner as the Board of Directors of the Corporation reasonably may determine. Notwithstanding the foregoing, the Corporation shall not redeem less than all of the Series B Convertible Preferred Stock at any time outstanding until all dividends accrued and in arrears upon all Series B Convertible Preferred Stock . . . then outstanding shall have been paid for all past dividend periods.
112. Like the prohibition on unequal distributions, this provision was designed to ensure that small holders are not disadvantaged relative to large holders when limited resources are used to redeem or repurchase outstanding shares. The Franklin Transaction, and the two Follow-On transactions, also violated this provision and caused exactly the sort of unequal and discriminatory treatment in the redemption of shares that it was intended to prevent. As noted above, for each of share of Preferred, Franklin received Kinross shares with an arguable fair value amounting to $49.99, or over 90% of the Preferred's then $55.25 per share redemption value, including accrued but unpaid dividends.
113. Article 4C.(5)(a) of the Charter provides in relevant part:
Right of Conversion. Subject to and upon compliance with the provisions of this Section 5, each share of Series B Convertible Preferred Stock shall, at the option of the holder thereof, be convertible at any time ... into that number of fully paid and nonassessable shares of Kinross Stock ... obtained by dividing $50.00 by the Conversion Price ... in effect at such time and multiplying the result by .8004.
114. As set forth above, following the 1998 merger, each share of the Preferred had a conversion price of approximately $10.31, making it convertible into 4.85 common shares of Kinross. Yet the Kinross defendants allowed Franklin to convert each share of Preferred held by it into 26.875 shares of Kinross common, equivalent to a conversion price of approximately $1.49. The conversion price and conversion rate received by Franklin were not authorized by the Preferred voting as a class, as required by Article 4 C.(6)(c). Franklin having received this more favorable rate on 43.5% of the original issue, equity requires that the same rate be accorded other holders if the Franklin Transaction itself is not construed as triggering an equitable obligation to redeem all shares of the Preferred at the redemption price.
115. Article 4C.(7) of the Charter provides in relevant part:
Outstanding Shares. For purposes of these Articles of Incorporation, all shares of Series B Convertible Preferred Stock shall be deemed outstanding except (i) from the date fixed for redemption pursuant to Section 4, all shares of Series B Convertible Preferred Stock that have been so called for redemption under Section 4 if the cash necessary for payment of the Redemption Price irrevocably has been set aside; (ii) from the date of surrender of certificates representing shares of Series B Convertible Preferred Stock, all shares of Series B Convertible Preferred Stock converted into Kinross Stock; and (iii) from the date of registration of transfer, all shares of Series B Convertible Preferred Stock held of record by the Corporation or any subsidiary of the Corporation.
116. Under this article, the shares of Preferred held by Kinross are not outstanding shares eligible to vote. They are either constructively redeemed shares or shares acquired through conversion, and in any event they are shares acquired by Kinam due to the complete unity of management control between and among the Kinross defendants.
117. All plaintiffs repeat and reallege each of the allegations set forth in the foregoing paragraphs insofar as they are relevant. This claim is asserted against Kinross, Kinross U.S.A., and Buchan.
118. Under applicable case law in Nevada, as applied by federal as well as state courts, and in accordance with the developing trend in many other jurisdictions, control persons and significant stockholders in closely held corporations owe generally elevated fiduciary duties to other stockholders, particularly in the context of agreements for the purchase or sale of shares of the corporation involving control persons or significant stockholders.
119. Under either the "compelling business reason test" or the "strict good faith standard", the Franklin Transaction constituted a breach of the fiduciary duties owed by the Kinross, Kinross U.S.A., and Buchan to holders of the Preferred.
120. The Kinross defendants arranged the Franklin Transaction for the transparent purpose, particularly in light of the two Follow-On transactions, of blocking the right of the Preferred's holders, voting separately as a class, to elect two additional directors under Article 4.C(6)(b) of the Charter upon the anticipated non-payment of a sixth dividend payment on the Preferred in November 2001.
121. The Offer is an attempt by Kinross, Kinross U.S.A., and Buchan, in violation of their fiduciary duties, to secure Kinam's assets for the benefit of Kinross and its stockholders without paying fair value to holders of the Preferred.
COUNT III BY THE TENDEROR CLASS AND THE HOLDER CLASS AGAINST
KINROSS, KINROSS U.S.A., AND KINAM FOR VIOLATION OF
THE BEST PRICE RULE UNDER SECTION 13(e)
OF THE EXCHANGE ACT AND NYSE RULE 311.03122. All plaintiffs repeat and reallege each of the allegations set forth in the foregoing paragraphs insofar as they are relevant. This claim is asserted against Kinross, Kinross U.S.A., and Kinam.
123. Section 13(e) of the Exchange Act (15 U.S.C. s. 78m(e)) provides in relevant part:
(e) Purchase of securities by issuer
(1) It shall be unlawful for an issuer which has a class of equity securities registered pursuant to section 781 of this title ... to purchase any equity security issued by it if such purchase is in contravention of such rules and regulations as the Commission, in the public interest or for the protection of investors, may adopt (A) to define acts and practices which are fraudulent, deceptive, or manipulative, and (B) to prescribe means reasonably designed to prevent such acts and practices.
(2) For the purpose of this subsection, a purchase by or for the issuer or any person controlling, controlled by, or under common control with the issuer, or a purchase subject to control of the issuer or any such person, shall be deemed to be a purchase by the issuer. [Emphasis supplied.]
124. Pursuant to this section, the SEC has promulgated Rule 13e-4 (17 CFR 240.13e-4). It prescribes numerous filing, disclosure and dissemination requirements for issuer tender offers, includes an anti-fraud provision in substantially the same language as that adopted under § 10(b), and imposes several important substantive requirements, including:
(f) Manner of making tender offer.
(3) If the issuer or affiliate makes a tender offer for less than all of the outstanding equity securities of a class, and if a greater number of securities is tendered pursuant thereto than the issuer or affiliate is bound or willing to take up and pay for, the securities taken up and paid for shall be taken up and paid for as nearly as may be pro rata, disregarding fractions, according to the number of securities tendered by each security holder during the period such offer remains open; . . .
(8) No issuer or affiliate shall make a tender offer unless:
(i) The tender offer is open to all security holders of the class of securities subject to the tender offer; and
(ii) ["best price" rule] The consideration paid to any security holder pursuant to the tender offer is the highest consideration paid to any other security holder during such tender offer. [Emphasis supplied.]
125. The policy of § 13(e) of the Exchange Act regarding equal treatment of all public stockholders in connection with issuer tender offers is further implemented by NYSE Rule 311.03, which states in relevant part:
The Exchange believes it is important that all shareholders of a company be given an opportunity to participate on equal terms in any tender offer made which may affect the rights or benefits of such shareholders. [Emphasis supplied.]
This objective has been implemented by the company's listing agreement with the Exchange. As an example, a company agrees that it will not select any of its securities listed on the Exchange for redemption otherwise than pro rata or by lot.
126. Neither the Exchange Act nor the rules thereunder define the terms "tender offer" or "during such tender offer." In general, the courts have utilized an eight-factor test first adopted in Wellman v. Dickinson, 475 F.Supp. 783, 823-824 (S.D.N.Y. 1979), aff'd on other grounds, 682 F.2d 355 (2d Cir. 1982), cert. denied, 460 U.S. 1069 (1983), to determine the existence of a tender offer.
127. The Franklin Transaction and the two Follow-On transactions were characterized by the presence of multiple Wellman factors, including but not limited to:
(A) active and widespread public solicitation carried out through the press release on the Franklin Transaction, with the result that other holders were attracted, including two additional institutional holders with sufficient shares to give the Kinross defendants over 50% of the Preferred;
(B) solicitation of a large percentage of the Preferred;
(C) payment of substantial premiums over the market price;
(D) the limited time frame in which the Franklin Transaction and two Follow-On transactions were executed;
(E) pressure on Franklin arising from expiry of the limitation period for bringing its threatened legal claims; and
(F) public announcements preceding or accompanying the rapid accumulation of over 51% of the outstanding Preferred.
128. In addition to the Wellman factors, the Franklin Transaction and two Follow-On transactions involved convertible preferred shares which by their express terms required that all holders be accorded equal treatment and opportunity in all matters pertaining to payment of current or accrued unpaid dividends, conversion into common stock, and redemption of shares.
129. For purposes of applying the best price rule to all transactions during the tender offer period, the courts have generally applied a functional test to determine which transactions should be deemed "an integral part of the tender offer." Epstein v. MCA, Inc., 50 F.3d 644, 656 (9th Cir. 1995), rev'd on other grounds, Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367 (1996).
130. The Offer Document makes clear that the Franklin Transaction was not a one-off private market transaction but merely the first step in a plan to acquire all the outstanding Preferred (at p. 5):
We had initially contemplated creating a senior debt instrument to offer in exchange for the Kinam preferred stock and outstanding Kinross convertible debentures. In December 2000, we approached the largest single holder of the Kinam preferred stock, Income Series, a subsidiary of Franklin Custodian Funds Inc., and Franklin Income Securities Fund, a subsidiary of Franklin Templeton Variable Insurance Products Trusts [sic] (the "Franklin Funds"), which rejected our proposal to exchange the Kinam preferred stock held by it for a debt instrument. After several months of negotiation, we reached an agreement with the Franklin Funds in June 2001, and shortly thereafter with two other institutional holders, to acquire the shares of Kinam preferred stock held by them in exchange for Kinross common shares. As a result of the rejection of the senior debt instrument and the difficulties in structuring an exchange offer or other transaction with the remaining holders of the Kinam preferred stock, we temporarily abandoned our efforts to acquire the remaining Kinam preferred stock. [Emphasis supplied.]
131. The Franklin Transaction and two Follow-On transactions were integral parts of a tender offer starting with the Franklin Transaction and extending through the Offer aimed at acquiring and retiring all the Preferred otherwise than by complying with its terms relating to redemption, and in violation of § 13(e), Rule 13e-4, and NYSE Rule 311.03.
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