The following Class Action Complaint was filed on April 26, 2002, 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 will be available in PDF format on or about April 29, 2002, at the website of Berger & Montague, P.C. (www.bergermontague.com).
[List of Attorneys for
at end of Complaint]
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
Case No. CV-S-02-0605-KJD-RJJ
CLASS ACTION COMPLAINT
Jury Trial Demanded
Robert A. Brown,
Glenbrook Capital LP,
George P. Drake, and
CN&L Investment Corp.,
Kinross Gold U.S.A., Inc.,
Kinam Gold Inc.,
Kinross Gold Corporation, and
Robert M. Buchan, ) ) Defendants.
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”), Kinross Gold U.S.A., Inc. (“Kinross U.S.A.”), and Kinam Gold Inc. (“Kinam”), and information available over the Internet.
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, 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) and 14(c), violation of § 20(a) of the Exchange Act, violation of Nevada’s anti-racketeering law (Nevada Revised Statutes, §§ 207.350-207.520), common law fraud, and violation of New York Stock Exchange Rule 311.03.
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, and § 1391(d) with respect to Kinross. 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.
5. Plaintiff Robert A. Brown (“Brown”) is a citizen and resident of Plymouth, Minnesota. He holds 11,824 shares of the Preferred in his IRA account (10,329 shares purchased in 2000, 1171 shares purchased in 2001, and 324 shares purchased in 2002); he holds 14,129 shares in a joint account with his wife (12,100 shares purchased in 2001, and 2029 shares purchased in 2002); and he has trading and investment authority over 3,247 shares in his wife’s IRA account (847 shares purchased in 2000, and 2400 shares purchased in 2001). Of these 29,200 shares, none were tendered to the Offer.
6. Plaintiff Glenbrook Capital LP (“Glenbrook”) is a Nevada limited partnership with its principal place of business at 430 Cambridge Avenue, Palo Alto, California. Glenbrook holds 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.
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. Defendant Kinross Gold U.S.A., Inc. (“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.
10. Defendant Kinam Gold Inc. (“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.
11. Defendant Kinross Gold Corporation (“Kinross”) 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 (collectively, the “Kinross defendants”) have multiple common directors and officers and are operated together as a single gold mining enterprise under unified management with ownership of its major gold mining assets in the United States and elsewhere vested in Kinam.
12. Defendant Robert M. Buchan (“Buchan”) has been Kinross’s Chairman and Chief Executive Officer at all times relevant hereto.
13. 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.
14. 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.”
15. Pursuant to Federal Rules of Civil Procedure 23(a) and b(3), plaintiffs Drake and CN&L 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.
16. 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 continue to hold shares of the Preferred (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.
17. The members of the Tenderor Class and the Holder Class 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.
18. 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.
19. 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 committed common law fraud as alleged; (f) whether defendants violated New York Stock Exchange Rule 311.03 as alleged; and (g) the extent of the per share damages suffered by the members of the Tenderor and Holder Classes and the appropriate remedies therefor.
20. 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 4300 shares to the Offer and continue to hold 43,900 shares. Accordingly, the named plaintiffs herein represent a total of 48,200 shares, or just over 5% of the shares covered by the Tenderor and Holder Classes.
21. Plaintiffs have retained competent and experienced counsel and intend to prosecute this action vigorously.
22. 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.
I. Amax Gold Issues the Preferred in 1994
23. Through a registered public offering in August 1994, Amax Gold issued 1,840,000 shares of the Preferred for net proceeds of $88.3 million. On information and belief, the Preferred was marketed nationwide to income-oriented retail accounts. At the time, Amax Gold’s Sleeper gold mine in Nevada was in full operation, but in light of its declining reserve base, Amax Gold required funds to finance new gold mining projects. The Sleeper was closed in 1996, and Amax Gold entered into a joint venture with X-Cal Resources Limited (“X-Cal”), a Canadian corporation listed on the Toronto Stock Exchange, to explore and develop a larger area that includes both the original Sleeper mine and contiguous properties acquired by X-Cal.
24. The proceeds of the Preferred were used in large part to fund the continued development of the Fort Knox gold mine in Alaska. Today this mine is Kinross’s crown jewel, accounting for over 40% of the company’s total annual gold production and around 50% of its total attributable proven and probable gold reserves.
25. The terms of the Preferred, as set forth in the 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.
26. As originally marketed, the terms of the Preferred contained the following provisions, now included in Article 4 of Kinam’s Articles of Incorporation (the “Charter”), providing:
[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 … .
27. 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 (“ASE”), where it has traded since.
II. Kinross Acquires Amax Gold in June 1998
28. In a joint press release issued February 9, 1998, Kinross and Amax Gold announced an agreement to merge, 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.
29. Under the merger completed on June 1, 1998, Kinross U.S.A. acquired all the common shares of Amax Gold. Each common share of Amax Gold was exchanged for .8004 common share of Kinross, 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 ASE.
30. The Preferred was not exchanged or retired during the 1998 merger. Instead, the conversion rate on the Preferred was adjusted pari passu with the exchange ratio for the common, giving each share of Preferred a conversion price of approximately $10.31 and making it convertible into 4.8512 shares of Kinross common. The merger was not submitted for approval by a class vote of the Preferred.
31. After the merger and as required by the merger agreement, Amax Gold was renamed Kinam. 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.
III. Treatment of the Preferred, 1998-2001
32. Since the 1998 merger, Kinross has exercised complete management control over Kinross U.S.A. and Kinam. Rather than injecting new equity capital into Kinam as promised in connection with the merger, Kinross has instead advanced funds to Kinam in the form of non-interest bearing demand loans with no fixed terms of repayment. These included an advance of $256 million to Kinam in 1998 to allow it to repay bank debt.
33. Similarly, instead of retiring debt of $92 million owed by Amax Gold to its former corporate parent, Cyprus Amax Minerals Company, as promised in connection with the 1998 merger, Kinross converted this obligation into a non-interest bearing demand loan from Kinross U.S.A., also with no fixed terms of repayment.
34. Far from infusing new equity capital into Kinam and “eliminating” the debt of the former Amax Gold, the purpose and intent of Kinross’s actions described in the preceeding paragraphs has been to saddle Kinam with debt and to put Kinross and its common stockholders, including the former common stockholders of Amax Gold, in the position of creditors vis-a-vis the Preferred, and thereby to change their relative rights and preferences with respect to the assets of Kinam.
35. In addition to its 100% owned Fort Knox gold mine, Kinam’s assets include a 54.7% interest in the Kubaka gold mine in Russia and a 50% interest in the Refugio gold mine in Chile. Collectively, these assets account for approximately 75% of Kinross’s total annual gold production and a similar percentage of its total attributable proven and probable gold reserves. Since virtually all of Kinross’s annual revenue comes from the sale of newly mined gold, some three-quarters of Kinross’s total business operations take place within Kinam.
36. Since the 1998 merger, Kinross has taken 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 have 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.
37. On July 27, 2000, Kinross announced that effective with the August 15 payment, Kinam’s board of directors had decided 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.” Following this announcement, prices for the Preferred on the NYSE dropped precipitously from the mid-20’s to under $10 per share.
38. 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 complaint, seven dividend payments in a cumulative amount of $6.5625 remain in arrears.
39. 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 explaining this move, Kinam stated:
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.
40. 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.
41. Kinross used Kinam’s capital deficiency to justify non-payment of dividends on the Preferred as well as to try to coerce holders of the Preferred into accepting the Offer. In this vein, the document containing the Offer (the “Offer Document”) stated (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.]
42. However, under the heading “Dividends” in the Schedule 14C Information Statement explaining the move to Nevada, Kinam stated that it would obtain greater discretion to pay dividends (p. 13):
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.
43. Since dividends on the Preferred were suspended in August 2000, Kinross has pulled cash out of Kinam in excess of what was needed to pay the dividends. Although in economic reality these cash withdrawals have amounted to distributions on common equity, Kinross labeled them repayments of “advances” to Kinam, 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 that:
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.
IV. The Franklin Transaction, June-July 2001
44. On June 12, 2001, Kinross and Kinam issued a press release announcing an agreement with Franklin to exchange 21.5 million of Kinross’s common shares for the 800,000 shares of the Preferred (43.5% of the original issue) held by Franklin. This transaction (hereinafter the “Franklin Transaction”) represented a conversion rate of 26.875 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 $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 market.
45. 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, giving Kinross 51.4% of the original issue. Each of these 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.
46. Kinross and Kinam refused all requests by other holders of the Preferred to tender, exchange or convert their shares for Kinross common at the same or similar rates to the Franklin Transaction or the two follow-on transactions, which all closed in July 2001.
47. Upon obtaining 51.4% of the Preferred, the Kinross defendants did not treat these shares as redeemed by Kinam. Rather, they continue to hold them in Kinross U.S.A. and to treat them as outstanding shares. By this means, they claim 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).
V. The Cash Tender Offer, February-March 2002
48. Following the Franklin Transaction, the Preferred traded around the $10.00 level for several months, before declining to the $8.00 level toward the end of 2001.
49. On January 21, 2002, Kinross management presented to its board of directors a proposal to make the Offer. Following 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 hold its common shares and options thereon. On or about January 23, 2002, the special committee engaged Raymond James to consider the fairness of the Offer from a financial point of view.
50. On Monday, February 4, 2002, Kinross and Kinam announced that Kinross was considering making a cash tender offer of $16.00 per share for the 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.
51. The Offer Document stated (p. 10) 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 (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.”
52. As the Offer Document conceded (p. 10), neither the Kinross defendants 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 (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.”
53. The Offer Document made several salient points directed at coercing holders of the Preferred to tender, including but not limited to:
(1) Following completion of the Offer, Kinam intends and expects to delist the Preferred from the ASE, and thus to make it a highly illiquid security with no readily available market price.
(2) 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.
(3) 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.
(4) Kinam does not expect, following completion of the Offer or in the foreseeable future, to resume payment of dividends on the Preferred.
54. The Offer Document disclosed publicly for the first time (p. 13) that in connection with the Franklin Transaction, there were “extended and acrimonious negotiations … in which litigation was threatened,” and further (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.
55. 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 an “Amendment and Supplement” to the Offer Document (the “Amendment”).
56. The Amendment republished eleven pages of the original Offer Document but failed separately to identify any of the changes or amendments, among which were:
(1) 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;
(2) A new section (at pp. 10-11) entitled “Transactions and Agreements Concerning the Shares” describing in greater detail the Franklin Transaction, but failing to describe either the specific nature of Franklin’s threatened legal claims or whether they were class-based; and
(3) 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 was class-based.
57. 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.
VI. Valuation of Kinam’s Assets
A. Kinam’s Gold Reserves
58. The Offer Document made reference to and described the fairness opinion provided by Raymond James, also included in the Schedule TO. The opinion failed to make any evaluation of the value of Kinam’s proven and probable in ground gold reserves, which amounted to 4,139,000 contained ounces as of December 31, 2001, according to the press release issued by Kinross on February 13, 2002, announcing its 2001 financial results. Nor did the opinion make any evaluation of Kinam’s exploration and development projects, such as its joint venture with X-Cal that includes the Sleeper gold mine, where X-Cal claims to have identified significant new gold resources.
59. A common and important measure used by gold mining analysts to rate the relative attractiveness of publicly traded gold mining equities is market capitalization per ounce of gold reserves. Similarly, in the context of mergers or acquisitions involving gold mining companies, a common and important measure of valuation is price per ounce of gold reserves acquired. While the intelligent use of either measure requires consideration of other factors (e.g., type of mine, cost of extraction, geographic location, political risk, composition of hedge book, etc.), both measures set basic benchmarks of valuation that are regularly employed by competent gold mining analysts and included in their reports to investors.
60. 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: “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.”
61. In large part as a result of low gold prices in recent years, the gold mining industry is undergoing increasing consolidation. 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.
62. Recent acquisitions of gold mining properties roughly comparable to Kinam’s have taken place 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.). Most analysts agree that Placer Dome overpaid for Getchell, and that Normandy’s large hedge book negatively affected its value. Homestake, on the other hand, was a company with both mining assets and limited hedging policies fairly comparable to Kinam’s. Multiplying Kinam’s gold reserves of 4,139,000 ounces by $110 per ounce yields a value in excess of $455 million.
63. 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 wipe out the capital deficiency, but also leave over $100 million for the Preferred even after repaying all $235 million of Kinross’s so-called advances.
64. According to the figures in its February 13, 2002, press release announcing its 2001 financial results, Kinross has 335 million common shares outstanding, total proven and probable gold reserves of 5,661,000 ounces, a relatively clean balance sheet with little debt, and stockholders’ equity of almost $330 million after deduction of $48 million on account of the 894,600 outstanding shares of Preferred. These numbers give the following approximate calculations: .0169 ounce 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.
65. 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. At $1.86 per share, a quite reasonable expectation in the event of a takeover of the company even at gold prices below $300/ounce, the 26.875 shares of Kinross common received for each share of Preferred in the Franklin Transaction would have a value of $49.99. Similarly, on any sustained increase in gold prices to over $320/ounce, it is reasonable to expect that Kinross common would approach the $2.00 per share level. Accordingly, had Franklin had the patience to await either a takeover of Kinross or higher gold prices, it likely would have received value approximately equal to the redemption price on its holdings of the Preferred.
B. Financial Insurance and Option Characteristics
66. In its report to the special committee, Raymond James noted that the Preferred was rated D by Standard & Poor’s and B3 by Moody’s. It dismissed Moody’s B3 rating, stating that “it anticipates that [the Preferred] will be supported by all the assets and cash flow of Kinross.”
67. Raymond James then performed what it called an “intrinsic value analysis” of Kinam by comparing the Preferred to the eight convertible preferreds rated D by Standard & Poor’s, three of which had made bankruptcy filings, and only one of which had any connection to gold. Of the eight, five were rated C, one Ca and two Caa3 by Moody’s. “Intrinsic value” was defined as “the sum of the value of accrued dividends plus the value of the underlying common shares received upon conversion.”
68. This type of conventional financial analysis misses perhaps the most fundamental point about the common shares of gold mining companies: they are widely considered by the investors who buy them as options on the price of gold, and in that sense, as a type of financial insurance. Accordingly, the Preferred is basically an option on an option, and what is more, it is in the nature of a perpetual option unless redeemed. The option characteristics of gold mining equities have been particularly evident in the past year as investors have turned more bullish on gold. The shares of relatively unhedged gold producers have far outperformed the shares of heavily hedged companies, which have limited their ability to profit from an upswing in gold prices by engaging in forward sales of large amounts of their future production at current low prices. In short, the heavy hedgers have reduced their attractiveness as call options on gold and their leverage as financial insurance.
69. The complete inadequacy and misleading nature of the fairness opinion by Raymond James was fully known to management of the Kinross defendants. In his January 7 interview in The Wall Street Transcript, defendant Buchan stated:
The reality of the situation is that gold stocks are not investments. They never have been. They’re very expensive stocks relative to a normal manufacturing company. They are reflective of an insurance policy. They are effectively a financial insurance policy. And I think if one starts to go beyond that, you’re missing the point.
BY THE TENDEROR CLASS AND THE HOLDER CLASS AGAINST DEFENDANTS
KINROSS, KINROSS U.S.A., AND KINAM FOR BREACH OF CONTRACT
70. 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.
71. Kinross admits in the Offer Document (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.
72. 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.
73. 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.
74. 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.
75. 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.
76. 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.
77. 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.
78. 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.
79. 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.
80. 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.
BY THE TENDEROR CLASS AND THE HOLDER CLASS AGAINST
DEFENDANTS KINROSS, KINROSS U.S.A., AND BUCHAN FOR BREACH OF
ELEVATED FIDUCIARY DUTIES
81. 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.
82. 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.
83. 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 Kinross, Kinross U.S.A., and Buchan to holders of the Preferred.
84. 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.
85. The Offer is an attempt by the 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.
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 311.03
86. 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.
87. 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.]
88. 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 those adopted under §§ 10(b) and 14(c), 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.]
89. 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.
90. 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.
91. The Franklin Transaction and the two follow-on transactions were characterized by the presence of multiple Wellman factors, including but not limited to:
(1) 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;
(2) solicitation of a large percentage of the Preferred;
(3) payment of substantial premiums over the market price;
(4) the limited time frame in which the Franklin Transaction and two follow-on transactions were executed;
(5) pressure on Franklin arising from expiry of the limitation period for bringing its threatened legal claims; and
(6) public announcements preceding or accompanying the rapid accumulation of over 51% of the outstanding Preferred.
92. 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.
93. 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).
94. 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 (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.]
95. 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.
BY THE TENDEROR CLASS AND THE HOLDER CLASS AGAINST ALL DEFENDANTS FOR
VIOLATION OF SECTIONS 10(b) AND 14(c) OF THE EXCHANGE ACT, RULES 10(b)(5)
AND 14c-6(a) PROMULGATED THEREUNDER BY THE SEC, AND COMMON LAW FRAUD
96. 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., Kinam, and Buchan.
97. Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 CFR 240.10b-5) promulgated thereunder by the SEC, prohibit fraud, deceit, and materially false or misleading statements or omissions “in connection with the purchase or sale of any security.” Rule 13e-4(j)(1) uses parallel language to prohibit these same practices “in connection with an issuer tender offer” by “an issuer or an affiliate of such issuer.” Section 14(c) (15 U.S.C. § 78n(c)) and Rule 14c-6(a) (17 CFR 240.14c-6(a)) prohibit materially false or misleading statements or omissions in any Schedule C Information Statement required under Rule 14c-2.
98. As noted in Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 546 (2d Cir. 1967), “deception may take the form of nonverbal acts” and may include “manipulation of market price and purposeful reduction of dividends in order to buy out minority shareholders cheaply.” Claims of securities fraud must allege scienter, which in this context is a mental state embracing intent to deceive, manipulate, or defraud.
99. The Offer Document and Amendment and attendant circumstances described herein demonstrate defendants’ scienter. The Offer Document and Amendment contain numerous misstatements and omissions of material facts intentionally calculated to deceive holders of the Preferred as to the true value of Kinam’s gold mining assets, including but not limited to:
(1) The statement quoted above to the effect that sale of Kinam’s mining properties would not cover the company’s debts and the liquidation value of the Preferred when the Kinross defendants knew, based on other recent acquisitions in the industry as set forth above, that this statement was untrue;
(2) The statement in the Amendment (at p. 8) that “net asset value analysis indicated that the preferred stock had insufficient asset coverage for a liquidation analysis to be meaningful [because] liquidation of mines and mining equipment is difficult, particularly … under distressed circumstances,” when the Kinross defendants knew that the Fort Knox gold mine could readily be sold as an operating mine;
(3) Multiple valuations of the Preferred based on inappropriate methodologies more suited to ordinary manufacturing, industrial and commercial concerns while omitting any valuations based on methodologies regularly used to evaluate gold mining companies and well-known to the Kinross defendants, all as described in more detail above;
(4) Multiple unqualified statements (e.g., Offer Document at pp. 4, 7 and 11; Amendment at pp. 2 and 3) that the “advances” and “loans” by Kinross to Kinam are debt without ever acknowledging that reasonable arguments can be made that these advances and loans must be treated as equity, particularly in light of the statement quoted in paragraph 28 above that Kinross’s acquisition of Amax Gold would result in the “elimination” of most or all of this debt; and
(5) Multiple unqualified statements (e.g., Amendment at pp. 7 and 8 ) that Kinam’s net asset value is a negative $73 to $116 million, a calculation based on two erroneous assumptions: (1) that Kinross’s advances and loans to Kinam are debt rather than equity; and (2) that Kinam’s mining properties are fairly valued on its balance sheet.
100. The Offer Document and the Amendment contain numerous misstatements and omissions of material facts intentionally calculated to mislead holders of the Preferred as to their legal rights and to coerce them into tendering to the Offer, including but not limited to:
(1) The unqualified statement (Offer Document at p. 7; Amendment at p. 3) that Kinross “controls” the now required separate class vote of the Preferred for two additional directors when the Kinross defendants know that their right to vote any Preferred shares held by them is subject to legal doubt, as set forth above;
(2) The unqualified statement (Offer Document at p. 19; Amendment at p. 9) that if Kinross obtains 90% of the Preferred, it can complete a “short-form” merger when the Kinross defendants know that their right to vote any Preferred shares held by them is subject to legal doubt; and
(3) With respect to the litigation threatened by Franklin, the failure to disclose the nature of the claims or violations of law asserted and the terms of the extension of the limitation period, particularly since the running of the time period for bringing a claim under § 10(b) of the Exchange Act and Rule 10b-5 does not foreclose bringing a claim for essentially the same conduct if it constitutes a predicate act under Nevada’s anti-racketeering law, all as set forth in more detail in Count V below.
101. The statement, quoted above, in the Schedule 14C Information Statement explaining the effect of moving Kinam’s state of incorporation from Delaware to Nevada with respect to the payment of dividends on the Preferred was materially false and misleading, and was calculated to cause holders of the Preferred to forego whatever legal remedies were available to them to enjoin the move or to apply for appointment of a receiver under the more lenient Delaware requirements before the move took effect.
102. Since acquiring Kinam in 1998, the Kinross defendants have engaged in a deliberate scheme to defraud holders of the Preferred and to facilitate a cheap buy-out of their shares at below fair value. This scheme has involved both verbal and non-verbal conduct, including but not limited to: representing that the debt of Amax Gold would be eliminated but thereafter treating it as debt of Kinam to Kinross rather than equity; suspending payment of dividends on the Preferred; moving the corporate home of Kinam from Delaware to Nevada; acquiring 51.4% of the Preferred in violation of both § 13(e) and Rule 13e-4 of the Exchange Act and the terms of the Preferred; making the Offer in violation of these same provisions; making numerous material misstatements and omissions in the Offer Document and Amendment; and threatening to undermine the liquidity and value of any shares of Preferred not tendered to the Offer.
BY THE TENDEROR CLASS AND THE HOLDER CLASS AGAINST
DEFENDANTS KINROSS, KINROSS U.S.A., AND KINAM FOR
VIOLATION OF NEVADA’S ANTI-RACKETEERING LAW
103. 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.
104. Sections 207.350 through 207.520 of the Nevada Revised Statutes (abbreviated “NRS”) contain the state’s anti-racketeering or “baby RICO” law. NRS 207.390 defines “racketeering activity” as “engaging in at least two crimes related to racketeering that have the same or similar pattern, intents, results, accomplices, victims or methods of commission, or are otherwise interrelated by distinguishing characteristics and are not isolated incidents… .” NRS 207.370 defines a “criminal syndicate” as “any combination of persons, so structured that the organization will continue its operation even if individual members enter or leave the organization, which engages in or has the purpose of engaging in racketeering activity.”
105. Under NRS 207.360, a “crime related to racketeering” or predicate act includes, inter alia, “[a]ny violation of NRS 90.570” as well as “obtaining possession of money or property valued at $250 or more … by means of false pretenses.” NRS 90.570, in language that tracks Rule 10b-5 under the Exchange Act, prohibits fraud, deceit, and materially false or misleading statements or omissions “in connection with the offer to sell, sale, offer to purchase or purchase of a security… .”
106. As in most states that have adopted the Uniform State Securities Code, NRS 90.660 provides a private right of action only to defrauded purchasers of securities, and then only for violations of NRS 90.570(2) relating to material misstatements or omissions. However, whether directed at purchasers or sellers, multiple violations of NRS 90.570, including subparagraphs (1) (“any device, scheme or artifice to defraud”) and (3) (“an act, practice or course of business which operates or would operate as a fraud or deceit”), give rise to a private right of action under NRS 207.470 by “[a]ny person who is injured in his business or property by reason of any violation NRS 207.400,” which provides in relevant part:
1. It is unlawful for a person:
* * * * *
(b) Through racketeering activity to acquire or maintain, directly or indirectly, any interest in or control of any enterprise.
(c) Who is employed by or associated with any enterprise to conduct or participate, directly or indirectly, in:
(1) The affairs of the enterprise through racketeering activity; or
(2) Racketeering activity through the affairs of the enterprise.
* * * * *
(f) To furnish advice, assistance or direction in the conduct, financing or management of the affairs of the criminal syndicate with the intent to promote or further the criminal objectives of the syndicate.
* * * * *
(h) To conspire to violate any of the provisions of this section.
107. NRS 207.520 provides that a civil action for violation of NRS 207.470 “may be commenced at any time within 5 years after the violation occurs or after the injured person sustains the injury, whichever is later.” Accordingly, individual acts of securities fraud that cannot be reached under § 10(b) and Rule 10b-5 of the Exchange Act because of the three year period of repose remain actionable as predicate acts under Nevada’s anti-racketeering law for another two years.
108. The multiple violations of the antifraud provisions of the federal securities laws alleged in Count IV above also constitute violations of NRS 90.570 and predicate acts under NRS 207.360. Under NRS 90.830, NRS 90.570 covers offers to purchase “made in this state,” including offers that “originate” in or are “directed” into the state whether or not the parties are there present.
109. The statement quoted above that Kinross’s acquisition of Amax Gold would result in the “elimination” of most or all of its debt violated NRS 90.570 and constitutes a further predicate act under NRS 207.360. Kinross made this statement to mislead holders of the Preferred as to its true intention with respect to this debt, which, as demonstrated by its subsequent conduct, was to saddle the Preferred with virtually all of it. Relying on this statement, holders of the Preferred did not request the separate class vote on the 1998 merger to which they would have been entitled had the plan to leave all of Amax Gold’s debt in Kinam been revealed.
110. All the predicate acts alleged above constitute racketeering activity under NRS 207.390 because they were related to each other as part of a coordinated scheme, starting in mid-1998 and continuing to the present time, directed at holders of the Preferred, located in Nevada and elsewhere, and designed to compel them ultimately to surrender their shares to the Kinross defendants at less than fair and full value.
BY THE TENDEROR CLASS AND THE HOLDER CLASS AGAINST
DEFENDANTS KINROSS, KINROSS U.S.A., AND BUCHAN
FOR VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
111. 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, pursuant to Section 20(a) of the Exchange Act, 75 U.S.C. § 78t.
112. Defendants Kinross, Kinross U.S.A., and Buchan, by virtue of their stock ownership, positions, and/or specific acts described above, were, at the time of the wrongs alleged herein, controlling persons within the meaning of Section 20(a) of the Exchange Act.
113. Said defendants had the power and influence and exercised the same to cause Kinam to engage in the illegal conduct and practices complained of herein.
114. By reason of the conduct alleged in Count IV of the Complaint, said defendants are liable for the aforesaid wrongful conduct, and are liable to Plaintiffs and the other members of the Tenderor and Holder Classes for the substantial damages which they have suffered.
WHEREFORE, Plaintiffs on behalf of themselves, the Tenderor Class and the Holder Class pray for judgment as follows:
(1) A declaration that the Franklin Transaction was a constructive redemption of the Preferred requiring that all outstanding shares thereof be redeemed at the redemption price;
(2) In the event that the declaration requested in (1) above is made, damages for the Tenderor Class in the amount of $39.25 per share (the redemption price at the date of the Franklin Transaction ($51.50 plus $3.75 in unpaid dividends) less the $16.00 per share paid pursuant to the Offer), plus interest since July 2001.
(3) A declaration that the Franklin Transaction was the first step in a multi-step issuer tender offer for the Preferred, that the Offer was an integral part of the multi-step issuer tender offer, and that the Franklin Transaction, as the highest per share value paid to any offeree during the multi-step issuer tender offer, set the value that must be paid to all recipients of the Offer.
(4) In the event that the declaration requested in (3) above is made, damages or equitable relief as follows:
(a) For all members of the Tenderor Class, damages in an amount per share not less than the greater of: (i) $9.80 per share (the $25.80 per share received by Franklin less the $16.00 per share paid pursuant to the Offer), plus all accrued and unpaid dividends since July 2001; or (ii) the market price of one Kinross common share on the date of payment (or such other date as may be fixed by the Court) multiplied by 26.875, the conversion rate received by Franklin in the Franklin Transaction, plus all accrued and unpaid dividends since July 2001;
(b) For all members of the Holder Class, an election between either: (i) damages per share as specified in request (4)(a); or (ii) an equitable adjustment of the conversion rate to 26.875 shares of Kinross for each share of Preferred, together with the right to all unpaid dividends accruing since July 2001.
(5) For members of both the Tenderor Class and the Holder Class who are entitled or who elect to receive damages, an award of treble damages under Nevada Revised Statutes, § 207.470.
(6) For members of the Holder Class who elect the remedy specified in request (4)(b)(ii) above, and in substitution for treble damages, a further equitable adjustment of the conversion rate from 26.875 to 80.625 shares of Kinross for each share of the Preferred.
(7) For members of the Holder Class who elect the remedy specified in request (4)(b)(ii) above, a declaration that neither Kinam nor any of its affiliates may redeem any outstanding shares of the Preferred without first offering the holders thereof reasonable opportunity to exercise their right of conversion into Kinross common shares.
(8) A declaration that for purposes of determining whether dividends may be paid on the Preferred, Kinam must employ a fair valuation of its assets and liabilities as allowed under Nevada law.
(9) An order converting into common equity, or extinguishing completely, all inter-company debt owed by Kinam to Kinross U.S.A., Kinross, or any of their other affiliates or subsidiaries.
(10) A declaration that all shares of the Preferred held by Kinross U.S.A. or any of its affiliates must be treated as shares redeemed, converted, or otherwise acquired by the issuer, and therefore cannot be voted on any matters on which the Preferred is entitled to vote.
(11) A declaration that the holders of the Preferred are entitled to elect two members to the board of directors of Kinross and Kinam in the circumstances set forth in Article 4C.(6)(b) of the Charter.
(12) An order of civil forfeiture under Nevada Revised Statutes s. 207.490(6) placing all the common shares of Kinam or, alternatively, its gold mining assets including the Sleeper and Fort Knox gold mines, in trust to secure payment of all damages awarded to class members, and thereafter to be available to compensate earlier holders of the Preferred for their damages resulting from the racketeering activity alleged, or to escheat to the states of Nevada or Alaska in punishment therefor.
(13) Attorneys’ fees and costs of investigation and litigation reasonably incurred.
(14) Interest at the statutory rate on all damages.
(15) Such other and further relief as the Court may deem just and proper.
Plaintiffs demand a trial by jury on all issues so triable.
DATED this 26th day of April, 2002.
MERRILL G. DAVIDOFF
JACOB A. GOLDBERG
DOUGLAS M. RISEN
BERGER & MONTAGUE, P.C.
REGINALD H. HOWE
KUMMER KAEMPFER BONNER & RENSHAW
By: /s/ L. Joe Coppedge
THOMAS F. KUMMER
Nevada Bar No. 1200
L. JOE COPPEDGE
Nevada Bar No. 4954
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
Attorneys for Plaintiffs