- Copy of Class Action Complaint filed against Kinross over Kinam Preferred
- 4/30/2002 – Press Release required by Private Securities Litigation Reform Act of 1995
- Berger & Montague, P.C. and Reginald H. Howe Sue Kinross Gold Corporation and Related Persons on Behalf of Unaffiliated Investors in Kinam Gold Inc.
- PHILADELPHIA, April 30/PRNewswire/ — On April 26, 2002, the law firm of Berger & Montague, P.C. and attorney Reginald H. Howe, through the Nevada law firm of Kummer Kaempfer Bonner & Renshaw, filed a class action suit against Kinross Gold Corporation (“Kinross”) (AMEX: KGC – news), Kinross Gold U.S.A. Inc. (“Kinross USA”), Kinam Gold Inc. (“Kinam”) (AMEX: KGC.pb) and Robert M. Buchan, Chairman & Chief Executive Officer of Kinross, in the United States District Court for Nevada on behalf of all persons or entities unrelated to Kinross who now hold Kinam Preferred Stock or who tendered Kinam Preferred Stock to the issuer tender offer (the “Tender Offer”) by Kinross USA effected February-March 2002. A copy of the complaint filed in this action is available from the Court, or can be viewed at (http://www.bergermontague.com) or at (http://www.goldensextant.com).
The Complaint alleges that defendants, over an extended time frame and in numerous separate steps, breached the terms of the Kinam Preferred Stock, breached the fiduciary duties owed by control persons and major shareholders to other shareholders, violated the “best price rule” promulgated under Section 13(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), violated anti-fraud provisions of rules promulgated under Sections 10(b), 13(e) and 14(c) of the Exchange Act, violated the anti-racketeering law set forth in Section 207 of the Nevada Revised Statutes, committed common law fraud, and violated New York Stock Exchange Rule 311.03. Since the 1998 merger pursuant to which Kinross acquired control of Kinam, as alleged in the complaint, Kinross has consistently and repeatedly acted to impair the value of Kinam Preferred Stock in order to facilitate a subsequent purchase at an unfair price, culminating in the coercive and illegal Tender Offer of February-March 2002.
- If you now hold shares of Kinam Preferred Stock, or if you tendered shares of Kinam Preferred Stock to the Tender Offer, you may, no later than 60 days from today, move to be appointed as a Lead Plaintiff. A Lead Plaintiff is a representative party that acts on behalf of other class members in directing the litigation. If you hold or tendered Kinam Preferred Stock, please contact Berger & Montague, P.C. at investorprotect@bm.net for a more thorough explanation of the Lead Plaintiff selection process.
- The law firm of Berger & Montague, P.C. has over 50 attorneys, all of whom represent plaintiffs in complex litigation. The Berger firm has extensive experience representing plaintiffs in class action securities litigation and has played lead roles in major cases over the past 25 years which have resulted in recoveries of several billion dollars to investors. The firm is currently representing investors as lead counsel in actions against Rite Aid, Sotheby’s, Waste Management, Inc., Sunbeam, Boston Chicken and IKON Office Solutions, Inc. The standing of Berger & Montague, P.C. in successfully conducting major securities and antitrust litigation has been recognized by numerous courts. For example:
- “Class counsel did a remarkable job in representing the class interests.”
In Re: IKON Offices Solutions Securities Litigation. Civil Action No. 98-4286(E.D.Pa.) (partial settlement for $111 million approved May, 2000). - “…[Y]ou have acted the way lawyers at their best ought to act. And I have had a lot of cases … in 15 years now as a judge and I cannot recall a significant case where I felt people were better represented than they are here… I would say this has been the best representation that I have seen.” In Re Waste Management, Inc. Securities Litigation, Civil Action No. 97-C 7709 (N.D. Ill.) (settled in 1999 for $220 million).
- If you now hold shares of Kinam Preferred Stock, or if you tendered shares of Kinam Preferred Stock to the Tender Offer, please visit our website at www.bergermontague.com to view the complaint and join the class action. If you have any questions concerning this notice or your rights with respect to this matter, please contact:
- Merrill G. Davidoff, Esquire
Jacob A. Goldberg, Esquire
Kimberly A. Walker, Investor Relations Manager
Berger & Montague, P.C.
1622 Locust Street
Philadelphia, PA 19103
Phone: 888-891-2289 or 215-875-3000
Fax: 215-875-5715
Website: http://www.bergermontague.com
e-mail: InvestorProtect@bm.net - SOURCE: Berger & Montague, P.C.
* * * * * * * * * * * * * * * * * * * *
On March 21, 2002, Kinross announced that its tender offer for the Kinam preferred would be extended until March 28, and that it is mailing to preferred shareholders new material amending and supplementing the original tender offer documents. This new material, which is also posted at Kinross’s website (www.kinross.com), contains under the heading “LEGAL MATTERS; REGULATORY APPROVALS” two new paragraphs responding to my letter of March 7 as follows:
On March 7, 2002, we received a letter from Reginald H. Howe, which stated that he represents two holders of the Kinam preferred stock who hold a total of 6,500 shares. In his letter, Mr. Howe states that his clients intend to pursue legal action with respect to our tender offer if we do not amend the Offer to Purchase and make certain material changes to its terms, including the offering price. Mr. Howe’s letter sets forth various potential legal arguments with respect to our tender offer for the Kinam preferred stock and our purchases of Kinam preferred stock from three shareholders in July of 2001. See the discussion in the Offer to Purchase entitled Special Factors-History; The Offer-Transactions and Agreements Concerning the Shares.
We do not believe that Mr. Howe states any grounds on which his clients would be entitled to relief and we intend to vigorously defend any legal action that may be brought by Mr. Howe, if and when such legal action is filed. As of the date hereof, Mr. Howe has not commenced any legal action, nor has he indicated an intent to commence legal action prior to the expiration of the tender offer. We anticipate that any legal action that may be filed may not be resolved for a significant period of time. While Mr. Howe’s threatened litigation gives us the right to terminate our offer pursuant to the conditions contained in the Offer to Purchase, we currently do not intend to exercise such right, and intend to continue with the tender offer according to its terms. Although we do not currently anticipate any change, we will make a public announcement concerning any change in our position with respect to termination of the tender offer on account of Mr. Howe’s letter or other developments if and when such change occurs. See the discussion in the Offer to Purchase entitled The Offer-Conditions of the Offer.
In partial response to these paragraphs, the following letter was transmitted as of its date to the boards of directors of Kinross and Kinam. It is posted here for the information of Kinam preferred shareholders, particularly those who have expressed interest in the proposed class action.
Reginald H. Howe
Attorney-at-Law
49 Tyler Road
Belmont, Massachusetts 02478-2022
tel. & fax: (617) 484-0029
e-mail: row@ix.netcom.com
Admitted to Practice:
Supreme Judicial Court of Massachusetts
U.S. District Court for the District of Massachusetts
U.S. Court of Appeals for the First Circuit U.S. Supreme Court
March 22, 2002
Boards of Directors
Kinross Gold Corporation and
Kinam Gold Inc.
52d Floor, Scotia Plaza
40 King Street West
Toronto, Ontario
Canada M5H 3Y2
Gentlemen:
Re: Pending Offer (the “Offer”) by Kinross to Purchase All Publicly-Held Shares of the $3.75 Series B Convertible Preferred Stock (the “Preferred”) of Kinam at $16.00 per Share
The materials dated March 21, 2002, amending and supplementing the Offer (the “Amendment”) refer to my letter to you dated March 7, 2002, on behalf of my clients Robert K. Landis, the beneficial owner of 2500 shares of the Preferred through an Individual Retirement Account, and Sconset Holdings LLC (“Sconset”), the beneficial owner of 4000 shares of the Preferred, which have been tendered to the Offer.
The Amendment contains an incomplete and partly inaccurate summary of my March 7 letter. Nor does it mention that the letter was posted at The Golden Sextant and is available online at www.goldensextant.com/Kinross-Kinam. While the Amendment states that “[my] clients intend to pursue legal action with respect to [the Offer]” in the absence of certain changes thereto “including the offering price,” it neglects to disclose the threat of a class action as set forth in the final paragraph:
Under s. 21D of the Exchange Act, 15 U.S.C. s. 78u-4, as added by the Private Securities Litigation Reform Act of 1995, a plaintiff who files a securities class action is required within 20 days to publish a notice informing members of the alleged class that they may move to serve as lead plaintiff under the concept of “most adequate plaintiff.” While this requirement does not apply until and unless an action is filed in court, Mr. Landis and I are presently prepared to work with, or in an appropriate case to defer to, any qualified holders of the Preferred who have competent counsel and who wish to undertake representation of the class in order to secure fair and equal treatment for all holders, large and small. What Mr. Landis and Sconset will not do, now or in the future, is to try to secure a favored position for themselves at the expense of other holders.
Since March 7, 2002, Mr. Landis and I have been contacted by holders of more than 50,000 shares of the Preferred, all of whom have expressed interest in participating in a class action and have indicated a desire that Mr. Landis serve as lead plaintiff and that I be lead counsel. However, because Mr. Landis and I are business partners in Golden Sextant Advisors LLC, it is my view that other prospective named plaintiffs should have separate counsel. Accordingly, I am in the process of assisting them to find suitable counsel in Boston. In this regard, I note that the special committee of Kinam directors also chose to retain a major Boston law firm, Foley, Hoag & Eliot LLP, to advise it on the Offer.
As presently contemplated, the class will include both holders who tender to the Offer and those who retain their shares, and therefore will embrace all 894,600 shares targeted by the Offer. Regardless of whether they tender to the Offer, or even in the event that the Offer is withdrawn, all holders of the Preferred have the same legal claims with respect thereto. However, assuming the Offer is completed, practical considerations may warrant alternative forms of relief. At present, for the reasons set out in my letter of March 7, we contemplate requesting class relief that includes, but may not be limited to:
(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 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 class who tendered shares to the Offer, damages in an amount per share not less than the greater of: (i) $9.80 per share (the $25.80 value 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 class who hold shares of the Preferred, 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) 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.
(6) 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.
(7) 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.
(8) A declaration that the holders of the Preferred are entitled to elect two members to the boards of directors of Kinross and Kinam in the circumstances set forth in Article 4C.(6)(b) of Kinam’s articles of incorporation.
Although disclosing my March 7 letter, the Amendment does not disclose: (1) the online commentary (www.goldensextant.com/LLCPostings#anchor243902) published by Mr. Landis last July addressing Kinross’s acquisition of over 51% of the Preferred from the Franklin Funds and two other institutional holders; or (2) the letter and accompanying legal memorandum from Mr. Landis and me delivered to you by fax and e-mail on February 12, 2002, eight days prior to the commencement of the Offer, and raising substantially the same concerns as my subsequent letter of March 7. In our February 12 letter, we offered to work with you “on the development of a strategy to fairly and efficiently address the problem of the Preferred.”
However, rather than consult with us or any other qualified non-affiliated holder of the Preferred, you have elected not to retain “an unaffiliated representative to act solely on the behalf of the non-affiliated holders” and “to participate in the negotiations of the terms of the offer.” Instead, the special committee — all of whose members are directors and shareholders of Kinross — have laid before the holders of the Preferred a “fairness opinion” that is materially and purposefully misleading in its approach to valuing both Kinam’s assets and the convertibility feature of the Preferred. In all our experience of investing in gold mining companies and reading research reports thereon, neither Mr. Landis nor I have ever encountered an analysis from a reputable professional concern as deeply and fundamentally flawed as the fairness opinion from Raymond James. It is impossible to believe that senior management of Kinross is not at least as aware as we are of the serious deficiencies in this opinion.
The Amendment fails to give holders of the Preferred adequate time to digest the changes contained therein, which are not separately identified. More generally, the Amendment fails to correct any of the deficiencies in the original tender offer materials, and all our prior objections thereto still stand.
Sincerely yours,
/s/ Reginald H. Howe
Reginald H. Howe
By Fax, Mail and E-Mail
Copies by Mail:
Charles E. Johnson, President and Trustee
Franklin Templeton Variable Insurance Products Trust
Director, Division of Enforcement
Securities and Exchange Commission
The following letter, which is in the nature of a sequel to A Reach Too Far: Kinross, Kinam and the Road to Redemption by Bob Landis posted on July 4, 2001, was transmitted as of its date to the persons indicated and is posted here for the reasons stated in the final two paragraphs.
Reginald H. Howe
Attorney-at-Law
49 Tyler Road
Belmont, Massachusetts 02478-2022
tel. & fax: (617) 484-0029
e-mail: row@ix.netcom.com
Admitted to Practice: Supreme Judicial Court of Massachusetts U.S. District Court for the District of Massachusetts U.S. Court of Appeals for the First Circuit U.S. Supreme Court
March 7, 2002
Board of Directors
Kinross Gold Corporation (“Kinross”)
Board of Directors
Kinam Gold Inc. (“Kinam” or the “Company”)
52d Floor, Scotia Plaza
40 King Street West
Toronto, Ontario
Canada M5H 3Y2
Gentlemen:
Re: Pending Offer (the “Offer”) by Kinross to Purchase All Publicly-Held Shares of the $3.75 Series B Convertible Preferred Stock (the “Preferred”) of Kinam at $16.00 per Share
I represent Robert K. Landis, the beneficial owner of 2500 shares of the Preferred through an Individual Retirement Account, and Sconset Holdings LLC (“Sconset”), the beneficial owner of 4000 shares of the Preferred. Mr. Landis is a Member and the Manager of Sconset, a family investment partnership. On their behalf, you are hereby advised as follows:
1. The per share consideration of $16.00 cash now being offered to Preferred shareholders is materially different in kind and amount from the 26.875 shares of Kinross common stock paid in July 2001 to Franklin Templeton Variable Insurance Products Trust and related entities (“Franklin”), formerly holders of 43.5% of the outstanding shares of the Preferred, for each of their 800,000 shares (the “Franklin Transaction”).
2. Kinross’s disparate treatment of Preferred shareholders violates the terms of designation of the Preferred, the fiduciary duties owed by control persons and major shareholders to other shareholders, and federal securities laws.
3. In the event that Kinross fails to amend the Offer as required by law to provide that all shareholders will receive the same consideration per share as that received by Franklin in the Franklin Transaction, plus all accrued and unpaid dividends from the date of the Franklin Transaction, Mr. Landis and Sconset intend to pursue appropriate legal remedies on behalf of themselves and all other Preferred shareholders similarly situated.
The grounds for any legal action will include, but may not be limited to:
I. SINCE ACQUIRING CONTROL OVER THE COMPANY, KINROSS
HAS SYSTEMATICALLY IMPAIRED THE POSITION OF THE
PREFERRED SHAREHOLDERS IN ORDER TO FACILITATE
PURCHASE OF THEIR SHARES AT AN UNFAIR PRICE.
A. The 1998 merger, by converting the Company’s common shares into equity in a creditor holding company, improperly deprived Preferred shareholders of their seniority relative to the Company’s common shareholders.
The Preferred was originally issued in August 1994. Kinam, then called Amax Gold Inc., issued 1.84 million shares of the Preferred for net proceeds of approximately $88.3 million. The issue was marketed to income-oriented retail accounts, and a substantial portion of the issue apparently came to rest in the hands of individual investors in the United States.
The terms of the Preferred are set out in Article 4 of the Company’s Articles of Incorporation (the “Charter”). The Charter constitutes a contract between holders of the Preferred and the Corporation. Article 4 C. (1) of the Charter provides in relevant part:
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.
Article 4 C. (6) (c) of the Charter provides in relevant part:
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 .
In a February 1998 press release (www.kinross.com/news/arc/980209.htm), Kinross announced that it would acquire Amax Gold Inc. in a merger transaction under which “US$335 million of Amax Gold debt will be eliminated.” This transaction is described by Kinross in the document containing the Offer (the “Offer Document”) as follows (p. 7):
We acquired control of Kinam on June 1, 1998, by completing a merger in which Kinam became a majority owned subsidiary of Kinross. Prior to the merger, Kinam was approximately 59% owned by Cyprus Amax Minerals Company. In the merger, each outstanding share of Kinam’s common shares was exchanged for 0.8004 of a share of Kinross common shares. Immediately following the merger, we held all of the outstanding common shares of Kinam. We subsequently transferred ownership of such shares to the Purchaser, our wholly-owned subsidiary, which is currently Kinam’s sole common shareholder.
The 1998 merger thus “upstreamed” the common shareholders to the holding company level. However, instead of likewise upstreaming the Preferred shareholders such that their position relative to the common shareholders would remain unchanged, the merger left them in place as downstream owners of an equity interest in a now closely held and debt-laden corporation. The principal significance of this structural realignment arises from the decision of Kinross to act primarily as a creditor rather than as a shareholder of Kinam.
As a consequence, the 1998 merger adversely affected the rights of the Preferred relative to the common. However, by failing to hold a class vote of the Preferred shareholders on the merger, Kinross failed to obtain their consent as required under the Charter.
B. By improperly characterizing its investment in Kinam as debt rather than equity, Kinross fatally weakened Kinam’s financial condition, making its subsequent failure to pay dividends on the Preferred inevitable and effectively subordinating the Preferred to Kinross’s common stock.
In structuring the 1998 merger, Kinross grossly undercapitalized Kinam. The Offer Document describes the intercompany indebtedness as follows (p. 7):
In connection with the 1998 merger, we advanced $255.8 million to Kinam for repayment of Kinam’s outstanding third-party bank debt. During the balance of 1998, Kinam repaid $41.6 million of this obligation. In 1999, we advanced an additional $16.6 million to Kinam to permit it to purchase assets related to the True North property in Alaska. An additional $6.7 million was advanced by Kinross in 2000, and approximately $14.9 million in the first nine months of 2001, primarily for True North property development and to repay third-party long term debt obligations of Kinam. Kinam has repaid a portion of the advances, resulting in a balance of $234.8 million owed to us on this obligation as of September, 2001. During the fourth quarter of 2001, this obligation was reduced by an additional $18 million, resulting in a balance of approximately $216.8 million as of December 31, 2000 [sic]. These advances are non-interest bearing, are due on demand, and have no fixed terms of repayment. [Emphasis supplied.]
Pursuant to the 1998 merger, we acquired a demand loan in the principal amount of $92.3 million from Cyprus Amax that was an obligation of Kinam. Again, we have not charged Kinam interest on this loan. Subsequent partial payments reduced this demand loan payable to $73.6 million at December 31, 2000, and it has remained unchanged through December 31, 2001. The demand loan is non-interest bearing, due on demand, and does not have any fixed terms of repayment. [Emphasis supplied.]
The Offer Document fails to disclose that these “advances” constituted the entire investment made by Kinross in Kinam. Of the $255.8 million that Kinross injected into Kinam in connection with the 1998 merger, not one dollar was designated as equity. This decision, in conjunction with a rapid writedown policy, quickly rendered Kinam insolvent. The Company’s shareholders’ equity declined from $273.8 million at year-end 1997, to $72.1 million at year-end 1998, to a capital deficiency of $47.5 million at year-end 1999, and to a capital deficiency of $104.1 million at year-end 2000.
The true purpose behind Kinross’s decision to cripple Kinam’s balance sheet can be seen in the treatment of cash pulled out of Kinam by Kinross subsequent to August 15, 2000, the date as of which Kinross first caused Kinam to skip all dividend payments on the Preferred. In the foregoing excerpts from the Offer Document, Kinross acknowledges that it pulled out $18 million in the fourth quarter of 2001 alone. This amount would have been more than sufficient to pay all arrearages on the Preferred, which aggregated $10.35 million as of year-end 2001. But by calling it a repayment of an “advance” rather than what it was in economic reality, namely a distribution on common equity, Kinross could sidestep 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:
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.
If Kinross had properly characterized its investment in Kinam and complied with its obligations under the Charter, the Preferred shareholders would be far better off than they are today. First, the Preferred would be current on payment of dividends, a condition that would likely be reflected in its market price. During the two quarterly trading periods prior to the announcement of the suspension of dividend payments in the third quarter of 2000, at a time when there was considerably less investment interest in gold and gold shares than exists today, the Preferred traded in a range of $22.50 to $30.00. Second, the cost to Kinross of cleaning out the Preferred, the last bit of unfinished business from the 1998 merger, would have been correspondingly and substantially increased.
II. THE FRANKLIN TRANSACTION VIOLATED THE TERMS OF
THE PREFERRED AND THE ELEVATED FIDUCIARY DUTIES
OWED BY CONTROL PERSONS AND MAJOR SHAREHOLDERS
TO ALL OTHER SHAREHOLDERS UNDER NEVADA LAW.
On July 12, 2001, Kinross announced that it had completed purchases of an aggregate 945,400 shares of the Preferred (plus rights to accrued but unpaid dividends) from three institutional investors. These purchases were made pursuant to a partial exchange offer that was neither registered with the Securities and Exchange Commission nor extended to any Preferred shareholder other than the three favored institutions.
Franklin, the largest holder among the three, reportedly received 21,500,000 shares of Kinross common stock in exchange for its 800,000 shares of the Preferred, which represented approximately 43.5% of the amount outstanding. The other two participants reportedly received 2,686,492 shares of Kinross common in exchange for their 145,400 shares of the Preferred. In all, Kinross acquired by this means just over 51% of the total number of Preferred shares then outstanding. Franklin received value of approximately $25.80 per Preferred share; the other two institutions received value of approximately $18.29 per Preferred share. Since Franklin received the highest per share consideration for its 43.5% of the Preferred, the Franklin Transaction sets the pricing benchmark under applicable legal standards for any subsequent purchases of the Preferred by Kinross.
A. The Franklin Transaction violated the terms of the Preferred.
Two provisions of the Charter deal directly with the issue of unequal treatment of Preferred shareholders: Article 4 C. (2), relating to the payment of dividends; and Article 4 C. (4), relating to redemption. Although these provisions do not appear at first glance to encompass actions taken by the issuer’s parent company, any distinction between Kinam, as issuer, and Kinross, its parent company, breaks down in light of the 1998 merger.
As Kinross notes 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.
Indeed, ever since the 1998 merger, Kinam has served as nothing more than a special purpose entity existing at the sufferance and for the convenience of Kinross. From a corporate finance perspective, this relationship serves only to give Kinross the purported ability to circle back and execute a bargain purchase cleanout of the Preferred on a multi-step, deferred basis. As noted in Part I above, the very existence of the Preferred at the subsidiary level results from the unfair and illegal treatment of the Preferred in the 1998 merger. Accordingly, any restriction in the Charter which speaks to the “Corporation” must be read to apply as well to Kinross.
1. The Franklin Transaction was a constructive dividend on some but not all shares of the Preferred.
Article 4 C. (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.
This provision was intended to ensure equal treatment of Preferred shareholders in the case of partial distributions. If less than the full dividend amount is to be paid, all Preferred shareholders must share equally in the reduced payments. Small holders are entitled to the same treatment as big institutional holders. An unequal payment by Kinam itself would violate the literal wording of the Charter. The unequal payment by Kinross pursuant to the Franklin Transaction violated the intent and meaning of the Charter, and if allowed to stand, would make a mockery of the contract between the Preferred shareholders and the Company.
2. The Franklin Transaction was a constructive redemption of some but not all shares of the Preferred.
Article 4 C. (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.
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 allocated, in this instance to repurchase outstanding shares. The Franklin Transaction violated this safeguard and caused exactly the disparate treatment which this provision was intended to prevent.
3. The Franklin Transaction was a constructive unauthorized amendment of the Charter for the benefit of some but not all Preferred shareholders.
Following the 1998 merger, the Preferred is convertible into shares of Kinross common stock at a fixed rate, subject to anti-dilution adjustment. The Conversion Price is $8.25.
Article 4 C. (5) (a) of the Charter provides in relevant part:
(a) 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.
Accordingly, the number of common shares of Kinross that an ordinary Preferred shareholder could have received on conversion in June 2001 was 4.85. Yet Franklin was permitted to convert its shares at a substantially better rate: 26.875. Under the formula set forth in the Charter, this change was equivalent to a modification of the Conversion Price to approximately $1.49. This private amendment of the Charter was not authorized by the Preferred voting as a class, as required by Article 4 C. (6) (c). The alteration of the terms of conversion to benefit the largest Preferred shareholder was manifestly an amendment of the Charter that affected adversely the relative rights of those shares of Preferred not held by the major shareholder.
B. The Franklin Transaction violated the fiduciary duties owed by Kinross and Franklin to other Preferred shareholders.
In Foster v. Arata, 74 Nev. 143, 155, 325 P.2d 759, 765 (1958), the Supreme Court of Nevada held that controlling or dominant stockholders, even if they do not hold a majority of the stock, stand in a fiduciary relationship to the corporation and its other shareholders. In the absence of any Nevada cases further defining such fiduciary duties, the Ninth Circuit has applied California’s “compelling business reason” test to Nevada corporations. Shivers v. Amerco, 670 F.2d 826, 832 & n. (CA9 1982), citing Jones v. H. F. Ahmanson & Co., 1 Cal.3d 93, 108-112, 460 P.2d 464, 471-474 (1969). This test overrides management’s “business judgment” in two situations: “either the directors or majority stockholders were engaged in self-dealing, or the actions taken by the directors or majority stockholders had a disproportionate impact on the minority stockholders.” Shivers, supra at 832. Both the Franklin Transaction and the pending Offer fall within both categories, particularly the second.
As a Massachusetts business trust, Franklin may also be subject to the “strict good faith standard” owed by shareholders in closely held corporations to each other under Massachusetts law. Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 592-594 (1975). A. W. Chesterton Co. v. Chesterton, 128 F.3d 1, 5-6 (CA1 1997), and cases cited. In Donahue, supra at 586, the court defined a “close corporation” as having the following attributes: “(1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.”
There is nothing in Foster v. Arata, supra, to preclude applying this more stringent standard of fiduciary duty to the directors and shareholders of a Nevada corporation with these characteristics. Like the present case, Donahue, supra, which announced this strict standard in Massachusetts, involved the preferential purchase of shares from a majority stockholder group without offering the same opportunity to the minority.
III. THE FRANKLIN TRANSACTION VIOLATED SECTION 13(e)
OF THE EXCHANGE ACT AND THE CURRENT OFFER
FURTHER VIOLATES THE SAME SECTION.
The Preferred, which is traded on a U.S. securities exchange (American; formerly New York) and registered with the SEC, is subject to regulation under the Securities Exchange Act of 1934 (the “Exchange Act”).
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.]
Pursuant to this section, the SEC has promulgated Rule 13e-4, 17 CFR 240.13e-4, which contains numerous filing, disclosure, and dissemination requirements as well as an antifraud provision. In addition, it prescribes several important substantive conditions that pertain to issuer tender offers, 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) 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.]
Neither the Exchange Act nor the rules thereunder define the terms “tender offer” or “during such tender offer.” However, these issues have been addressed in a number of reported cases under s. 14(d), 15 U.S.C. s. 78n(d), which deals with tender offers by third parties and contains many provisions analogous to those in s. 13(e).
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 (CA2 1982), cert. denied, 460 U.S. 1069 (1983), to determine the existence of a tender offer. Compare Securities and Exchange Commission v. Carter Hawley Hale Stores, Inc., 760 F.2d 945, 950-953 (CA9 1985) (Wellman test adopted and applied), with Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 56-57 (CA2 1985) (Wellman factors relevant but not a mandatory “litmus test”).
Applying the Wellman test to the Franklin Transaction and two follow-up transactions, five factors point to the existence of a tender offer: (1) active and widespread solicitation, particularly in light of the press release about the Franklin Transaction that brought in two additional institutional holders; (2) solicitation of a large percentage of the Preferred; (3) payment of a substantial premium over the market price; (4) the limited time frame in which the Franklin Transaction and two follow-up transactions were executed; and (5) public announcements preceding or accompanying the rapid accumulation of over 51% of the outstanding Preferred. No factor clearly points in the other direction.
In applying the best price rule under s. 14(d) to all transactions during the tender offer period, the courts have generally applied a functional test to determine whether any particular transaction should be deemed “an integral part of the tender offer.” Epstein v. MCA, Inc., 50 F.3d 644, 656 (CA9 1995), rev’d on other grounds, Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367 (1996). Field v. Trump, 850 F.2d 938, 943-944 (CA2 1988). But see Lerro v. Quaker Oats Co., 84 F.3d 239, 242-243 (CA7 1996).
As these cases show, determining the existence and duration of a tender offer requires a fact-specific inquiry conducted with due regard for the purpose of the relevant statute. Nearly all involved third-party tender offers under s. 14(d). An exception is Securities and Exchange Commission v. Carter Hawley Hale Stores, Inc., supra, which involved an issuer tender offer under s. 13 (e) made without a significant premium to market and in response to a hostile offer under s. 14(d). Rejecting the SEC’s argument for a broader definition of tender offer, the court held (760 F.2d at 950): “The Wellman factors seem particularly well suited in determining when an issuer repurchase program during a third-party tender offer will itself constitute a tender offer.” [Emphasis supplied.]
An important goal of s. 14(d) is to secure neutrality between hostile offerors and existing managements. Section 13(e), on the other hand, is directed at ensuring that issuer tender offers give fair and equal treatment to all shareholders, large and small. What is more, in the present case this statutory mandate does no more than carry out the express terms of the Preferred. Accordingly, whether a court would engage in a mechanistic application of the Wellman factors to the Franklin Transaction or an elaborate functional analysis of Kinross’s subsequent purchases and attempted purchases of the Preferred is problematic.
A. The Franklin Transaction violated Rule 13e-4.
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.]
However convenient it may have seemed to Kinross at the time to “temporarily abandon” its efforts to clean out the Preferred once it had crossed the 51% threshold, Rule 13e-4 does not permit an offeror to act in this manner. Indeed, the rule acts as a direct brake on such self-serving second thoughts. Once an issuer tender offer is commenced, it is subject to the rule, which sets the terms of its completion. The Franklin Transaction, as the first step in an on-again off-again issuer tender offer culminating in the Offer, violated Rule 13e-4 in numerous respects, including: (1) no prospectus or tender offer documentation was filed with the SEC; (2) no other Preferred shareholders were permitted to participate in the Franklin Transaction or the two follow-up transactions; and (3) the consideration paid to the participants was not uniform.
B. The Offer violates the substantive provisions of Rule 13e-4.
Notwithstanding its observance of some of the procedural formalities required by Rule 13e-4, the Offer cures none of the substantive deficiencies attaching to the Franklin Transaction. To the contrary, the Offer further violates the uniform consideration requirement by introducing yet another dollar value and by using an unlike type of consideration (cash versus shares of Kinross common stock).
C. The Offer is coercive and the Offer Document is materially misleading.
The Offer is coercive in its attempt to bully Preferred shareholders into surrendering their shares notwithstanding their contractual and other legal rights to fair treatment by Kinross. The Offer Document is also materially misleading in numerous respects, including without limitation some that bear on the coercive nature of the Offer.
The Offer Document materially misrepresents the power of Kinross to effect a squeeze-out of any remaining Preferred shareholders following completion of the Offer. The Offer Document states in relevant part (pp. 18-19):
We are seeking to acquire all of the shares of the Kinam preferred stock that we do not currently own through the tender offer. To the extent that not all of such shares are tendered into the offer, we intend to pursue a merger or a recapitalization in which the remaining holders of the Kinam preferred stock would receive $16.00 per share for their shares of Kinam preferred stock. However, we are under no obligation to complete such a merger or recapitalization or to pay $16.00 per share and may decide, subsequent to the completion of the tender offer, not to proceed with the merger or recapitalization or to change the price if we do proceed.
* * *
If we proceed with a merger subsequent to the tender offer, we will create a newly-formed, wholly-owned subsidiary for the purpose of merging with Kinam. If we obtain sufficient shares of the Kinam preferred stock in the tender offer so that we hold 90% or more of the outstanding preferred stock, we will complete a “short-form” merger under the corporate code of the state of Nevada. This permits us to authorize and complete the merger by action of our board of directors, and the merger would not be subject to, or submitted to, the vote of the shareholders of Kinam.
In the event that we do not hold 90% or more of the Kinam preferred stock, the merger would be required to be approved by the shareholders of Kinam. Approval of the merger would require the affirmative vote of those shares entitled to vote on the proposal. In any such vote, we would hold a majority of the shares entitled to vote on the merger and would vote those shares in favor of the merger. Consequently, the merger would be approved whether or not remaining non-affiliated holders voted for or against the merger.
If we elected to proceed with a recapitalization, we would propose a reverse split of the outstanding preferred stock so that all of the remaining holders of preferred stock, except for us, would be reduced to owning a fraction of a share. We would not issue fractional shares and instead would pay the holders an amount of cash equal to $16.00 per share (on a pre-split basis). Approval of the recapitalization would require the affirmative vote of those shares entitled to vote on the proposal. In any such vote, we would hold a majority of the shares entitled to vote on the recapitalization and would vote those shares in favor of the recapitalization. Consequently, the recapitalization would be approved whether or not remaining non-affiliated holders voted for or against the recapitalization.
These and similar statements are calculated to coerce acceptance of the Offer. No matter how Preferred shareholders may feel about the fairness of the Offer, if they hold out, in the best case they will simply be squeezed out later for $16.00 or less; in the worst case they will be left owning an illiquid and worthless security.
These and similar statements are also false and misleading. As noted above, the Preferred is governed by the Charter, which constitutes a contract between Kinam and the Preferred shareholders. The Charter explicitly provides a mechanism for calling in the Preferred: redemption, which must occur at a stated price and in accordance with stated procedures. The current redemption price is $51.125 plus accrued and unpaid dividends aggregating $6.5625.
Accordingly, if Kinross wants to call in all the Preferred remaining outstanding after completion of the Offer, assuming it proceeds, Kinross will have to pay $57.6875 per share. The exact amount required will vary over time as the redemption price gradually declines to $50.00 over the next several years, while the amount of the dividend arrearage increases by $3.75 per year. It is not open to Kinross to choose a cheaper way of achieving the same end. The cheaper alternatives posited by Kinross in the foregoing excerpts, if attempted, would constitute further violations of the Charter and breaches of fiduciary duty, all of which Kinross fails to disclose.
D. Kinross may not vote the Preferred shares it holds.
In stating that Kinross could simply overwhelm unaffiliated Preferred shareholders by voting to approve a squeeze-out, Kinross makes an important omission of two material facts. First, Kinross fails to disclose that even if an attempt to effect such a bargain redemption of the Preferred could survive legal challenge, a class vote would be required pursuant to Article 4 C. (6) (c) of the Charter. Second, Kinross fails to disclose that with respect to any such class vote, the Preferred shares held by Kinross could not be voted, and therefore, the decision would be made by the statutory voting percentage of the remaining unaffiliated Preferred shareholders. If, for example, there turned out to be but three remaining Preferred shares held by unaffiliated holders, the matter would be decided by a vote of two out of those three.
This result flows from the fact that shares held by Kinross are no longer outstanding shares eligible to vote. Three independent reasons support this assertion. First, as noted above, the acquisition by Kinross of Preferred shares was a constructive partial redemption. Shares acquired pursuant to redemption are not deemed to be outstanding. Second, also as noted above, the acquisition by Kinross of Preferred shares involved a constructive amendment of the Charter to benefit a few holders, followed by a conversion of their shares at a special conversion price. Shares acquired pursuant to conversion are not deemed to be outstanding. Third, the acquisition by Kinross of Preferred shares by any other means would be tantamount to an acquisition of those shares by Kinam itself, due to the unity between the two entities. Shares acquired by Kinam through any means are not deemed to be outstanding.
Each of these three categories is expressly covered in Article 4 C. (7) of the Charter, which provides in relevant part:
(7) 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.
To conclude: As a result of the continued dividend arrearages on the Preferred, the Preferred shareholders, voting as a class, are now entitled to elect two additional directors to Kinam’s board. As already noted, Kinross may not vote Preferred shares held by it in this election. Indeed, given the deficiencies of the 1998 merger, there is a compelling case, which may be taken up separately, that the Preferred shareholders are actually entitled to elect two new directors to the Kinross board itself.
Both Mr. Landis and I have repeatedly made known to officials of Kinross and Kinam our objections to the Franklin Transaction. Last July, Mr. Landis also published an online commentary (www.goldensextant.com/LLCPostings#anchor243902) addressing this matter. As a result, he has received various inquiries regarding the Offer, and in response thereto a copy of this letter will be posted today at The Golden Sextant.
Under s. 21D of the Exchange Act, 15 U.S.C. s. 78u-4, as added by the Private Securities Litigation Reform Act of 1995, a plaintiff who files a securities class action is required within 20 days to publish a notice informing members of the alleged class that they may move to serve as lead plaintiff under the concept of “most adequate plaintiff.” While this requirement does not apply until and unless an action is filed in court, Mr. Landis and I are presently prepared to work with, or in an appropriate case to defer to, any qualified holders of the Preferred who have competent counsel and who wish to undertake representation of the class in order to secure fair and equal treatment for all holders, large and small. What Mr. Landis and Sconset will not do, now or in the future, is to try to secure a favored position for themselves at the expense of other holders.
Sincerely yours,
/s/ Reginald H. Howe
Reginald H. Howe
By Fax, Mail and E-Mail
Copies by Mail:
Charles E. Johnson, President and Trustee
Franklin Templeton Variable Insurance Products Trust
One Franklin Parkway
San Mateo, CA 94403-1906
Director, Division of Enforcement
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549