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Stanford
University Law School - Securities Class Action Clearinghouse
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Law Offices of
BONNETT, FAIRBOURN, FRIEDMAN,
& BALINT, P.C.
4041 North Central Avenue
Suite 1100
Phoenix, Arizona 85012
602/274-1100
ANDREW S. FRIEDMAN
(State Bar #005425)
BURT & PUCILLO
222 Lakeview Avenue
Suite 300 East
West Palm Beach, FL 33401
561/835-9400
MICHAEL J. PUCILLO
RYAN, WOCHOK, RYAN & REED, LTD.
13 Paoli Court
Paoli, PA 19301
610/296-9900
JOSEPH A. RYAN
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
DISTRICT OF ARIZONA
RICHARD T. HANLEY, ) CV 96-390 TUC WDB
)
Plaintiff, )
)
vs. ) No. CIV
)
WARBURG PINCUS CAPITAL )
COMPANY, L.P., WARBURG )
PINCUS & CO., BHP COPPER, )
INC., BHP SUB INC., ) CLASS ACTION COMPLAINT
BROKEN HILL PROPRIETARY )
COMPANY LIMITED, JOHN L. ) JURY TRIAL DEMANDED
VOGELSTEIN, CHRISTOPHER W. )
BRODY, J. BURGESS WINTER, )
JUDD R. COOL, SIMON D. )
STRAUSS, JOHN R. KENNEDY, )
JOHN W. GOTH, HENRY P. )
SARGENT, DONALD J. DONAHUE, )
THOMAS W. ROLLINS and H. )
WINSTON SUNDT, )
)
Defendants. )
______________________________)
Plaintiff, Richard T. Hanley, sues Defendants and alleges as
follows:
SUMMARY OF ACTION
1. This action is brought under Sections 10(b), 13(e)(1) and
14(e) of the Securities Exchange Act of 1934 (the "Exchange Act")
and Rules 10b-5, 13e-3(b)(1) and 13e-3(b)(2) promulgated thereun-
der, and common law principles of fiduciary duty. This action
arises out of a self-tender offer by Magma Copper Company ("Magma"
or the "Company") for all of the outstanding listed common stock
warrants, $8.50 exercise price of Magma (the "Magma Warrants") at
price of $8.25 per warrant. The self-tender commenced on or
about May 16, 1995 and was concluded at midnight June 14, 1995.
JURISDICTION AND VENUE
2. This Court has jurisdiction over this action pursuant to
Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and by reason of
federal questions presented herein pursuant to 28 U.S.C. § 1331.
Venue is proper in this Judicial District pursuant to Section 27 of
the Exchange Act. Many of the acts alleged herein, including a
self-tender offer for all of the outstanding Magma Warrants of
Magma, occurred in this District. At all relevant times to this
action, Magma's principal place of business was at 7400 North
Oracle Road, Suite 200, Tucson, Arizona. In addition, some of the
Individual Defendants named herein reside in this District.
3. In connection with the acts alleged in this Complaint,
the Defendants directly or indirectly used various means and
instrumentalities of interstate commerce including, but not limited
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to, the mails, interstate telephonic communications and the
facilities of the national securities markets.
PARTIES
4. Plaintiff is a citizen of the State of Florida. As of
May 15, 1995, the date the self-tender was announced, he was the
holder of 8,000 Magma Warrants individually; 30,000 Magma Warrants
in his capacity as Trustee of two retirement trusts; and 300 Magma
Warrants as custodian for his minor son. Plaintiff tendered all of
those warrants pursuant to the self-tender offer described herein,
and has been damaged thereby.
5. Defendant BHP Copper, Inc. ("BHP Copper") is a Delaware
corporation with its principal place of business in Tucson Arizona.
BHP Copper is the successor to Magma. Prior to its acquisition by
a subsidiary of Defendant Broken Hill Proprietary Company Limited,
Magma was a publicly held Company whose stock was listed and traded
on the New York Stock Exchange. Magma's principal place of
business was in Tucson, Arizona. Magma was a fully integrated
producer of electrolytic copper and was among the largest United
States copper producers. Magma produced high quality copper,
cathode and copper rod wire used in the copper wire and cable
industry. Magma currently conducts business under the name BHP
Copper, as a wholly owned operating subsidiary of Broken Hill
Proprietary Company Limited.
6. Defendant Warburg Pincus Capital Company, L.P. ("Warburg
Pincus") is a Delaware limited partnership headquartered in New
York, New York. As part of a recapitalization of Magma, Warburg
Pincus acquired on or about November 30, 1988, 930,000 shares of
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Series B Cumulative Convertible Exchangeable Preferred Stock of the
Company. Warburg Pincus also acquired warrants to purchase 1
million shares of Class B Common Stock at an exercise price of
$8.50 per share (the "Warburg Warrants"). Warburg Pincus immedi-
ately sold 100,000 shares of Series B Preferred and 107,527 Warburg
Warrants. In December 1992, Warburg Pincus exchanged its preferred
stock for 12,820,865 shares of common stock of Magma. In late
1991, Warburg Pincus also acquired 4,176,600 shares of Class B
Common Stock at the approximate price of $5 per share. Since
Warburg Pincus controlled over 10% of the voting power of Magma's
common stock at the time of that 1991 acquisition, its shares were
immediately converted to Class A Common Stock. As of February 15,
1995, Warburg Pincus owned 16,007,143 shares of common stock of
Magma, representing approximately 34.7% of the Company's outstand-
ing common stock. Warburg Pincus also held 892,473 Warburg
Warrants. In addition to its stock ownership, Warburg Pincus also
controlled two seats on Magma's Board of Directors. Defendants
Christopher W. Brody ("Brody") and John L. Vogelstein
("Vogelstein") were both Warburg Pincus representatives on the
Magma Board. Notwithstanding its control over Magma, Warburg Pincus
chose not to include the Warburg Warrants in the self-tender offer.
7. Defendant Warburg Pincus & Co. is the general partner of
Warburg Pincus, and therefore has the power to, and has exercised
such power, to control the conduct of Warburg Pincus. Warburg
Pincus & Co. is responsible for the acts of Warburg Pincus under
the control person doctrine.
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8. Defendant Vogelstein had been a Director of Magma since
December 1988. He was one of Warburg Pincus's representatives on
the Magma Board of Directors. Vogelstein had been Vice Chairman of
the Board of E.M. Warburg Pincus & Company, Inc. and was an officer
and Director of E.M. Warburg Pincus & Company, Inc. and certain of
its affiliates. Defendant Vogelstein was a Director at the time of
the self-tender complained of herein. Defendant Vogelstein was
also a General Partner of Warburg Pincus.
9. Defendant Brody had been a Director of Magma since 1988.
He was a Managing Director of E.M. Warburg Pincus & Company, Inc.
and certain of its affiliates. Defendant Brody was a Director at
the time of the self-tender complained of herein. Defendant Brody
was also a General Partner in Warburg Pincus.
10. Defendants BHP Sub Inc. and Broken Hill Proprietary
Company Limited (hereinafter collectively referred to as "Broken
Hill") are the successors in interest to Magma. They are named as
Defendants solely by reason of their assumption of the liabilities
of Magma, as described herein. On or about December 5, 1995,
Broken Hill commenced a tender offer to acquire all of the
outstanding common stock of Magma at a price of $28 per share.
Broken Hill also acquired all of the convertible preferred shares
outstanding. The offer was to expire on January 4, 1996. As a
result of this tender offer, Broken Hill acquired 97% of the
outstanding common stock of Magma. The balance of the shares not
acquired in the tender offer were acquired in a merger completed on
January 18, 1996. Since that time, Magma has operated as a wholly
owned subsidiary of Broken Hill under the name BHP Copper.
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11. Defendant J. Burgess Winter ("Winter") has been Presi-
dent, Chief Executive Officer and a Director of Magma since August
1988. Between 1983 and 1988, Defendant Winter served as Senior
Vice President of Operations for BP Minerals America. At the time
of the self-tender for the Magma Warrants, Winter was a Director of
Magma as well as its President and Chief Executive Officer.
Defendant Winter is a member of the Executive Committee of the
Company. He also served on the Finance Committee which was
responsible for overseeing the financial activities of the Company.
12. Defendant Judd R. Cool ("Cool") had been a Director of
Magma since February 1989. Defendant Cool was also a member of the
Executive Committee and the Compensation Committee of Magma.
13. Defendant Simon D. Strauss ("Strauss") had been a
Director of Magma since February 1989. Defendant Strauss also
serves on the Company's Executive Committee and Compensation
Committee.
14. Defendant John R. Kennedy ("Kennedy") had been a Director
of Magma since June 1989. He was also a member of the Audit
Committee.
15. Defendant John W. Goth ("Goth") had been a Director of
the Company since March 1987. He was also a member of the Audit
Committee and the Compensation Committee.
16. Defendant Henry B. Sargent ("Sargent") had been a
Director of the Company since March 1987. Defendant Sargent was a
member of the Audit Committee and the Executive Committee.
17. Defendant Donald J. Donahue ("Donahue") had been Chairman
of the Board of Directors of Magma since January 1987. He
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continued to be Chairman of the Board at the time of the self-
tender offer in May of 1995. Defendant Donahue also served as
interim Chief Executive Officer from April 1988 to August 1988.
Defendant Donahue is a member of the Executive Committee and the
Compensation Committee. He also served on the Finance Committee
which was responsible for overseeing the financial activities of
the Company.
18. Defendant Thomas W. Rollins ("Rollins") had been a
Director of the Company since March 1987. He also served as a
member of the Audit Committee and the Compensation Committee.
19. Defendant H. Wilson Sundt ("Sundt") had been a Director
of the Company since March 1987. Defendant Sundt also served on
the Compensation Committee.
20. All of the Individual Defendants described in paragraphs
8 through 19 above were members of the Board of Directors at the
time the self-tender offer was initiated on or about May 16, 1995.
By reason of their positions on the Board of Directors, each of the
Defendants owed a fiduciary duty to Plaintiff and the members of
the Class. In addition, each of the Defendants had the ability to,
and exercised the power to, control the affairs of the Company
including the issuance of the proxy solicitation in connection with
the May 1995 self-tender offer.
BACKGROUND
21. Magma Copper mines have been producing copper in
southeastern Arizona since 1877. In 1969, Magma became a wholly-
owned subsidiary of Newmont Mining Corporation ("Newmont"). In
March 1987, 80% of Magma common stock was distributed to Newmont
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shareholders. Thereafter, Newmont as well as one of its major
shareholders, consolidated Gold Fields PLC ("Gold Fields")
continued to own a substantial number of Magma shares.
22. In 1988, Magma recognized a profit for the first time in
many years. The Company generated approximately $40 million in net
income off sales of approximately $418 million. Prior to 1988, the
Company's operations had been adversely affected by high cost
production methods, aging plant and equipment, and depressed copper
prices. The Company had also been subject to a consent decree with
the United States, the State of Arizona and the Environmental
Defense Fund which had reduced the Company's output at its San
Manuel Smelter Facility due to environmental concerns.
23. In March 1987, the Company entered into a credit
agreement with Chemical Bank, with Newmont as its guarantor, which
provided for $185 million in debt financing secured by substantial-
ly all of the assets of Magma. The limitations imposed on Magma's
operations by the credit facility together with Newmont's continu-
ing involvement proved unworkable, and in 1988, the Company entered
into a recapitalization which provided for the repurchase from
Newmont of all of its common stock, all of Newmont's Series A
Preferred Stock and the repurchase of the Gold Fields common stock,
and the repayment of all of Magma's outstanding indebtedness to
Chemical Bank.
24. Warburg Pincus provided much of the financing for the
purchase of Newmont and Gold Fields' interest in Magma. In
exchange for this, Warburg Pincus received 930,000 shares of Series
B convertible exchangeable preferred stock convertible into Class
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B common stock and 1 million Warburg Warrants. Magma also obtained
a commitment from Continental Illinois National Bank & Trust
Company of Chicago to provide a $100 million unsecured term loan
and a $75 million unsecured revolving credit facility. Thus, as a
result of the 1988 recapitalization completed on or about November
30, 1988, Warburg Pincus obtained the ability to acquire a minimum
35% of Magma's common stock and possibly more, depending upon the
exercise of the warrants.
25. In addition to Warburg Pincus's ability to control Magma
by reason of stock ownership, Warburg Pincus also entered into a
purchase agreement, dated as of November 20, 1988, with Magma in
which the Company agreed to provide Warburg Pincus, its accoun-
tants, counsel and other representatives:
reasonable access, upon reasonable notice in
such manner as it will not unreasonably inter-
fere with the conduct of the Company's busi-
ness, to their respective properties, books,
contracts, commitments and records.
Recognizing that such information was non-public, Warburg Pincus
agreed to "hold such information in confidence until such time as
such information otherwise becomes publicly available."
26. Significantly, for purposes of this action, Warburg
Pincus also received a commitment from Magma that it would, through
its respective officers, directors and representatives, "advise
Warburg promptly upon receipt of any communication from any third
party with respect to any proposed acquisition of any stock or
other equity securities or any significant portion of the assets of
[Magma] or its subsidiaries." Defendant Vogelstein executed the
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purchase agreement on behalf of Warburg Pincus wherein these rights
were acquired by Warburg Pincus.
27. From the time Warburg Pincus acquired its convertible
exchangeable preferred stock and warrants until late 1991, Magma's
stock price traded in a range between $4 and $9 per share. After
trading as high as $9 in January of 1989, it generally traded in
the $4 to $7 range during most of this period of time. By December
1991, Magma stock closed at below $5 per share, at which point
Warburg Pincus acquired 4,176,600 shares of Class B common stock.
Beginning in January 1992 and continuing until February 1993,
Magma's stock price rose from a low of approximately $5 per share
to a high of over $18 per share. This growth was due in part to
the rise in copper prices.
28. After declining in the latter part of 1993, by October
1994, Magma's stock was again trading at over $18 per share.
29. October 1994 reflected a three and a half year high for
copper prices at a time when copper stock piles had declined. John
Champaign ("Champaign"), President of Magma Metals, was quoted in
a speech before the Association of Mining Analysts on October 12,
1994, as stating, "Copper markets are looking very healthy with
excellent demand and good prospects for prices." On October 13,
1994, following Champaign's statement, Goldman Sachs raised its
rating on Magma to "moderate outperformer" from "market performer."
30. On March 1, 1995, Goldman Sachs lowered its rating on
Magma to "market performer" from "moderate outperformer."
31. On or about March 16, 1995, Magma filed its Annual Report
on Form 10-K for the fiscal year ending December 31, 1994. Magma
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reported net income of $75,772,000 on sales of $889,620,000. This
resulted in net income per share of $1.54 after taking into account
preferred stock dividends of $.24 per share, a significant increase
over 1993 results of operations.
32. On March 23, 1995, Smith Barney, taking a different view
than Goldman Sachs, raised its ratings on Magma and other copper
and aluminum stocks to "buy" from "neutral."
33. On April 19, 1995, Magma announced record net income of
$51.8 million, or $.82 per share, for the first quarter ending
March 31, 1995. This was a significant improvement over the net
income for the first quarter of the prior year of $36.9 million, or
$.58 per share. Defendant Winter was quoted as stating:
Strong operating performance in copper prices
have pushed earnings for the trailing four
quarters to over $2 per share, while the $.22
per pound decrease in net cash operating cost
over the past several years has greatly im-
proved Magma's ability to generate cash flow.
These cost decreases enable us to take advan-
tage of the strong copper price and achieve
record cash flow during the first quarter.
Burgess went on to state:
Copper prices are likely to remain strong as
improving world economies have decreased
inventories of copper to very low levels. We
look forward to second quarter earnings and
cash flow which will have the full benefit of
sales from Tintaya, our new copper mine in
Peru.
34. Notwithstanding Magma's "record" first quarter results
and Winter's strong predictions for the balance of the year,
Goldman Sachs again cut its rating on Magma to "market
underperform" on May 9, 1995. Goldman Sachs' view was clearly a
minority one. Three weeks later Merrill Lynch issued a report on
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Magma which noted strong first quarter earnings per share and
projected stronger second quarter earnings due to Magma's new
Tintaya mine which had been acquired in November 1994.
35. While Magma's common stock price had generally traded in
the range of $15 to $18 per share and had closed at $18.62 on April
17, 1995, it declined to a low of $13.86 on May 22, 1995. Other
than Goldman Sachs' successive downgrades in ratings, there was no
apparent reason for the price decline.
36. On May 12, 1995, Magma filed its First Quarter Report on
Form 10-Q with the United States Securities and Exchange Commission
("SEC" or the "Commission"). The first quarter results of
operations confirmed that Magma's 1995 operations were significant-
ly improved over the prior year. Revenue for the first three
months of 1995 was $297,537,000 compared to $175,532,000 for the
prior year's first quarter. More significantly, net income (after
preferred stock dividends) was $48,860,000, or about $.99 per
share, compared to $4,705,000, or $.10 per share, for the first
quarter of 1994.
37. The first quarter earnings were clearly an indication of
strong revenue and earnings for 1995. Based on the first quarter
results, Magma was on track to recognize revenues in excess of $1
billion, and, more significantly, to report earnings of about $4
per share. In fact, by the third quarter of 1995, revenues would
exceed $1 billion on nine months of operations alone, and earnings
per share were $3.06 through the first nine months. Such earnings,
with a multiple of only 7.5 times earnings, would support a stock
price of $30 per share.
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THE MAY 1995 TENDER OFFER FOR WARRANTS
38. On May 15, 1995, Magma announced that effective the
following day it would commence an offer to purchase for cash all
of its outstanding publicly traded common stock warrants ("Magma
Warrants") at a price of $8.25 per warrant. The Company's release
stated that on May 12, 1995, the closing price of the Magma
Warrants had been $7 per warrant.
39. While the closing price of the warrants had been $7 per
warrant on May 12, 1995, the warrants had traded at $10 per warrant
only three weeks earlier. Indeed, the warrants traded at prices
dictated by the underlying stock prices, and Magma common stock had
traded at prices in excess of $17 per share from March 24, 1995
through April 23, 1995, reaching a high of $18.62 on April 17,
1995. During that period, the warrants traded at prices at or
above the tender price of $8.25 per warrant, trading at prices of
up to $10 per warrant.
40. Contemporaneously with the announcement of the tender
offer, Magma filed a Schedule 13E-3 transaction statement with the
SEC pursuant to Section 13(e) of the Exchange Act (hereinafter the
"Schedule 13E-3"). The Schedule 13E-3 was required under the
Exchange Act because Magma was engaging in a "self-tender" for its
own warrants, and a "self-tender" for any equity security by the
issuer of that security requires a Rule 13E-3 transaction statement
on Schedule 13E-3.
41. The Schedule 13E-3 identified Goldman Sachs & Company
(the same firm that one week earlier had downgraded its rating on
Magma common stock) as the dealer manager in connection with the
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self-tender offer. Goldman Sachs was paid a fee of $350,000 for
acting as dealer manager on the self-tender offer. Magma reserved
the right to extend the tender offer in its discretion beyond the
June 14, 1995 termination date for the tender offer. The offer
applied only to publicly held warrants and did not offer to
purchase the Warburg Warrants.
42. Magma was required under Schedule 13E-3 to disclose
specific factors relating to the self-tender offer that the SEC
deemed material to such transactions. This information included,
at Item 8(b), a statement as to whether the issuer "reasonably
believes that the Rule 13e-3 transaction is fair or unfair to
unaffiliated security holders." The instructions to Item 8 require
the offering company to "discuss in reasonable detail the material
factors on which the belief [as to fairness] ... is based." The
Commission Rules further provide that "conclusory statements" that
a transaction is "fair ... in relation to net book value, going
concern value and future prospects ... will not be considered
sufficient disclosure in response to Item 8(b)."
43. In addition to Item 8 of Schedule 13E-3, the SEC has also
stated in Exchange Act Release No. 34-17719 (April 13, 1981, 46
F.R. 22571) regarding the fairness discussion in response to Item
8 that:
... if historical market prices [are] believed
not to be indicative of the value of the
securities because of recent adverse develop-
ments, the basis for such beliefs should be
discussed.
The Release further states that (i) current market prices; (ii)
historical market prices; (iii) net book value; (iv) going concern
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value; and (v) liquidation value are "material to the transaction
and should be discussed." Further:
... in particular, if any of the sources of
value indicate a value higher than the value
of the consideration offered to unaffiliated
security holders, the discussion should spe-
cifically address such difference and should
include a statement of the bases for the
belief as to fairness in light of the differ-
ence.
44. On May 16, 1995, all warrant holders were mailed the
offer to purchase for cash any and all listed common stock
warrants, $8.50 exercise price, at the tender offer price of $8.25
per common stock warrant (the "Warrant Tender Offer"). The Warrant
Tender Offer conformed to the Schedule 13E-3 filed by Magma the
previous day. The Warrant Tender Offer stated that there were
4,067,971 warrants outstanding at the time of the offer. The
stated purpose of the offer was "to eliminate the potential
dilutive effect that would occur if the warrants are exercised by
the holders thereof on or before November 30, 1995." Tenders of
Warrants could be withdrawn at any time prior to midnight, June 14,
1995.
45. With respect to the fairness of the self-tender, the
Warrant Tender offer affirmatively represented as follows:
The Company believes the offer is fair to
warrant holders. In particular, the Offer
gives warrantholders the opportunity to sell
their Warrants at a 17% premium over the
closing sales price of the warrants on May 12,
1995. The Offer will also provide
warrantholders who are considering a sale of
all or a portion of their Warrants the oppor-
tunity to sell their Warrants for cash without
the usual transaction costs associated with
open market sales.
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46. The foregoing statements were found at Section 1 of the
Warrant Tender Offer. According to Magma's Schedule 13E-3, this
was the only discussion of the specific factors required by Item
8(b) discussing in reasonable detail the material factors on which
the Individual Defendants based their belief that the transaction
was fair. There was no discussion of why historic prices for the
warrants that were in excess of the tender offer price during much
of the seven week period prior to the tender offer were not
indicative of the value of the Magma Warrants.
47. In addition to the lack of disclosure regarding why the
historic market prices were not indicative of the value of the
warrants, there was also no discussion in the Schedule 13E-3 of net
book value. According to Magma's most recent quarterly report on
Form 10-Q for the quarter ending March 31, 1995 (which was filed
with the SEC on or about May 12, 1995), Magma's shareholders'
equity was $809,729,000. Based on the 46,112,065 shares outstand-
ing, Magma's common stock book value was about $17.56 per share.
Assuming all warrants were exercised, the book value per share
would have been about $16.14 per share. Thus, in terms of book
value, $8.25 per share hardly reflected a significant premium over
the value of the Magma Warrants based on net book value.
48. There was also no discussion in the Warrant Tender Offer
regarding Magma's results of operations as an ongoing operation.
The first quarter results clearly signalled record revenues and
earnings that, if sustained, would lead to a higher stock price.
Moreover, Defendant Winter's statements on April 19, 1995,
suggested that, if anything, this trend would continue based on the
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price of copper and expected revenues from the new Tintaya mine.
However, there was no discussion of these factors and how they
impacted on the fairness of the tender offer price.
49. The Warrant Tender Offer further represented:
Neither the Company nor the Board of Directors
of the Company received any report, opinion or
appraisal which is materially related to the
offer including, but not limited to, any such
report or opinion or appraisal relating to the
consideration of the fairness of the consider-
ation to be offered to the holders of the
warrants or the fairness of such transaction
to the Company.
The Warrant Tender Offer further represented that the majority of
Directors, not employed by the Company, had not retained any
representative to act solely on behalf of warrant holders for
purposes of negotiating a transaction.
50. The Warrant Tender Offer also represented that:
Following the consummation of the offer, the
business and operations of the Company will be
continued by the Company substantially as they
are currently being conducted. Except as
disclosed in this offer to purchase, including
any report or statement incorporated by refer-
ence herein, the Company no present plans or
proposals that would result in (i) the acqui-
sition by any person of additional securities
of the Company, or the disposition of securi-
ties of the Company, (ii) any extraordinary
corporate transactions such as a material
merger or reorganization, any liquidation or
any sale or transfer of a material amount of
assets involving the Company or any of its
material subsidiaries with any other non-
affiliated entity, (iii) any change in the
present Board or management of the Company
including, but not limited to, a plan or
proposal to change the number or term of
directors ... (v) any other material change in
the Company's corporate structure or business.
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Disclosure on these matters is specifically mandated by the SEC in
Schedule 13E-3.
51. On June 15, 1995, Magma announced that approximately 3.8
million of the publicly traded warrants had been tendered and
accepted for purchase pursuant to the Warrant Tender Offer.
THE BROKEN HILL TENDER OFFER
52. The May 1995 self-tender offer for Magma Warrants came at
the 1995 low of the Company's stock price (and corresponding
warrant price) for the year. Soon after the offer was completed,
Magma's common stock price rose moving rapidly from $16 per share
to over $20 per share in the first half of June 1995.
53. It was later disclosed in connection with the Broken Hill
tender offer that sometime during the month of June 1995, Defendant
Winter was first approached by J.K. Ellis ("Ellis"), a Director and
Executive General Manager of Broken Hill Minerals, regarding a
possible acquisition of Magma by Broken Hill or one of its
subsidiaries. There was no contemporaneous public disclosure of
this contact from Broken Hill.
54. The following Individual Defendants, all Directors of
Magma, held the following amounts of Magma Warrants as of February
15, 1995. Based on a review of Form 3 and Form 4 filings with the
SEC, none of these Magma Warrants were tendered in the self-tender,
notwithstanding the Directors' view that the tender price was
"fair:"
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Director No. of Warrants
-------- ---------------
Winter 26,250
Donahue 5,100
Goth 150
Rollins 150
Sargent 150
______
TOTAL 31,800
55. Rather than tender his Magma Warrants, while the self-
tender was ongoing, on June 7, 1995, Defendant Donahue purchased
5,000 shares of Magma common stock in the open market at $15.25,
for a total cost, exclusive of commissions, of $76,250. This
increased Donahue's common stock holdings to 43,000 shares.
56. On July 12, 1995, a meeting was held between Ellis and
Defendant Winter which was followed by a larger meeting that same
day among Ellis, Winter, Defendant Donahue and Defendant
Vogelstein. The purpose of this meeting was to follow up on the
contact by Ellis back in June about a possible acquisition of Magma
by Broken Hill.
57. On or about August 8, 1995, Magma filed its Second
Quarter Report on Form 10-Q with the SEC. For the first six months
of 1995 revenues were $659,058,000, compared to $395,066,000 in the
prior year. Net income (after preferred stock dividends) was
$100,377,000 compared to $22,409,000 in the prior year, or $2.05
per share compared to $.46 per share. With 46,144,942 shares
outstanding, the book value per share had risen to over $18 per
share. The Second Quarter Report also stated that approximately
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3.7 million Magma Warrants had been acquired in the self-tender
offer, at a cost of approximately $30.2 million.
58. In August and early September 1995, representatives from
CS First Boston contacted Defendant Vogelstein on behalf of Broken
Hill to pursue further discussions between Broken Hill and Magma.
On September 29, 1995, representatives of CS First Boston met with
Defendants Winter, Vogelstein and Brody to discuss possible
structures and prices at which Broken Hill would be interested in
acquiring Magma.
59. On October 18, 1995, a meeting was held between B.T.
Lorton ("Lorton"), the Chairman of Broken Hill, J.B. Prescott
("Prescott"), a managing Director and Chief Executive Officer of
Broken Hill, Ellis and Defendants Winter and Vogelstein, where the
potential price at which the BHP would acquire Magma was discussed.
60. On or about October 28, 1995, Defendants Winter and
Vogelstein and Bradford A. Mills, Executive Vice President of
Magma, flew to Australia, where they met from October 29 to 31 with
Lorton, Prescott and Ellis and other senior members of management
of Broken Hill, to discuss the acquisition of Magma by Broken Hill.
On October 30, 1995, Broken Hill and Magma entered into an
agreement regarding the confidentiality of information shared
between the companies which information was intended to enable
Broken Hill to engage in "due diligence" regarding an acquisition
of Magma.
61. On October 31, 1995, Defendant Goth purchased 1000 shares
of Magma common stock at $17 per share, increasing his holdings to
8,000 shares.
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62. On November 6, 1995, drafts of the Merger Agreement
between Broken Hill and Magma were exchanged by the parties. On
November 13, 1995, legal counsel engaged in extensive discussions
regarding the terms of the potential offer for all of the outstand-
ing shares of Magma and a potential Merger Agreement.
63. On November 16, 1995, representatives of CS First Boston,
on behalf of Broken Hill, met with Defendants Brody and Vogelstein,
the two Warburg Pincus representatives on the Board of Magma, and
informed them that Broken Hill was prepared to offer $28 per share
for all of the outstanding shares of Magma subject to negotiation
of the terms of a definitive agreement.
64. On November 17, 1995, Defendants Donahue and Winter met
with Ellis who confirmed the $28 per share tender price conveyed by
CS First Boston. On November 19, 1995, Prescott also confirmed to
Defendant Winter that Broken Hill was prepared to offer $28 per
share for all of the common stock of Magma.
65. On November 30, 1995 -- the last day that Warburg Pincus
could execute its Warburg Warrants -- the Board of Directors of
Broken Hill had approved the terms of the offer at $28 per share.
Immediately following the Broken Hill Board meeting, the Company's
Board also met in New York and approved the offer and a Merger
Agreement whereby all of the shares of Magma would be acquired by
Broken Hill and the companies would be merged. That evening a
Merger Agreement was executed between representatives of Broken
Hill and Magma.
66. The representatives of Warburg Pincus were intimately
involved in the discussions regarding a possible acquisition of
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Magma from the outset. Their counsel was also present in these
discussions. The Warburg Warrants, with the same terms as the
Magma Warrants conveyed in the self-tender back in June, were worth
$19.50 per share based on the $28 tender offer price.
67. On November 30, 1995, Warburg Pincus exercised its rights
to acquire Magma common stock pursuant to the terms of the Warburg
Warrants at a price of $8.50 per share. At the time Warburg Pincus
executed its warrants, Broken Hill had agreed to pay $28 per share
for the shares acquired pursuant to the exercise of the Warburg
Warrants and Magma's Board of Directors had agreed to the acquisi-
tion at the $28 price. None of the Warburg Warrants had been
exercised earlier in 1995, notwithstanding the fact that Magma's
common stock price substantially exceeded the exercise price, and
the $8.25 price for the public warrants was supposedly a "fair
price." Rather, on information and belief, aware that Broken Hill
was interested in acquiring Magma, at least as early as June 1995
and possibly earlier, Warburg Pincus elected not to participate in
the self-tender, or exercise its warrants until November 30, 1995,
the final date on which the warrants could be exercised. Indeed,
the termination of the exercise period of the Warburg Warrants was
a driving force behind the November 30 Board meeting at which both
Broken Hill and Magma's Boards agreed to the $28 per share
acquisition price. Warburg Pincus recognized in excess of $20
million immediate profit on the exercise of the Warburg Pincus
warrants alone.
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CLASS ALLEGATIONS
68. Plaintiff brings this action as a class action pursuant
to Rule 23(b)(3) of the Federal Rules of Civil Procedure on behalf
of a class consisting of all persons who tendered their warrants to
acquire Magma common stock at an exercise price of $8.25, expira-
tion November 30, 1995, pursuant to the May 1995 self-tender (the
"Class"). Excluded from the Class are the Defendants named herein,
any members of their immediate families and any subsidiaries or
affiliates of the entities named as Defendants herein.
69. Members of the Class are so numerous and geographically
dispersed that joinder of all Class Members is impracticable.
While the exact number of Class Members are not known at the
present time, over 3.7 million warrants were tendered pursuant to
the self-tender. As of May 14, 1995, there were approximately 4300
holders of record of Magma Warrants.
70. Plaintiff will fairly and adequately protect the
interests of the members of the Class, and has retained counsel
competent and experienced in class and securities litigation.
71. Plaintiff's claims are typical of the claims of members
of the Class as Plaintiff and all members of the Class have
sustained damages as a result of the violations of Sections 10, 13
and 14(e) of the Exchange Act alleged herein.
72. A Class is superior to all other available methods for
the fair and efficient adjudication of this controversy. Further,
there are questions of law and fact common to all members of the
Class. Such questions include:
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a. The extent to which the Defendants named herein were
aware of Broken Hill's interest in acquiring Magma either at the
time the self-tender was initiated on or about May 16, 1995 or
during the course of the self-tender offer;
b. The extent to which the Defendants named herein
became aware of Broken Hill's interest in acquiring all of the
outstanding shares of Magma during the course of the self-tender
offer between May 16, 1995 and its termination on June 14, 1995;
c. The extent to which the Schedule 13E-3 filed with
the SEC and Warrant Tender Offer sent to all warrant holders was
materially false and misleading to the extent that it represented
that the Defendants were aware of no material changes contemplated
in the corporate structure, organization or ownership of Magma as
of the time of the Warrant Tender Offer;
d. The extent to which the Magma Schedule 13E-3 filing
failed to comply with Item 8(b) of Schedule 13E by failing to
discuss historic market prices, net book value, and trends relating
to Magma's profitability as a going concern;
e. The extent to which the Warrant Tender Offer was
false and misleading to the extent that it represented that the
transaction was fair to the warrant holders; and
f. The measure of damages sustained by each member of
the Class.
73. Plaintiff knows of no difficulty that will be encountered
in the management of this action as a class action that would
preclude its maintenance as a class action and, indeed, believes
that a class action is the superior method for the fair and
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efficient adjudication of this action so as to avoid any inconsis-
tent adjudications.
COUNT I
VIOLATIONS OF SECTION 13(e) OF THE
EXCHANGE ACT AND RULE 13e-3(b)(1)
THEREUNDER, AGAINST ALL DEFENDANTS
74. Plaintiff realleges all prior allegations as though fully
set forth herein.
75. The Magma self-tender was governed by the provisions of
Rule 13e-3 relating to tender offers for a company's own securi-
ties. The statements in the Warrant Tender Offer regarding the
fairness of the transaction, described more fully in paragraphs 45,
49 and 50 herein, contained untrue statements of material fact
and/or omitted to state material facts necessary in order to make
the statements made, in light of the circumstances under which they
were made, not misleading in violation of Section 13(e) and Rule
13e-3(b)(1) thereunder.
76. Specifically, the Warrant Tender Offer:
a. failed to disclose any interest on the part of
Broken Hill in acquiring Magma;
b. failed to discuss historic market prices for Magma
common stock and Magma Warrants and why those prices were not
indicative of the value of the warrants, since the price of
publicly traded warrants exceeded the self-tender offer price
during much of the seven week period prior to the tender offer;
c. failed to discuss the net book value of Magma common
stock, and the fact that based on current book value, there was
little premium being offered for the Magma Warrants; and
-25-
d. failed to discuss the positive trend in revenue and
earnings as reflected in first quarter 1995 results of operations,
which trend Defendant Winter stated would continue throughout 1995,
and the effect such earnings would have on the value of the Magma
Warrants.
77. Warburg Pincus and the Individual Defendants either knew,
or were reckless in not knowing, of the false and misleading nature
of the statements in the Warrant Tender Offer described more fully
in paragraphs 45, 49 and 50 herein. Specifically, by reason of
their positions as officers and directors of the Company, and
Warburg Pincus, by reason of its position as the single largest
stockholder and the holder of 892,473 Warburg Warrants with terms
identical to the public warrants, were in a position to know of
Broken Hill's approaches to members of Magma's management alleged
herein. In addition, notwithstanding the fact that Warburg Pincus
was in a position to control the terms of the tender offer, it
specifically excluded the Warburg Warrants from the tender offer in
an effort to continue to hold said warrants until such time as the
Broken Hill offer matured into what would clearly be a more
favorable transaction for Warburg Pincus. Also, the Individual
Defendants also failed to tender their Magma Warrants, and
Defendant Donahue purchased more Magma stock during the self-
tender, suggesting an awareness of Broken Hill's intent prior to
June 14, 1995.
78. Plaintiff and the members of the Class have been damaged
as a proximate cause of the violations of Section 13(e) and Rule
13e-3(b)(1) thereunder alleged herein.
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COUNT II
VIOLATIONS OF SECTION 13(e) OF THE
EXCHANGE ACT AND RULE 13e-3(b)(2)
THEREUNDER AGAINST ALL DEFENDANTS
79. Plaintiff realleges all prior allegations as though fully
set forth herein.
80. By reason of the self-tender, Magma was required to file
and did file on or about May 15, 1995, a disclosure on Schedule
13E-3 pursuant to Section 13(e) of the Exchange Act of 1934 and
Rule 13e-3 promulgated thereunder.
81. The Schedule 13E, filed with the Commission on or about
May 15, 1995, failed to comply with the requirements of Schedule
13E and, specifically, Item 8(b) therein. Specifically, the
discussion regarding the fairness of the tender offer failed to
discuss historic market prices for Magma common stock and the Magma
Warrants, net book value, and current trends in Magma's ongoing
business as required by Item 8(b) and, failed to advise Plaintiff
and members of the Class why such historic market prices, net book
value and current trends in earnings were not indicative of the
value of the Magma Warrants and relevant factors in evaluating the
fairness of the tender offer price.
82. Rather than provide the mandated disclosure required
under Item 8(b) of Schedule 13E-3, the Defendants simply made
conclusory statements as to the fairness of the tender offer price
citing only the current premium based on the May 12, 1995 market
price (which was itself misleading) and the absence of commissions.
The Schedule 13E-3 failed to discuss historic market prices, net
book value and positive trends. The lack of discussion regarding
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net book value, historical market prices and positive trends in
Magma's operations failed to provide Plaintiff and the members of
the Class with the required analysis as to factors which were
clearly important in determining the fairness of the transaction
and the weight that should be given to these factors.
83. By reason of the Defendants' failure to comply with the
requirements of Rule 13e-3(b)(2) and Item 8(b) in Schedule 13E-3,
Plaintiff and the members of the Class have been damaged as a
proximate cause of said violation.
COUNT III
VIOLATIONS OF SECTION 14(e) OF THE
EXCHANGE ACT BY ALL DEFENDANTS
84. Plaintiff realleges all prior allegations as though fully
set forth herein.
85. The statements made in the Warrant Tender Offer regarding
the fairness of the transaction, the lack of the required disclo-
sure under Item 8(b) as discussed in paragraph 87 herein, the
affirmative representation as to the absence of any report, opinion
or appraisal material to the offer, and the lack of any plans for
an acquisition, extraordinary corporate transaction, change of
control, or other material change in the corporate structure of
Magma, were untrue statements of material fact and/or omitted to
state material facts necessary in order to make the statements
made, in the light of the circumstances under which they were made,
not misleading in connection with the tender offer for Magma
Warrants.
86. Specifically, the Warrant Tender Offer:
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a. failed to disclose any interest on the part of
Broken Hill in acquiring Magma;
b. failed to discuss historic market prices for Magma
common stock and Magma Warrants and why those prices were not
indicative of the value of the warrants, since the price of
publicly traded warrants exceeded the self-tender offer price
during much of the seven week period prior to the tender offer;
c. failed to discuss the net book value of Magma common
stock, and the fact that based on current book value, there was
little premium being offered for the Magma Warrants; and
d. failed to discuss the positive trend in revenue and
earnings as reflected in first quarter 1995 results of operations,
which trend Defendant Winter stated would continue throughout 1995,
and the effect such earnings would have on the value of the Magma
Warrants.
87. Warburg Pincus and the Individual Defendants either knew,
or were reckless in not knowing, of the false and misleading nature
of the statements in the Warrant Tender Offer described more fully
in paragraphs 45, 49 and 50 herein. Specifically, by reason of
their positions as officers and directors of the Company, and
Warburg Pincus, by reason of its position as the single largest
stockholder and the holder of 892,473 Warburg Warrants with terms
identical to the public warrants, were in a position to know of
Broken Hill's approaches to members of Magma's management alleged
herein. In addition, notwithstanding the fact that Warburg Pincus
was in a position to control the terms of the tender offer, it
specifically excluded the Warburg Warrants from the tender offer in
-29-
an effort to continue to hold said warrants until such time as
the Broken Hill offer matured into what would clearly be a more
favorable transaction for Warburg Pincus. Also, the Individual
Defendants also failed to tender their Magma Warrants, and
Defendant Donahue purchased more Magma stock during the self-
tender, suggesting an awareness of Broken Hill's intent prior to
June 14, 1995.
88. Plaintiff and the members of the Class have been damaged
as a proximate cause of the untrue statements of material fact and
omissions of material fact in violation of Section 14(e) of the
Exchange Act described herein.
COUNT IV
VIOLATIONS OF SECTION 10(b) OF THE
EXCHANGE ACT AND RULE 10b-5
THEREUNDER AGAINST ALL DEFENDANTS
89. Plaintiff realleges all prior allegations as though fully
set forth herein.
90. Plaintiff, and the members of the Class, sold securities;
i.e., their Magma Warrants, either directly or indirectly, in
reliance on the representations as to the fairness in the Warrant
Tender Offer more fully alleged in paragraphs 45, 49 and 50 herein.
Statements in the Warrant Tender Offer, more fully set forth in
paragraphs 45, 49 and 50 herein, made untrue statements of material
fact and omitted to state material facts necessary in order to make
the statements made in light of the circumstances under which they
were made, not misleading.
91. Specifically, the Warrant Tender Offer:
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a. failed to disclose any interest on the part of
Broken Hill in acquiring Magma;
b. failed to discuss historic market prices for Magma
common stock and Magma Warrants and why those prices were not
indicative of the value of the warrants, since the price of
publicly traded warrants exceeded the self-tender offer price
during much of the seven week period prior to the tender offer;
c. failed to discuss the net book value of Magma common
stock, and the fact that based on current book value, there was
little premium being offered for the Magma Warrants;
d. failed to discuss the positive trend in revenue and
earnings as reflected in first quarter 1995 results of operations,
which trend Defendant Winter stated would continue throughout 1995,
and the effect such earnings would have on the value of the Magma
Warrants.
92. Warburg Pincus and the Individual Defendants either knew,
or were reckless in not knowing, of the false and misleading nature
of the statements in the Warrant Tender Offer described more fully
in paragraphs 45, 49 and 50 herein. Specifically, by reason of
their positions as officers and directors of the Company, and
Warburg Pincus, by reason of its position as the single largest
stockholder and the holder of 892,473 Warburg Warrants with terms
identical to the public warrants, were in a position to know of
Broken Hill's approaches to members of Magma's management alleged
herein. In addition, notwithstanding the fact that Warburg Pincus
was in a position to control the terms of the tender offer, it
specifically excluded the Warburg Warrants from the tender offer in
-31-
an effort to continue to hold said warrants until such time as the
Broken Hill offer matured into what would clearly be at more
favorable transaction for Warburg Pincus. Also, the Individual
Defendants also failed to tender their Magma Warrants, and
Defendant Donahue purchased more Magma stock during the self-
tender, suggesting an awareness of Broken Hill's intent prior to
June 14, 1995.
93. By reason of the sale of Magma Warrants by Plaintiff and
the Class, and reliance on the untrue statements of material fact
and omissions of material fact in violation of Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder alleged herein, Plaintiff
and the members of the Class have been damaged.
COUNT V
BREACH OF FIDUCIARY DUTY AGAINST
ALL INDIVIDUAL DEFENDANTS
94. Plaintiff realleges all prior allegations as though fully
set forth herein.
95. Each of the Individual Defendants named herein, by reason
of their positions as Directors and, in some instances, officers of
Magma, owed a fiduciary duty to the holders of the Magma Warrants
to obtain the best price available for the warrant holders in the
event of a public auction or tender offer.
96. The structuring of the tender offer for Magma Warrants at
the low price for the year, after the placement agent on the tender
offer, Goldman Sachs, issued two negative reports regarding Magma,
reflected an attempt to drive down the price of the Magma Warrants
and to pay the least amount possible for the Magma Warrants. In
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addition, the failure to tender the Warburg Warrants, controlled by
Defendants Vogelstein and Brody, and the Individual Defendants'
warrants further suggested that the Defendants were aware of the
fact that a more favorable offer was highly likely as of the time
of the self-tender offer for the Magma Warrants.
97. Plaintiff and the members of the Class have been damaged
by reason of the breaches of fiduciary duty more fully alleged
herein.
WHEREFORE, pursuant to the foregoing, Plaintiff requests the
following relief:
a. Certification of this action as a class action
pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure;
b. A judgment in Plaintiff's favor on his behalf and on
behalf of the Class alleged herein;
c. Compensatory damages in an amount appropriate;
d. An award of Plaintiff's costs, including fees for
experts; and
e. Such other relief as this Court deems just and
proper.
DEMAND FOR JURY TRIAL
Plaintiff demands a trial by jury.
Dated this 13th day of June, 1996.
BONNETT, FAIRBOURN, FRIEDMAN
& BALINT, P.C.
/s/
By: ___________________________
Andrew S. Friedman
4041 North Central Avenue
Suite 1100
Phoenix, AZ 85012-3311
602/274-1100
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and
BURT & PUCILLO
Michael J. Pucillo
Florida Bar No. 261033
222 Lakeview Avenue
Suite 300 East
West Palm Beach, FL 33401
561/835-9400
and
RYAN, WOCHOK, RYAN & REED, LTD.
Joseph A. Ryan
13 Paoli Court
Paoli, PA 19301
610/296-9900
Attorneys for Plaintiff
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29 Jul 1997