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FILED
01 JAN-9 PM 4:12
REGISTER IN CHANCERY
DIANNE M. KEMPSKI
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
THOMAS TURBERG, )
)
Plaintiff, )
)
-against- )
)
PENNACO ENERGY, INC., MARATHON ) C.A. No. 18607NC
OIL ACQUISITION 1, LTD., PAUL M. )
RADY, GLEN C. WARREN, JR., GREGORY )
V. GIBSON, DAVID W. LANZA and KURT )
M. PETERSON, )
)
Defendants. )
CLASS ACTION COMPLAINT
Plaintiff, by his attorneys, for his class action complaint against
defendants, alleges upon information and belief, except for paragraph 2 hereof,
which is alleged upon knowledge as follows:
1. Plaintiff brings this action pursuant to Rule 23 of the Rules of the
Court of Chancery on his behalf and as a class action on behalf of all persons,
other than defendants and those in privity with them, who own the common stock
of Pennaco Energy, Inc. ("Pennaco" or the "Company").
2. Plaintiff has been the owner of the common stock of the Company since
prior to the transaction herein complained of and continuously to date.
3. Defendant Pennaco is a corporation duly organized and existing under
the laws of the State of Delaware with principal executive offices at 1050 17th
Street, Suite 700, Denver, Colorado. The Company is an independent energy
company focused on the acquisition, exploration, development and production of
natural gas from coal bed methane properties located in Wyoming
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and Montana. The Company has over 23 million shares of common stock issued and
outstanding, held by hundreds of shareholders of record, which shares trade on
the American Stock Exchange.
4. Defendant Marathon Oil Acquisition 1, Ltd. ("Acquisition") is a
Delaware corporation formed for this acquisition and is a wholly-owned
subsidiary of Marathon Oil Company ("Marathon"), an Ohio corporation, which
is in turn is a wholly-owned subsidiary of USX Corporation ("USX"), a
Delaware corporation. Acquisition, Marathon and USX are collectively referred
to herein as "Marathon". Marathon, which formed Acquisition for purposes of this
transaction, is named as an aider and abettor of the breaches of fiduciary duty
alleged herein.
5. Defendant Paul M. Rady ("Rady") is and was at all relevent times
President, Chief Executive Officer and a director of Pennaco.
6. Defendant Glen C. Warren, Jr. ("Warren") is and was at all relevant
times Executive Vice President, Chief Financial Officer and a director of
Pennaco. Prior to July, 1998, Warren was an investment banker with Lehman
Brothers ("Lehman Bros."), the advisor ultimately retained by Pennaco.
7. Defendant Gregory V. Gibson ("Gibson") is and was at all relevant
times Vice President-Legal, Secretary and a director of Pennaco.
8. Defendant David W. Lanza ("Lanza") is and was at all relevant times
a director of Pennaco and a real estate developer, oil and gas property, in,
inter alia, Wyoming.
9. Defendant Kurt M. Peterson ("Peterson") is and was at all relevant
times a director of Pennaco and a partner in the natural resources department
of Davis, Graham and Stubbs, LLP, a Denver law firm that provides services to
Pennaco.
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10. The Individual Defendants named in paragraphs 5 through 9 constitute
the Board of Directors of Pennaco (the "Board") and are in a fiduciary
relationship with plaintiff and the other public stockholders of Pennaco and
owe them the highest obligations of good faith and fair dealing.
CLASS ACTION ALLEGATIONS
11. Plaintiff brings this action on his own behalf and as a class action,
pursuant to Rule 23 of the Rules of the Court of Chancery, on behalf of all
common stockholders of the Company (except the defendants herein and any
person, firm, trust, corporation, or other entity related to or affiliated with
any of the defendants) and their successors in interest, who are or will be
threatened with injury arising from defendants' actions as more fully described
herein.
12. This action is properly maintainable as a class action.
13. The class is so numerous that joinder of all members is
impracticable. As of January 8, 2001, there were in excess of 23 million shares
of Pennaco common stock outstanding, owned by thousands of shareholders located
throughout the country.
14. There are questions of law and fact which are common to the class
including, inter alia, the following: (a) whether defendants have breached their
fiduciary and other common law duties owed by them to plaintiff and the members
of the class; and (b) whether defendants have failed to disclose material
information to Pennaco's common stockholders; (c) whether the class is entitled
to injunctive relief or damages as a result of the wrongful conduct committed
by defendants.
15. Plaintiff is committed to prosecuting this action and has retained
competent counsel experienced in litigation of this nature. The claims of the
plaintiff are typical of the claims of other members of the class and plaintiff
has the same interests as the other members the class. Plaintiff will fairly
and adequately represent the class.
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16. The prosecution of separate actions by individual members of the
class would create a risk of inconsistent or varying adjudications with respect
to individual members of the class, which would establish incompatible
standards of conduct for defendants, or adjudications with respect to
individual members of the class which would, as a practical matter, be
dispositive of the interests of other members or substantially impair or impede
their ability to protect their interests.
17. Defendants have acted in a manner which affects plaintiff and all
members of the class, thereby making appropriate injunctive relief and/or
corresponding declaratory relief with respect to the class as a whole.
SUBSTANTIVE ALLEGATIONS
18. On or about December 22, 2000, Pennaco announced in a press release
that it had entered into a definitive agreement with Marathon pursuant to which
Marathon will acquire each share of Pennaco common stock at a price of $19 cash
per share (the "transaction"). The total value of the transaction is
approximately $500 million.
19. Pursuant to the terms of the transaction, Acquisition commenced a
cash tender offer for Pennaco common stock at $19 per share on or about January
8, 2001 ("tender"). The tender is to be followed by a cash out merger at $19
per share ("Merger").
20. As described below, the transaction is fraught with procedural
unfairness. Moreover, defendants have failed to disclose material information
to Pennaco's public stockholders.
THE BACKGROUND OF THE TRANSACTION.
21. On or about January 8, 2001, Acquisition filed with the Securities
and Exchange Commission ("SEC") a form TO-T ("TO-T"). The TO-T contains
Acquisition's Offer to Purchase all outstanding common shares of Pennaco at $19
per share ("Offer"). Simultaneously, on January
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8, 2001, Pennaco filed its Schedule 14D-9 ("14D-9"). The Offer and 14D-9
outline in the barest of the terms the transaction.
22. In the Offer, TO-T and 14D-9, (collectively, "offer documents"),
defendants note the background and negotiations of the transaction. The 14D-9
says that "[f]rom time to time" Pennaco "has been the subject of informal
inquiries regarding a possible acquisition or other business combination
transaction". According to the offer documents, on September 8, 2000, Pennaco
received an inquiry from Marathon regarding a possible business combination.
Following receipt of this inquiry, on September 11 and 19, 2000, Pennaco
provided Marathon with certain public information.
23. On November 8, 2000, Clarence P. Cazalot, President of Marathon,
contacted Rady to express Marathon's interest in acquiring the Company. On
November 10, 2000, Rady and Warren met with Cazalot and other members of
Marathon to discuss a possible acquisition, and agreed at this meeting to
explore such a possible transaction over the next 30 days.
24. Following this meeting, defendants Rady and Warren quickly sought to
protect their own personal interests. On November 15, 2000, Rady and Warren
executed amended employment agreements with the following key provisions: Rady
receives a $3 million termination fee and a $6 million non-compete payment in
the event his employment is terminated; Warren receives a $2 million termination
fee and a $4 million non-compete payment if his employment is terminated. Rady's
prior employment agreement provided for, inter alia, a termination fee of $3
million if terminated after July 2000 and no non-compete payment. Warren's prior
employment agreement provided for, inter alia, a termination fee of $1,250,000
and no non-compete payment.
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25. On this same day (i.e., November 15, 2000) Pennaco and Marathon
entered into a confidentiality agreement. Marathon conducted due diligence
through the first half of December, 2000.
26. Following Rady and Warren's execution of the amended employment
agreements, in late November, 2000, Pennaco began interviewing possible
investment advisors.
27. On December 14, 2000, after proffering a lower, undisclosed offer on
December 8 which was deemed "unacceptable" by the Board, Marathon offered $19
per share and Pennaco's Board authorized continued discussions with Marathon
and the engagement of Lehman Brothers ("Lehman").
28. On December 22, 2000 the transaction was approved. The Board of
Directors also approved the merger agreement, which provides for a $15 million
termination fee, or 3% of the transaction value and a waiver of this
transaction from the operations of Pennaco's shareholder rights plan.
29. Following the announcement of the transaction, the price of Pennaco
stock immediately climbed to surpass the $19 price, closing at $19 5/8 on
December 26, 2000, compared with the closing price of $14 5/8 on December 22,
2000. Since December 26, Pennaco stock has consistently closed over $19 per
share.
30. According to an analyst at Sanders Morris Harris, Inc., Irene Haas,
Marathon "has to pay more." Haas values Pennaco at about $22 per share.
31. On January 8, 2001, by virtue of the TO-T, the tender commenced, and
is currently scheduled to expire on Monday, February 5, 2001.
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DEFENDANTS HAVE FAILED TO DISCLOSE MATERIAL INFORMATION
32. The Offer, the To-T and 14D-9 fail to disclose information and
material necessary for a reasonable Pennaco stockholder to make a fully informed
decision on whether or not to tender shares in the Offer, including:
a. The 14D-9 provides Pennaco shareholders no information to enable
them to understand why the Board decided to sell the Company.
b. The Lehman fairness opinion dated December 22, 2000, which is
annexed as an exhibit to the 14D-9, states that the Company's investment advisor
relied, in part, upon information supplied by Pennaco and its management,
including projections for 2001-2005; Lehman's own analysis based upon "more
conservative assumptions" than those contained in management's projections; and
certain estimates of proved and non-proved reserves and future production,
revenue, operating costs and capital investment. The Board, in determining to
recommend the transaction to Pennaco shareholders, reached its conclusion in
part on the presentation of Lehman. Yet, the offer documents do not detail
discuss any financial analyses, range of values derived from any analyses or any
disclosure of reserve information. In fact, the analysis prepared by Lehman and
presumably presented to the Board, which is customarily an exhibit to SEC
filings in this type of transaction, is not available and has not been made an
exhibit to any of the offer documents. Thus, Pennaco stockholders have been
completely deprived of any information, known to the defendants, about the
anticipated future prospects of the Company or alternative transactions.
c. The 14D-9 does not provide Pennaco shareholders with any
information concerning the range of values for the Company the Board considered.
In fact, the offer documents
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do not discuss the types of analyses prepared by Lehman, such as comparable
companies analysis, discounted cash flow analysis and the like, which are
customarily prepared in these types of transactions nor the derived ranges of
value.
d. The 14D-9 does not provide Pennaco shareholders with information
to evaluate whether or not the transaction is the best transaction available.
The 14D-9 does not say what efforts were made to determine Pennaco's value in
the market for corporate control, or even whether or not any such efforts were
made. Pennaco shareholders are not told why the Board decided to pursue the
Marathon bid as opposed to any other, particularly in light of other inquiries
the Company is said to have received in the past. The amount and identity of the
other expressions of interest received by Pennaco in the past and briefly noted
in the offer documents, are not disclosed.
33. The foregoing information is necessary and material to a Pennaco
stockholder's decision to accept or reject the Offer. Thus, defendants should
supplement the Offer promptly to cure these material deficiencies.
COUNT ONE
34. Plaintiff incorporates by reference the allegations of paragraphs 1 to
33 as if fully set forth herein.
35. The transaction represents a change in control of Pennaco and/or sale
of the Company and imposes heightened fiduciary duties on the Individual
Defendants to maximize shareholder value and to disclose to Pennaco shareholders
all information material to an informed decision.
36. Defendants have violated their fiduciary duties by disseminating the
offer documents with the material deficiencies described in paragraph 32 above.
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37. Plaintiff and other members of the Class have been and will be
irreparably damaged in that they must make a significant investment decision
without material information known and readily available to the Individual
Defendants.
38. Plaintiff has no adequate remedy at law.
COUNT TWO
39. Plaintiff incorporates by reference the allegations of paragraphs 1
to 33 as if fully set forth herein.
40. Even though the transaction is a change of control transaction, it is
not the result of a process designed and implemented to ascertain the
transaction offering the best value reasonably available for Pennaco's
stockholders.
41. Lehman was not authorized to solicit, and did not during its
engagement solicit, third party indications of interest in acquiring Pennaco.
42. The only substantive reasons the 14D-9 states for the Board's
approval of the transaction are that it offers Pennaco shareholders a premium
to the market price of their stock, and Lehman's fairness opinion. This
assertion does not represent an informed basis for concluding that the
transaction represents the best value available for Pennaco.
43. Accordingly, Individual Defendants have breached their fiduciary duty
of care and good faith.
44. Moreover, defendants Rady and Warren, aided and abetted by the
remaining Individual Defendants, have protected their own interests in breach
of their fiduciary duty of loyalty.
45. Plaintiff and other members of the Class have been and will be
damaged in that they have not and will not receive the best price available in
the market for corporate control.
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46. In the circumstances, Marathon was aware that the Individual
Defendants were not making any efforts to inform themselves of the best value
available for Pennaco and that Rady and Warren improved their own employment
contracts in the context of negotiating the transaction. Marathon participated
in the Individual Defendants' breaches of fiduciary duty by pursuing the
transaction in these circumstances. Accordingly, it has aided and abetted the
Individual Defendants breaches of fiduciary duty.
47. Plaintiff has no adequate remedy at law.
WHEREFORE, plaintiff demands judgment as follows:
A. Declaring this to be a proper class action and appointing plaintiff
Class representative;
B. Enjoining, preliminarily and permanently, the proposed transaction
under the terms presently proposed, requiring the Individual Defendants to
place the Company up for auction and/or to conduct a market-check, and
requiring defendants to make full and fair disclosure of all material facts to
the Class before the completion of any such acquisition;
C. To the extent, if any, that the transaction complained of is
consummated prior to the entry of this Court's final judgment, rescinding the
same or awarding rescissory damages to the Class;
D. Directing that defendants account to plaintiff and the Class for all
damages caused to them and account for all profits and any special benefits
obtained by defendants as a result of their unlawful conduct;
E. Ordering defendants to supplement the Offer to include all material
information not currently disclosed;
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F. Awarding to plaintiff the costs and disbursements of this action,
including a reasonable allowance for the fees and expenses of plaintiff's
attorneys and experts; and
G. Granting such other and further relief as the Court deems appropriate.
Dated: January 9, 2001 ROSENTHAL, MONHAIT, GROSS
& GODDESS, P.A.
By: /s/ Norman M. Monhait
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Suite 1401, Mellon Bank Center
P.O. Box 1070
Wilmington, DE 19899-1070
(302) 656-4433
Attorneys for Plaintiff
OF COUNSEL:
FARUQI & FARUQI, LLP
415 Madison Avenue
New York, NY 10017
(212) 986-1074
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