<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
(AMENDMENT NO. 5)
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------
MAGMA POWER COMPANY
(Name of Subject Company)
MAGMA POWER COMPANY
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS)
(Title of Class of Securities)
0005591941
(CUSIP number of Class of Securities)
JON R. PEELE, ESQ.
Executive Vice President, Secretary and General Counsel
MAGMA POWER COMPANY
4365 EXECUTIVE DRIVE, SUITE 900
SAN DIEGO, CALIFORNIA 92121
(619) 622-7800
(Name, address and telephone number of person authorized to receive notice and
communications on behalf of the person(s) filing statement)
Copies to:
<TABLE>
<S> <C>
Michael J. Kennedy, Esq. David W. Heleniak, Esq.
SHEARMAN & STERLING SHEARMAN & STERLING
555 California Street 599 Lexington Avenue
San Francisco, California 94104 New York, New York 10022
(415) 616-1100 (212) 848-4000
</TABLE>
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- --------------------------------------------------------------------------------
<PAGE>
This Amendment No. 5 amends and supplements the Solicitation/Recommendation
Statement on Schedule 14D-9, dated October 11, 1994, as amended (the "Schedule
14D-9"), filed by Magma Power Company, a Nevada corporation ("Magma" or the
"Company"), relating to the tender offer disclosed in a Tender Offer Statement
on Schedule 14D-1, dated October 6, 1994, as amended and supplemented through
the date hereof, of CE Acquisition Company, Inc., a Delaware corporation (the
"Purchaser") and a wholly owned subsidiary of California Energy Company, Inc.,
a Delaware corporation ("California Energy"), to purchase 12,400,000 Shares at
a price of $38.50 per Share net to the seller in cash, upon the terms and
subject to the conditions set forth in the Offer to Purchase, dated October 6,
1994, as supplemented on October 26, 1994, and as amended through the date
hereof, and the related Letter of Transmittal as amended and supplemented
through the date hereof (the "Revised Offer"). Capitalized terms used and not
defined herein shall have the meanings sets forth in the Schedule 14D-9.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
Item 4 is hereby amended and supplemented by adding thereto the following:
(a) THE MAGMA BOARD HAS UNANIMOUSLY DETERMINED THAT THE REVISED OFFER IS NOT
IN THE BEST INTERESTS OF THE STOCKHOLDERS OF THE COMPANY. THE MAGMA BOARD
UNANIMOUSLY RECOMMENDS THAT ALL HOLDERS OF SHARES REJECT THE REVISED OFFER AND
NOT TENDER THEIR SHARES PURSUANT TO THE REVISED OFFER.
A copy of a letter to stockholders communicating the Magma Board's
recommendation and a form of press release announcing such recommendation are
filed as Exhibits 23 and 24 hereto, respectively, and are incorporated herein
by reference.
(b) At a meeting of the Magma Board held on October 28, 1994, the Company's
management and Goldman Sachs each reviewed and updated the presentations they
had made to the Magma Board at the October 2 and 3, 1994 and October 10, 1994
board meetings. In addition, Goldman Sachs opined to the Magma Board that the
consideration provided in the Revised Offer was inadequate.
At the October 28, 1994 board meeting the Magma Board, after careful
consideration, unanimously voted to reject the Revised Offer. Accordingly, the
Magma Board unanimously recommends that the Company's stockholders reject the
Revised Offer and not tender their Shares pursuant to the Revised Offer.
In reaching its determinations and recommendations with respect to the
Revised Offer, as indicated above, the Magma Board took into account numerous
factors discussed at its October 28, 1994 board meeting, including, among other
things, the following:
(i) The Magma Board's determination that the consideration reflected in
the Revised Offer is inadequate and does not reflect the intrinsic value of
Magma. In reaching this conclusion, the Magma Board relied on its
familiarity with the Company's business, financial condition, geothermal
resources, technologies and future prospects and the opportunities that the
Company has to reap substantial benefits in the future from the various
strategic initiatives which the Company has implemented over the past
several years.
(ii) Inquiries from various third parties expressing interest in pursuing
a possible business combination with the Company.
(iii) The fact that the CE Proposal, as revised, remains a two-tiered,
front-end loaded, highly leveraged and coercive transaction, in that the CE
Proposal is intended to intimidate stockholders to tender their Shares to
the Revised Offer so as to avoid receiving in the Back-End Merger primarily
common stock of California Energy, which would (A) be nominally valued at
approximately $20 per share, (B) be issued by an even more highly leveraged
California Energy, and (C) not provide any ongoing protections for holders
of those shares.
2
<PAGE>
(iv) The Board's understanding, based on publicly available information,
of California Energy's business, financial condition and prospects,
including, without limitation, the degree of California Energy's leverage,
California Energy's existing projects, California Energy's geothermal
resources and California Energy's announced future projects.
(v) The highly conditional nature of the Revised Offer, particularly the
conditions requiring (A) California Energy to obtain financing, given that,
according to the Offer to Purchase, the Credit Suisse financing commitment
that California Energy has received is subject to numerous conditions,
including execution of a merger agreement and Credit Suisse's satisfaction
with its due diligence review of both California Energy and Magma, (B)
California Energy stockholder approval, given that the Offer to Purchase
indicates such approval will not be obtained until mid-November at the
earliest, (C) the execution of a friendly merger agreement, given the
inadequate price offered, and (D) that no material contractual right of the
Company be impaired as a result of the CE Proposal.
(vi) The opinion of Goldman Sachs that the consideration provided for in
the Revised Offer is inadequate.
(vii) The adverse effect the Revised Offer, and a subsequent merger, has
had, and could continue to have, on the Company and on the Company's
employees, creditors, partners and customers and the communities in which
the Company operates.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
Item 7 is hereby amended and supplemented by adding thereto the following:
(a) Except as described below, the Company is not engaged in any negotiations
in response to the Revised Offer which relates to or would result in (i) an
extraordinary transaction, such as a merger or reorganization, involving the
Company or any subsidiary of the Company; (ii) a purchase, sale or transfer of
a material amount of assets by the Company or any subsidiary of the Company;
(iii) a tender offer for or other acquisition of securities by or of the
Company; or (iv) any material change in the present capitalization or dividend
policy of the Company.
(b) Except as described below there are no transactions, board of directors
resolutions, agreements in principle or signed contracts in response to the
Revised Offer that relate to or would result in one or more of the events
referred to in Item 7(a) above.
At its meeting held on October 28, 1994, the Magma Board considered a variety
of alternatives to the Revised Offer. After considerable discussion, the Magma
Board resolved that it was desirable and in the best interests of the Company
and its stockholders to direct the Company's management and financial advisor
to explore all available alternatives to further the best interests of Magma
stockholders, including conducting discussions with interested parties,
including California Energy, concerning possible business combinations,
strategic partnerships or equity investments, recapitalizing or restructuring
the Company and similar transactions.
At the Magma Board's October 28, 1994 meeting, the Magma Board determined
that if, and when, any discussions or negotiations of the type referred to
above in this Item 7 (including, without limitation, the provision of
confidential information to interested third parties) are underway or
undertaken, disclosure with respect to any parties to, furnishing confidential
information in connection with, and the possible terms of, any such
transactions or proposals might jeopardize the continuation of any discussions
or negotiations. Accordingly, the Magma Board has adopted a resolution
instructing the members of the Magma Board and management not to disclose the
possible terms of any such transactions or proposals, or the parties thereto,
or the furnishing of confidential information in connection therewith, unless
and until a definitive agreement or an agreement in principle relating thereto
has been reached.
3
<PAGE>
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Item 8 is hereby amended and supplemented by adding thereto the following:
On October 25, 1994, California Energy and CE Acquisition Company filed
their Answer to Amended Complaint and Second Amended Counterclaims against
Magma and its board of directors in the United States District Court for
the District of Nevada, in which they (i) repeated their denials of the
material allegations of the Amended Complaint and their denials that Magma
is entitled to declaratory or injunctive relief, (ii) reasserted factual
allegations and claims for declaratory and injunctive relief set forth in
their earlier Amended Counterclaims, and (iii) added further allegations
concerning (A) the increase in consideration offered by California Energy
to effect the acquisition, to $38.50 per share (consisting of $28.50 per
share in cash and $10.00 per share of California Energy stock), (B)
violations of federal securities laws and breaches of fiduciary duties
allegedly arising from Magma's October 21, 1994 announcement of the
termination of an energy development project in Indonesia caused by the
pendency of California Energy's offer and other alleged efforts by Magma to
permit unidentified international joint venture partners to withdraw from
unidentified projects in the event that California Energy's offer is
successful.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
Item 9 is hereby amended and supplemented by adding thereto the following:
Exhibit 23 -- Letter to Stockholders of the Company.
Exhibit 24 -- Press Release of the Company, dated October 31, 1994.
Exhibit 25 -- Answer to Amended Complaint and Second Amended
Counterclaims.
4
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
MAGMA POWER COMPANY
By: /s/ Jon R. Peele
___________________________________
Name: Jon R. Peele
Title: Executive Vice President,
Secretary and General
Counsel
Dated: October 31, 1994
5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBITS DESCRIPTION NUMBER
-------- ----------- ----------
<C> <S> <C>
Exhibit 23 --Letter to Stockholders of the Company
Exhibit 24 --Press Release of the Company, dated October 31, 1994
Exhibit 25 --Answer to Amended Complaint and Second Amended
Counterclaims
</TABLE>
<PAGE>
[LETTERHEAD OF MAGMA POWER COMPANY]
October 31, 1994
Dear Fellow Magma Stockholder:
On October 21, 1994, California Energy Company announced that it had raised
the price offered in its unsolicited tender offer to purchase approximately 51%
of Magma's outstanding common stock to $38.50 per share. The consideration
offered in the back-end merger contemplated by the revised California Energy
offer would now consist of approximately $18.10 in cash and California Energy
common stock with a nominal value of approximately $20.40.
After extensive analysis and for the reasons set forth in the accompanying
Amendment No. 5 to Magma's Schedule 14D-9, including the revised offer's
conditional nature, the terms and conditions of California Energy's financing,
which include execution of a merger agreement and California Energy's financing
source's satisfaction with its due diligence review of both California Energy
and Magma, and the opinion of Magma's financial advisor, Goldman, Sachs & Co.,
that the consideration offered in the revised offer was inadequate, your Board
of Directors has unanimously determined that the revised California Energy
offer is not in the best interests of Magma's stockholders. YOUR BOARD STRONGLY
RECOMMENDS THAT YOU REJECT THE REVISED OFFER AND NOT TENDER YOUR SHARES TO
CALIFORNIA ENERGY.
Your Board has authorized Magma management and its financial advisor to
explore all available alternatives to further the best interests of Magma
stockholders, including remaining independent, conducting discussions with
interested parties, including California Energy, concerning possible business
combinations, strategic partnerships or equity investments, recapitalizing or
restructuring the company and similar transactions.
Your Board is dedicated to serving your interests. Please read carefully the
enclosed Schedule 14D-9 amendment which describes in depth your Board's
recommendation.
We greatly appreciate your continued support and encouragement. We will keep
you advised of significant future developments.
Sincerely,
/s/ Paul M. Pankratz /s/ Ralph W. Boeker
Paul M. Pankratz Ralph W. Boeker
Chairman President and C.E.O.
<PAGE>
[LETTERHEAD OF MAGMA POWER COMPANY]
NEWS RELEASE
FOR IMMEDIATE RELEASE: CONTACT: Thomas Davies
Andrea Bergofin
Kekst & Company
(212) 593-2655
(619) 622-7800
MAGMA BOARD REJECTS CALIFORNIA ENERGY OFFER/
AUTHORIZES EXPLORATION OF ALTERNATIVES
San Diego, CA October 31, 1994 -- Magma Power Company's (Nasdaq NNM: MGMA)
board of directors today announced it has unanimously determined that
California Energy Company's revised unsolicitated tender offer to purchase
approximately 51 percent of Magma Power's outstanding common stock is not in
the best interests of Magma stockholders. Accordingly, Magma's board today
recommended that Magma stockholders reject the revised offer and not tender
their shares to California Energy.
In rejecting the revised offer, Magma's board considered a variety of
factors, including the revised offer's conditional nature, the terms of
California Energy's financing, and the opinion of its independent financial
advisor, Goldman, Sachs & Co., that the consideration offered in the revised
offer was inadequate.
Magma said that its board has authorized Magma management and its financial
advisor to explore all available alternatives to further the best interests of
Magma stockholders, including remaining independent, conducting discussions
with interested parties, including California Energy, concerning possible
business combinations, strategic partnerships or equity investments,
recapitalizing or restructuring the company and similar transactions.
Magma will file a formal response with the Securities and Exchange Commission
today and mail the response and a letter from the company to its stockholders.
Magma Power Company is a leader in the geothermal industry. The company
currently operates seven geothermal power plants in Southern California on
geothermal leaseholds and fee interests held by the company, and holds
additional geothermal leasehold and fee interests in other parts of California
and Nevada. Magma is also currently constructing a power plant in the
Philippines with a total capacity of 231 MW.
<PAGE>
Richard W. Horton
STATE BAR #1542
Jeffrey D. Menicucci
STATE BAR #545
LIONEL SAWYER & COLLINS
50 W. Liberty Street, #1100
Reno, Nevada 89501
(702) 788-8666
Attorneys for Defendant
and Counterclaim-Plaintiff and
Additional Plaintiff on Counterclaim
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
MAGMA POWER COMPANY )
a Nevada corporation, )
)
Plaintiff, )
)
v. ) CV-N-94-00719-DWH
)
CALIFORNIA ENERGY COMPANY, INC., )
a Delaware corporation, and CE ) ANSWER TO AMENDED
ACQUISITION COMPANY, INC., a ) COMPLAINT AND SECOND
Delaware corporation, ) AMENDED COUNTERCLAIMS
) ---------------------
Defendants. )
- ------------------------------------------------/
)
CALIFORNIA ENERGY COMPANY, INC., )
)
Counterclaim-Plaintiff, )
)
-and- )
)
CE ACQUISITION COMPANY, INC., )
)
Additional Plaintiff )
on Counterclaims, )
)
-against- )
)
MAGMA POWER COMPANY, )
)
Counterclaim-Defendant, )
)
-and- )
[LETTERHEAD OF LIONEL SAWYER & COLLINS APPEARS HERE]
<PAGE>
RALPH W. BOEKER, PAUL M. PANKRATZ,
THOMAS C. HINRICHS, ROGER L. KESSELER,
JAMES D. SHEPARD, WILLIAM R. KNEE,
BENT PETERSEN, J. PEDRO REINHARD,
LESTER L. COLEMAN, LOUIS A. SIMPSON,
and JOHN D. ROACH,
Additional Defendants
on Counterclaims.
ANSWER
------
Defendant and Counterclaim-Plaintiff California Energy Company, Inc.
("CECI") and Defendant and Additional Plaintiff on Counterclaims CE Acquisition
Company, Inc. ("CEAC"), by their attorneys Lionel Sawyer & Collins and Willkie
Farr & Gallagher, for their Answer to the Amended Complaint for Declaratory and
Injunctive Relief (the "Complaint") allege as follows:
1. Deny the allegations contained in paragraph 1 of the Complaint to the
extent they purport to related to CECI or CEAC, and deny knowledge or
information sufficient to form a belief as to the truth of the allegations
contained in paragraph 1 to the extent that they purport to relate to others,
except admit that on October 6, 1994, CECI and CEAC commenced a tender offer
(the "Tender Offer"), and that CECI and CEAC have announced and made certain
filings with the Securities and Exchange Commission concerning their intention
to commence a request solicitation and a proxy solicitation, and respectfully
refer the Court thereto for the contents thereof, and except to the extent
paragraph 1 states conclusions of law to which no response is required.
2. Deny the allegations contained in paragraph 2 of the Complaint, except
to the extent paragraph 2 states conclusions of law to which no response is
required.
2
<PAGE>
3. Deny the allegations contained in paragraph 3 of the Complaint, except
to the extent paragraph 3 states conclusions of law to which no response is
required.
4. Deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in paragraph 4 of the Complaint, except to
the extent paragraph 4 states conclusions of law to which no response is
required.
5. Deny the allegations contained in paragraph 5 of the Complaint to the
extent they purport to relate to CECI or CEAC, except admit that the Tender
Offer is subject to certain conditions as set forth in the Schedule 14D-1 Tender
Offer Statement pursuant to Section 14(d)(1) of the Securities Exchange Act of
1934 (the "Schedule 14D-1") relating to the Tender Offer, and otherwise deny
knowledge or information sufficient to form a belief as to the truth of the
allegations contained in paragraph 5 of the Complaint, and except to the extent
paragraph 5 states conclusions of law to which no response is required.
6. Deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in paragraph 6 of the Complaint, except to
the extent paragraph 6 states conclusions of law to which no response is
required.
7. Deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in paragraph 7 of the Complaint, except to
the extent paragraph 7 states conclusions of law to which no response is
required, and except admit the removal of this action to this Court.
8. Deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in paragraph
3
<PAGE>
8 of the Complaint, except admit upon information and belief that Magma is a
corporation incorporated in the State of Nevada, which, in California, is
engaged in the business of the generation of electricity from geothermal
resources, that Magma's common stock is traded on the NASDAQ and that Magma's
principal executive offices are located in San Diego, California, and except
deny that in the recent past Magma's common stock has traded at $41.50 per
share, and except to the extent paragraph 8 states conclusions of law to which
no response is required.
9. Admit the allegations contained in paragraph 9 of the Complaint.
10. Deny the allegations contained in paragraph 10 of the Complaint, except
admit that in connection with the Tender Offer, CECI and CEAC have filed a
Schedule 14D-1 which contains various information concerning Peter Kiewit Sons',
Inc., and respectfully refer the Court to the Schedule 14D-1 and the Offer to
Purchase for the contents thereof, and admit that David L. Sokol, Chairman of
CECI was, from November 1990 to February 1991, the President and Chief Executive
Officer of Kiewit Energy Company, and that Thomas R. Mason, Senior Vice
President, Engineering, Construction and Operations of CECI was, from October
1989 to March 1991, Vice President and General Manager of Kiewit Energy Company.
11. Deny the allegations contained in paragraph 11 of the Complaint, except
admit the existence of the Schedule 14D-1 referenced in paragraph 11, and
respectfully refer the Court to the Schedule 14D-1 for the contents thereof, and
except to the extent paragraph 11 states conclusions of law to which no response
is required.
4
<PAGE>
12. Deny the allegations contained in paragraph 12 of the Complaint, except
admit that on September 19, 1994, CECI delivered a written proposal to Magma
Power Company ("Magma") offering to acquire all of the outstanding shares of
Magma at a price of $35 per share in cash and stock, and respectfully refer the
Court to the letter setting forth the proposal for the contents thereof.
13. Deny the allegations contained in paragraph 13 of the Complaint to the
extent they purport to relate to CECI or CEAC, and deny knowledge or information
sufficient to form a belief as to the truth of the allegations contained in
paragraph 13 of the Complaint to the extent they purport to relate to others,
except admit the existence of letters and press releases concerning CECI and
CEAC's intentions, and respectfully refer the Court to the letters and press
releases for the contents thereof.
14. Deny the allegations contained in paragraph 14 of the Complaint to the
extent they purport to relate to CECI, and deny knowledge or information
sufficient to form a belief as to the truth of the allegations contained in
paragraph 14 to the extent they purport to relate to others, except to the
extent paragraph 14 states conclusions of law to which no response is required.
15. Deny the allegations contained in paragraph 15 of the Complaint to the
extent they purport to relate to CECI or CEAC, and deny knowledge or information
sufficient to form a belief as to the truth of the allegations contained in
paragraph 15 to the extent they purport to relate to others, except admit upon
information and belief that on October 3, 1994, the Magma Board of
5
<PAGE>
Directors adopted a purported Stockholder Rights Plan or "Poison Pill" and
authorized a purported amendment to Magma's Bylaws, which purports to limit the
right of a majority of Magma's stockholders to take certain actions, and
respectfully refer the Court to the Poison Pill and the purported Bylaws
amendment for the contents thereof, and except to the extent paragraph 8 states
conclusions of law to which no response is required.
16. Deny the allegations contained in paragraph 16 of the Complaint, except
admit that Magma has adopted a purported Stockholder Rights Plan or Poison Pill,
and respectfully refer the Court to the Poison Pill for the contents thereof,
and except to the extent paragraph 9 states conclusions of law to which no
response is required.
17. Deny the allegations contained in paragraph 17 of the Complaint, except
admit that Magma purportedly has amended its Bylaws as they relate to
stockholder action by written consent, in an attempt to prevent a majority of
the stockholders of Magma from exercising their views by written consent and
respectfully refer the Court to the purported Bylaws amendment for the contents
thereof.
18. Deny the allegations contained in paragraph 18 of the Complaint to the
extent they purport to relate to CECI or CEAC, and deny knowledge or information
sufficient to form a belief as to the truth of the allegations contained in
paragraph 18 to the extent they purport to relate to others, except admit that
on October 6, 1994, CECI and CEAC commenced the Tender Offer and respectfully
refer the Court to the Schedule 14D-1 and the Offer to Purchase contained
therein for the terms of the Tender Offer.
6
<PAGE>
19. Deny the allegations contained in paragraph 19 of the Complaint except
admit that on October 6, 1994, CECI and CEAC commenced the Tender Offer and
respectfully refer the Court to the Schedule 14D-1 and the Offer to Purchase
contained therein for the terms of the Tender Offer.
20. Deny the allegations contained in paragraph 20 of the Complaint, except
admit that on October 6, 1994, CECI and CEAC commenced the Tender Offer, and
respectfully refer the Court to the Schedule 14D-1, and the Offer to Purchase
contained therein, for the terms of the Tender Offer.
21. Deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in paragraph 21 of the Complaint, except deny
the allegation that "California Energy's tender offer also does not begin to
reflect Magma's intrinsic value and long-term strategic promise."
22. Deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in paragraph 22 of the Complaint, except
admit that the Magma Board of Directors has recommended that Magma's
shareholders reject the Tender Offer, and deny the allegations contained in
paragraph 22 to the extent they purport to relate to CECI or CEAC, and further
deny that the Magma Board properly considered the Tender Offer, and respectfully
refer the Court to the allegations made by CECI and CEAC in their Counterclaims
herein which set forth in greater detail the defective and improper actions
taken by Magma and its Board of Directors, and except to the extent paragraph 22
states conclusions of law to which no response is required.
7
<PAGE>
23. Deny knowledge or information sufficient to form a belief as to the
truth of the allegations contained in paragraph 23 of the Complaint, except deny
the allegations contained in paragraph 23 to the extent they purport to relate
to CECI or CEAC, and further deny that the Magma Board properly considered the
Tender Offer, and respectfully refer the Court to the allegations made by CECI
and CEAC in their Counterclaims herein which set forth in greater detail the
defective and improper actions taken by Magma and its Board of Directors, and
except to the extent paragraph 23 states conclusions of law to which no response
is required.
24. Deny the allegations contained in paragraph 24 of the Complaint,
except admit that on October 13, 1994, CECI filed a preliminary Request
Solicitation Statement to Stockholders of Magma Power Company with the
Securities and Exchange Commission (the "Request Solicitation Statement")
pursuant to Section 14(a) of the Securities Exchange Act of 1934, and
respectfully refer the Court to the Request Solicitation Statement for the
contents thereof, and except to the extent paragraph 24 states conclusions of
law to which no response is required.
25. Deny the allegations contained in paragraph 25 of the Complaint,
except to the extent paragraph 25 states conclusions of law to which no response
is required.
26. Deny the allegations contained in paragraph 26 of the Complaint,
except to the extent paragraph 26 states conclusions of law to which no response
is required.
27. Deny the allegations contained in paragraph 27 of the Complaint,
except admit the existence of the Schedule 14D-1 and the Request Solicitation
Statement referenced in paragraph 27,
8
<PAGE>
and respectfully refer the Court to those documents for the contents thereof.
28. Deny the allegations contained in paragraph 28 of the Complaint,
except to the extent paragraph 28 states conclusions of law to which no response
is required.
29. Deny the allegations contained in paragraph 29 of the Complaint,
except admit the existence of the Schedule 14D-1 and the exhibits thereto, and
respectfully refer the Court to those documents for the contents thereof, and
except to the extent paragraph 29 states conclusions of law to which no response
is required.
30. Deny the allegations contained in paragraph 30 of the Complaint,
except admit the existence of the preliminary Request Solicitation Statement
referenced therein and respectfully refer the Court to the Statement for the
contents thereof, and except to the extent paragraph 30 states conclusions of
law to which no response is required.
31. Repeat and reallege each and every response to the allegations
contained in paragraphs 1 through 30 of the Complaint as if fully set forth at
length.
32. Deny the allegations contained in paragraph 32 of the Complaint, except
admit the existence of sections 78.411 through 78.444 of the Nevada General
Corporations Law (the "Nevada Merger Moratorium Statute") referenced in
paragraph 32, and admit that the CEAC Tender Offer is subject to certain
conditions relating to the Nevada Merger Moratorium Statute, and respectfully
refer the Court to the Schedule 14D-1 and the Offer to Purchase contained
therein for the complete terms of the Tender Offer, and
9
<PAGE>
further admit that certain allegations concerning the Nevada Merger Moratorium
Statute are made in the Counterclaims herein, and respectfully refer the Court
to the Counterclaims for the contents thereof, and except to the extent
paragraph 32 states conclusions of law, to which no response is required.
33. Paragraph 33 makes no allegations against CECI or CEAC and states
conclusions of law, and thus no response thereto is required.
34. Repeat and reallege each and every response to the allegations
contained in paragraphs 1 through 33 of the Complaint as if fully set forth at
length.
35. Deny the allegations contained in paragraph 35 of the Complaint,
except admit the existence of the Nevada Merger Moratorium Statute referenced in
paragraph 35, and also admit that the Tender Offer is subject to certain
conditions relating to the Nevada Merger Moratorium Statute, and respectfully
refer the Court to the Schedule 14D-1 and the Offer to Purchase contained
therein for the complete terms of the Tender Offer, and further admit that
certain allegations concerning the Nevada Merger Moratorium Statute are made in
the Counterclaims herein, and respectfully refer the Court to the Counterclaims
for the contents thereof, and except to the extent paragraph 35 states
conclusions of law, to which no response is required.
36. Paragraph 36 makes no allegations against CECI or CEAC and states
conclusions of law, and thus no response thereto is required.
10
<PAGE>
37. Repeat and reallege each and every response to the allegations
contained in paragraphs 1 through 37 as if fully set forth at length.
38. Deny the allegations contained in paragraph 38 of the Complaint, except
admit the existence of the purported Stockholder Rights Plan, ByLaws amendment,
and the Schedule 14D-1 referenced therein, and respectively refer the Court to
the purported Stockholder Rights Plan, the ByLaws amendment and the Schedule
14D-1 for the contents thereof, and admit that certain allegations are made by
CECI and CEAC in their Counterclaims concerning the Stockholder Rights Plan and
the ByLaws amendment and respectfully refer the Court to the Counterclaims
herein for the contents thereof.
39. Paragraph 39 makes no allegations against CECI or CEAC and states
conclusions of law and thus no response thereto is required.
40. Repeat and reallege each and every response to the allegations
contained in paragraphs 1 through 39 of the Complaint as if fully set forth at
length.
41. Deny the allegations contained in paragraph 41 of the Complaint.
42. Deny the allegations contained in paragraph 42 of the Complaint.
43. Repeat the reallege each and every response to the allegations
contained in paragraphs 1 through 42 of the Complaint as if fully set forth at
length.
44. Deny the allegations contained in paragraph 44 of the Complaint.
11
<PAGE>
45. Deny the allegations contained in paragraph 45 of the Complaint.
46. Repeat and reallege each and every allegation contained in paragraphs
1 through 45 of the Complaint as if fully set forth at length.
47. Deny the allegations contained in paragraph 47 of the Complaint.
48. Deny the allegations contained in paragraph 48 of the Complaint.
49. Deny that plaintiff is entitled to the relief requested in the
Complaint.
AFFIRMATIVE DEFENSES
--------------------
FIRST DEFENSE
-------------
50. The Complaint fails to state a cause of action upon which relief can
be granted.
SECOND DEFENSE
--------------
51. The plaintiff lacks standing to make some or all of the claims set
forth in the Complaint.
THIRD DEFENSE
-------------
52. The claims made in the Complaint are barred in whole or in part by the
doctrine of laches.
FOURTH DEFENSE
--------------
53. The claims made in the Complaint are barred in whole or in part by the
doctrine of waiver.
FIFTH DEFENSE
-------------
54. The claims made in the Complaint are barred in whole or in part by the
doctrine of estoppel.
12
<PAGE>
SIXTH DEFENSE
-------------
55. The claims made in the Complaint are barred in whole or in part by
applicable statutes of limitations.
SEVENTH DEFENSE
---------------
56. The claims made in the Complaint are barred in whole or in part by the
doctrine of unclean hands or in pari delicto.
-- ---- -------
EIGHTH DEFENSE
--------------
57. The claims made in the Complaint should be dismissed in whole or in
part because plaintiff has neither sustained nor asserted in the complaint a
legally cognizable injury.
NINTH DEFENSE
-------------
58. The claims made in the Complaint should be dismissed in whole or in
part because they are not ripe for review.
TENTH DEFENSE
-------------
59. The claims made in the Complaint should be dismissed in whole or in
part because the plaintiff has failed to plead such claims for relief with
sufficient particularity and/or specificity.
ELEVENTH DEFENSE
----------------
60. The claims made in the Complaint should be dismissed in whole or in
part because the defendants have acted in conformance with the procedures,
rules, regulations and provisions of the federal securities laws governing
tender offers and proxy solicitations.
13
<PAGE>
TWELFTH DEFENSE
---------------
61. The claims for injunctive relief in the Complaint should be dismissed
for lack of irreparable injury.
THIRTEENTH DEFENSE
------------------
62. The allegations made in the Complaint are not well-grounded in fact,
not warranted by existing law, and are interposed purely for harassment purposes
in order to seek to cause unnecessary delay in the consummation of CECI and
CEAC's Tender Offer, and for the purpose of entrenching current management.
WHEREFORE, defendants request that judgment be entered dismissing the
Complaint, granting judgment on all counterclaims as hereinafter described, and
awarding defendants their costs and disbursements, including attorneys fees,
together with such other and further relief as this Court may deem to be just
and proper.
COUNTERCLAIMS
-------------
Counterclaim-Plaintiff California Energy Company, Inc. ("CECI") and
Additional Plaintiff on Counterclaims CE Acquisition Company, Inc. ("CEAC")
(hereinafter "plaintiffs") by their attorneys Lionel Sawyer & Gollins and
Willkie Farr & Gallagher, for their Second Amended Counterclaims against the
Counterclaim-Defendant and Additional Defendants on Counterclaims (hereinafter
collectively "defendants") allege, as follows:
NATURE OF THE ACTION
--------------------
63. This action seeks declaratory and injunctive relief against Magma
Power Company ("Magma") and its directors to prevent them from continuing to
breach their fiduciary duties to Magma's stockholders by wrongfully erecting or
refusing to
14
<PAGE>
withdraw the illegal impediments they have raised to CECI's proposal to purchase
Magma and the tender offer which CECI and CEAC commenced on October 6, 1994 for
a majority of the outstanding shares of Magma's common stock at $35 per share
net in cash (a $7.50 per share premium over the closing trading price for the
shares on September 19, 1994, the date on which CECI delivered a written
proposal to Magma seeking to acquire Magma, as more fully described herein) (the
"Tender Offer"), as the first step toward implementing the acquisition proposal
to acquire all of Magma's outstanding shares of common stock. Defendants'
unlawful actions in adopting a purported "Poison Pill," attempting to strip
shareholders of their rights to act by written consent, entering into excessive
"golden parachute" severance agreements with 15 of Magma's top executives,
entering into broad new indemnification agreements with its directors and
executives, agreeing to excessive fee arrangements with the investment bankers
hired to orchestrate its defensive actions, and refusing to opt-out of Nevada's
merger moratorium statute are scorched-earth tactics designed to entrench
incumbent management in their lucrative positions and protect the interests of
The Dow Chemical Company ("Dow"), Magma's largest shareholder, at the expense of
the interests of Magma's other shareholders.
64. In furtherance of these breaches of fiduciary duty, defendants have
made numerous false statements, nondisclosures and omissions of material fact
concerning CECI's Tender Offer in the Solicitation/Recommendation Statement (and
amendments thereto), which Magma filed pursuant to Section 14(e)(2) of the
Securities Exchange Act of 1934 on Schedule 14D-
15
<PAGE>
9 (Magma's "Schedule 14D-9"), and this action also seeks injunctive relief
requiring defendants to correct those false disclosures and to refrain from such
violations in the future.
65. Finally, this action seeks a declaratory judgment that Sections 78.411
through 78.444 of the Nevada General Corporation Law (the "Nevada Merger
Moratorium Statute") are unconstitutional and injunctive relief against the
Statute's application to CECI's proposal to acquire Magma.
66. In sum, Magma's shareholders should be allowed to consider CECI's
proposal to purchase their company on its merits, free of the illegal
impediments which the defendants have wrongfully constructed to try to defeat
that proposal. The relief sought herein seeks to accord Magma's shareholders
that opportunity.
THE PARTIES
-----------
67. Plaintiff CECI is a corporation incorporated in the State of Delaware
which, together with its subsidiaries, is engaged primarily in the business of
the exploration for and development of geothermal resources and the development,
ownership and operation of environmentally responsible independent power
production facilities worldwide utilizing geothermal resources or other energy
sources, such as hydroelectric, natural gas, oil and coal. CECI does business in
California, Nevada (where it is the owner and operator of a 10 megawatts
geothermal plant at Desert Peak, Nevada), Arizona and other states. The
principal executive offices of CECI are located in Omaha, Nebraska. The stock of
CECI is traded publicly on the New York Stock Exchange.
16
<PAGE>
68. Plaintiff CEAC is a Delaware Corporation and a wholly owned subsidiary
of CECI. CEAC was formed for the purpose of acquiring Magma stock.
69. Defendant Magma is a corporation incorporated in the State of Nevada,
which in California is principally engaged in the generation of electricity from
geothermal resources, and in the acquisition of, exploration for and development
of geothermal resources. The principal executive offices of Magma are located in
San Diego, California. The stock of Magma is traded publicly on the New York
Stock Exchange and the NASDAQ.
70. Defendant Ralph W. Boeker is a Director and the President and Chief
Executive Officer of Magma. Defendant Boeker retired from Dow as of March 1,
1993 where he had been employed since 1959, most recently as Group Vice
President for Chemicals, Performance Products and Hydrocarbons and as a member
of the operating Board of Dow Chemical U.S.A. and the Dow Management Committee.
Defendant Boeker is a resident of the State of California.
71. Defendant Paul M. Pankratz is a Director and the Chairman of the Board
of Magma. Defendant Pankratz joined Magma upon his retirement from Dow where he
had been employed since 1957, most recently as Vice President, Corporate
Products Department. He has served as a Magma director since 1984. Defendant
Pankratz is a resident of the State of California.
72. Defendant Thomas C. Hinrichs is a Director and a Vice President of
Magma. Defendant Hinrichs is a resident of the State of California.
17
<PAGE>
73. Defendant Roger L. Kesseler is a Director of Magma. Defendant Kesseler
has been an employee of Dow since 1959, and is currently employed by Dow as a
Vice President and its controller. Defendant Kesseler is a resident of the State
of Michigan.
74. Defendant James D. Shepard is a Director of Magma. He was formerly
employed as an officer of Magma and is currently a trustee of the B.C. McCabe
Foundation which is the beneficial owner of 11.9% of Magma's common stock.
Defendant Shepard is also currently a shareholder relations consultant to Magma.
Defendant Shepard is a resident of the State of California.
75. Defendant William R. Knee is a Director of Magma. Defendant Knee has
been employed by Dow since 1968 and is currently its Director of Technology
Centers. Defendant Knee is a resident of the State of Michigan.
76. Defendant Bent Petersen is a Director of Magma. Defendant Petersen is a
resident of the State of California.
77. Defendant J. Pedro Reinhard is a Director of Magma. Defendant Reinhard
has been employed by Dow since 1970 and is currently a Vice President and
Treasurer of Dow. Defendant Reinhard is a resident of the State of Michigan.
78. Defendant Lester L. Coleman is a Director of Magma. Defendant Coleman
is a resident of the State of Texas.
79. Defendant Louis A. Simpson is a Director of Magma. He also serves on
the board of directors of Salomon Inc, whose subsidiary Salomon Brothers Inc.
provides financial advisory and underwriting services to Magma. Defendant
Simpson is a resident of the State of California.
18
<PAGE>
80. Defendant John D. Roach is a Director of Magma. Defendant Roach is a
resident of the State of California.
DOW'S SPECIAL RELATIONSHIPS
WITH MAGMA AND ITS DIRECTORS
----------------------------
81. As the description of the defendant directors and their current or past
employment relationships with Dow listed herein suggests, Dow has a wide range
of special relationships with Magma and its directors, all of which underscore
the seriously conflicted position of the Magma board of directors in considering
any proposal to acquire Magma in which the interests of Dow and those of Magma's
other stockholders are not aligned. In its 1994 proxy statement, Magma reports
that it designates each of defendants Kesseler, Knee and Reinhard, all current
Dow employees (as well as defendants Boeker, Pankratz (both ex-Dow employees)
and Hinrichs and Shepard), as "inside" directors for purposes of determining
compensation of directors. A number of Magma's executive officers also either
came to Magma after a career at Dow or are or have been Dow employees "loaned"
to Magma pursuant to various agreements by which Magma reimburses Dow for
certain of their compensation (John R. Peele, Vice President, Secretary and
General Counsel of Magma; Trond Aschehoug, Vice President of North American
Operations of Magma; and Kenneth Kerr, Senior Vice President, Commercial
Development of Magma).
82. In its Schedule 13D filings under the Securities Exchange Act of 1934,
Dow has described itself as a controlling shareholder of Magma and an amendment
to its Schedule 13D filed on October 7, 1994 reflects that it is the beneficial
owner of 5,032,430 shares of Magma common stock, 20.9% of all the
19
<PAGE>
outstanding shares of common stock of Magma. Of these shares, 857,143
apparently were recently acquired by Dow pursuant to an option agreement with
Garantia Banking Limited (the "Option Shares") as more fully described herein in
paragraph 84-85, while the balance of 4,175,287 shares (the "Escrow Shares") are
held in escrow as more fully described herein in paragraph 86.
83. Dow has been a significant Magma shareholder since 1981 when the
current Magma Power Company came into existence and over the years it has
obtained additional shares of Magma common stock through a series of long-range
stock purchase agreements and a broad variety of other services agreements,
which, among other things, permitted Dow to elect to receive payment for a broad
variety of services to Magma in shares of Magma common stock, rather than in
cash. For example, Dow and Magma entered into an Engineering Services For Stock
Agreement, dated as of March 27, 1987, pursuant to which Dow took some
1,177,433 shares of Magma common stock as "advance payment" for engineering
and construction management services to be provided to Magma. Dow also acquired
additional Magma shares in conjunction with various loan guaranty, overrun
financing, financial modeling services and other management and technical
services agreements. Dow's many services agreements with Magma have not only
been economically lucrative to Dow but they have created an unusual level of
interdependence between Dow and Magma.
84. On May 27, 1993 Dow announced its intention to sell 5 million shares of
Magma common stock in a proposed underwritten secondary offering and on June 29,
1993 Magma's registration statements pertaining to the offering (which had been
20
<PAGE>
reduced to 4 million shares of Magma stock) became effective and Dow sold
3,635,000 shares of such amount at a net price of $30.88. Prior to the sale of
shares in the secondary offering, Dow, as of June 29, 1993, had sole voting and
dispositive power over 9,810,287 shares of Magma common stock (including
unexercised options), or 39.1%
85. On October 12, 1993 Dow surrendered a "special stock option" to
purchase 2 million shares of Magma common stock, which it had received pursuant
to a 1987 stock agreement, in consideration of the issuance to it of 857,143
shares of Magma common stock. Pursuant to the surrender agreement, Dow agreed to
certain "lock-up" obligations which, among other things, precluded it from
selling the shares it received until September 30, 1994. However, on September
12, 1994, in a transaction not publicly disclosed until September 23, 1994, Dow
sold 857,143 shares of Magma stock to Garantia Banking Limited ("Garantia"), a
Bahamian corporation for a per share price of $28.25, or approximately $24
million dollars. At the same time Dow entered into a highly unusual stock option
agreement with Garantia pursuant to which, for consideration of only $150,000,
Dow received an apparently perpetual option to purchase 857,143 shares of Magma
common stock from Garantia at any time after September 29, 1994 for the same per
share price of $28.25, or $24 million, which it had received from Garantia (the
"Garantia Option"). Magma facilitated the Dow/Garantia transaction by entering
into an amendment to the option surrender agreement pursuant to which Dow had
obtained the shares. That amendment, dated July 26, 1994, but, like the rest of
the Dow/Garantia
21
<PAGE>
transaction, not disclosed until September 23, 1994, released Dow from the
"lock-up" obligations it had previously agreed to, including the requirement
that it not sell the 857,143 shares of Magma stock until September 30, 1994. In
connection with Dow's disclosure of the Dow/Garantia transaction on September
23, 1994, Dow stated that it was not aware of CECI's proposal to purchase Magma
when it entered into its transaction with Garantia, which it described as being
motivated by tax characterization purposes. On October 7, 1994, Dow belatedly
made public the fact that on September 30, 1994, it had exercised its option
with Garantia and apparently acquired the 857,143 shares of Magma common stock.
86. Of the 5,032,430 shares of Magma common stock owned by Dow as of
September 30, 1994, approximately 4 million shares are held in escrow for
delivery upon the exchange of certain 5-3/4% Subordinated Exchangeable Notes due
April 1, 2001 issued by Dow. The notes are exchangeable into Magma common stock
at any time at an exchange rate of 26.6667 shares per $1,000 principle amount of
the notes. The escrow agreement between Dow and Morgan Guaranty Trust Company of
New York, as Escrow Agent, provides, among other things, that Dow has retained
the right to vote the escrowed shares and also to direct their disposition under
certain limited circumstances. Magma has stated in its Schedule 14D-9 that to
the extent noteholders exercise their exchange rights, Dow's ownership interest
in Magma would decrease, but it has failed to disclose that Dow has certain
rights to obtain the shares by providing converting noteholders with cash in
lieu of the Magma shares and the impact upon Dow's ability to benefit from
CECI's offer in the same
22
<PAGE>
manner as other Magma shareholders that results from the exchangeable note and
escrow arrangements.
87. It appears that since the acquisition of the Garantia Option and any
cash-out of the noteholders by Dow would constitute "purchases" under Section 16
of the Securities Exchange Act of 1934 which have to be matched with any
subsequent sale in the following 6 months, Dow is unable to take advantage of
the Tender Offer because it would incur short-swing profit liability under
Section 16(b) if the Option Shares or the Escrow Shares were tendered.
Accordingly, in considering the Tender Offer, Dow's economic interests and the
economic interests of Magma's other stockholders clearly conflict.
88. The intricate web of special interrelationships and agreements between
Dow and Magma and its directors and officers and the very different economic
interests facing Dow and Magma's other shareholders create not only a unique
level of interdependence, but also a situation in which the timing and nature of
a proposal to acquire Magma, such as CECI's instant proposal, pose legal and
economic issues for Dow which are not shared by Magma's other public
stockholders, which unavoidably place Magma's directors in a highly conflicted
position in addressing any such proposal, and which, due to the conflict, may
render any such actions by Magma's board invalid under Nevada law.
JURISDICTION AND VENUE
----------------------
89. This action arises under the Supremacy and Commerce Clauses of the
United States Constitution, Art. VI, cl.2 and Art. I (S) 8, cl.3 and under the
Securities and Exchange Act of
23
<PAGE>
1934, 15 U.S.C. (S)(S)78, 78bb and 78n(d) and (e), and the rules and regulations
promulgated thereunder. This Court has jurisdiction over this controversy
pursuant to Section 27 of the Securities Exchange Act, 15 U.S.C. (S)78aa, and
pursuant to 28 U.S.C. (S)(S) 1331 (federal question) and 1337 (commerce) in that
the action arises under the Constitution and laws of the United States and
arises under Acts of Congress regulating commerce or protecting trade and
commerce against restraints and monopolies, and under principles of supplemental
jurisdiction.
90. This Court also has jurisdiction over this controversy pursuant to 28
U.S.C. (S)(S) 1332(a)(1) in that the plaintiff and defendant and counterclaim
plaintiffs and counterclaim defendants are citizens of different states, and the
matter in controversy exceeds the sum of $50,000 exclusive of interest and
costs. The facts alleged show that there exists and actual controversy between
the parties and thus declaratory relief may be afforded pursuant to 28 U.S.C.
(S) 2201.
91. Venue is proper in this district pursuant to Section 27 of the
Securities Exchange Act, 15 U.S.C. (S)78aa and pursuant to 28 U.S.C. (S) 1391
because the Counterclaim-Defendant and the Additional Defendants on the
Counterclaim reside or transact business in this District and the claims
asserted herein arose in the District.
24
<PAGE>
BACKGROUND
----------
CECI's Efforts To Acquire
Magma In A Negotiated Transaction
- ---------------------------------
92. Although Magma has characterized, and undoubtedly will try to continue
to characterize, CECI's acquisition proposal as hostile and unsolicited, CECI
has made numerous attempts to negotiate an entirely friendly transaction with
Magma since as early as May, 1991, and has stated that it remains fully prepared
to do so. Magma, for the improper management entrenchment purposes described
herein, has rebuffed these attempts. During the summer of 1994, CECI's chairman,
David Sokol, proposed a meeting between management of the two companies to
discuss a possible combination of CECI and Magma. A meeting date was set in
August, but, shortly before the meeting was to occur, Magma cancelled the
meeting, suggesting it would be scheduled for late September 1994. On September
15, 1994, however, in response to an inquiry from CECI's chairman to one of
Magma's directors, defendants Pankratz and Boeker informed Mr. Sokol that they
were unwilling to hold the meeting with CECI until after the closing of the
financing for Magma's Malitbog project in the Philippines in mid-November. In
response, Mr. Sokol informed Pankratz and Boeker that CECI was considering a
number of strategic alternatives, including a possible combination with Magma,
and that there was no need to delay the meeting since CECI was prepared to
negotiate in good faith on a basis that would value Magma as if the Malitbog
financing had closed. Boeker and Pankratz, however, reiterated their
unwillingness to meet until after the Malitbog closing occurred.
25
<PAGE>
93. Denied an opportunity to meet with Magma, on September 19, 1994 David
Sokol sent a letter to Boeker and Pankratz setting forth the terms of a proposed
acquisition by CECI of the outstanding shares of Magma's common stock for $35
per share in cash and CECI stock (the "September 19th proposal"). The letter
stated inter alia:
----- ----
As you know, California Energy believes strongly that the strategic
benefits which result from merging our companies would enhance value for
the shareholders of both companies, while improving our shared competitive
position in an increasingly challenging business environment.
* * *
Consequently, pursuant to the authority of its Board of Directors,
California Energy hereby proposes to acquire all outstanding shares of
Magma's common stock for $35 per share, comprised of $25.00 in cash and
$10.00 in market value of California Energy's common stock . . .
* * *
We hope that our proposed transaction can be consummated amicably and
expect to hear from you promptly. I am available to meet with you and
Magma's Board to discuss this proposal, and to answer any questions you may
have. As you know, California Energy has substantial cash on hand and our
financial advisor has confirmed to us that we can conclude any additional
financing required to effect the combination of our two companies on a
timely basis.
As I have stressed in our past discussion, we would prefer that the
combination of Magma and California Energy be effected on a friendly,
consensual basis in which the interest of our respective shareholders,
employees, customers and business partners are fairly served. We are, of
course, prepared to negotiate in good faith all aspects of our proposal and
to work out the terms of a mutually satisfactory merger
26
<PAGE>
agreement, containing terms and conditions typical for a transaction of
this type.
. . . [W]e believe that Magma's Board of Directors has a fiduciary
responsibility to provide its shareholders with the opportunity to take
advantage of this proposal. While we hope that it will not become necessary
for us to approach your shareholders directly, in the event that you do not
respond to this proposal promptly, we reserve the right to approach your
shareholders directly with an exchange offer and/or a consent solicitation
to call a special meeting of shareholders for purposes of acting on this
proposal and electing directors.
94. Although Magma's responsive letter dated September 20th, stated that
the Magma Board of Directors would "consider your proposal in due course and
inform you of its decision after completion of its evaluation," in fact, in
breach of its fiduciary duties, the Board was instead preparing a flurry of
"golden parachute" agreement and obstructionist maneuvers aimed at protecting
entrenched management and Dow and preventing Magma shareholders from having any
opportunity to freely consider the merits of CECI's proposal.
95. On September 28, 1994, Magma responded to CECI's request to have a
face-to-face meeting with Magma to discuss the September 19th proposal, by
offering a meeting with Magma's financial advisors, Goldman Sachs & Co. But, as
a condition to permitting even this meeting, Magma required that CECI refrain
from commencing a tender offer or issuing any press releases until after Magma's
board met on October 2 and 3, 1994, purportedly for the purpose of permitting
the Board to consider the September 19th proposal. CECI accepted this condition
on the understanding that Magma's Board would fully and fairly consider
27
<PAGE>
its proposal and CECI provided a draft merger agreement for review by the Board
during its deliberations. On October 3rd, it became clear that, rather than
giving fair consideration to CECI's September 19th proposal, in violation of
their fiduciary duties, Magma directors had utilized the standstill period to
begin to adopt "golden parachute" agreements serving their own economic
interests and to erect a series of illegal impediments to the proposal.
The Magma Directors' Illegal Defensive Measures
- -----------------------------------------------
96. After Magma's Board of Directors met on October 2 and October 3, 1994,
Goldman, Sachs informed CECI's financial advisors that the Board had authorized
Magma to enter into a purported "stockholder rights agreement,' known as a
"poison pill" (the "Poison Pill"). This report of the Magma directors' wrongful
defensive maneuvers was, however, misleadingly incomplete since CECI
subsequently learned through press reports that Magma's Board of Directors had
also acted unilaterally to amend its Bylaws to strip shareholders of certain of
their rights to take actions by written consent. Magma also immediately
commenced this lawsuit against CECI.
97. Although Magma's Bylaws had previously allowed a majority of Magma's
stockholders to take any corporate action which they favored by written consent,
during its October 2 and 3, 1994 board meeting, the Magma directors suddenly,
and without any discussion with Magma shareholders, withdrew this basic vehicle
for shareholder democracy in the face of CECI's previously stated intention to
commence a consent solicitation in support of its proposal to acquire Magma if
Magma proved
28
<PAGE>
unwilling to negotiate a friendly transaction. The Bylaws amendment was clearly
not only an illegal defensive response to CECI's proposal, it also directly
denied all Magma shareholders the opportunity to take action by written consent
to promptly resolve matters of concern to them. Instead, Magma's directors
changed Magma's Bylaws to merely allow a majority of its stockholders to call
special meetings of the shareholders at which proposals presented there could be
considered and voted upon, a much more cumbersome and less effective means for
the majority of Magma stockholders to act in their own best interests. Finally,
by adopting the Bylaws change at the very time that the Magma directors were
purportedly giving fair consideration to CECI's proposal, the Board sent a clear
message that it intended to play whatever hardball was needed to protect
entrenched management and the interests of Dow.
98. Magma's Poison Pill sent the same message even more forcefully. Magma's
Poison Pill allows its Board of Directors unilaterally to block acquisition
offers or substantial stock accumulations, even if they provide substantial
stock accumulations, even if they provide substantial benefits to the Magma
stockholders, because the financial penalty which an acquiror will incur in the
event the Poison Pill is "triggered" is so severe. The Poison Pill places any
potential acquiror at the mercy of the Magma Board which alone has the power to
redeem the Rights distributed pursuant to the Poison Pill. It is intended to
prevent a majority of the owners of Magma from making their own economic
decision.
99. Under the terms of the Poison Pill, a "Right" is distributed for each
outstanding share of Magma stock held by
29
<PAGE>
shareholders on a record date set according to the terms of the Poison Pill. A
Right entitles a shareholder to purchase one one-thousandth of a newly issued
share of Series A Preferred Stock of Magma at an exercise price of $125 per
share. The Rights are "triggered" if a person or group acquires beneficial
ownership of 10% or more of the Company's outstanding common stock, unless
within ten days thereafter, the Board of Directors redeems the Rights.
100. In the event the rights are "triggered," the holders of Rights, other
-----
than the person who has acquired the holding which triggered the rights, are
- -----------------------------------------------------------------------
entitled to purchase at the Right's then current exercise price, an amount of
newly issued Series A Preferred Stock (or, in certain circumstances, Magma
common stock, cash, property or other Magma securities) equal to twice the then
-----
current exercise price. In addition, if Magma is involved in a merger or other
business combination transaction with another person after which its common
stock does not remain outstanding, or sells 50% or more of its assets or
earning power to another person, each Right will entitle its holder to purchase,
at the Right's then current exercise price, shares of common stock of such other
person having a market value equal to twice the then current exercise price.
-----
101. Not only does Magma's Poison Pill discriminate against CECI or any
other potential acquiror not favored by Magma's board by precluding them from
acquiring 10% or more of Magma's common stock, it also discriminatorily permits
the already existing holders of over 10% of Magma common stock (namely, Dow and
the B.C. McCabe Foundation), to continue to
30
<PAGE>
increase their holdings in Magma shares unrestrained by the onerous provisions
- --------
of the Poison Pill. As with defendants' other actions, the Poison Pill not only
entrenches incumbent management, it also benefits the interests of Dow while it
denies Magma's other shareholders the opportunity to freely consider CECI's
acquisition proposal.
102. The Poison Pill has the effect of precluding successful completion of
any tender offer, such as CECI's, or any other significant share acquisition by
an entity other than Dow or the B.C. McCabe Foundation, absent the approval of
the Magma Board, which, as detailed herein, is heavily populated with Dow
members. As a result, Magma's stockholders are prevented from taking advantage
of any offer the Board chooses to rebuff, irrespective of the value it may
afford the stockholders. The Magma Board's adoption of the Poison Pill was
unreasonable in the face of CECI's proposal to negotiate a fair and equitable
transaction and constitutes a breach of the Magma directors' fiduciary duties.
103. In addition to illegally adopting the Poison Pill and amending its
Bylaws, Magma's directors have taken other steps to entrench themselves in
response to CECI's proposal to acquire the company. Magma's schedule 14D-9,
filed on October 11, 1994, announced that on September 15, 1994, Magma entered
into lucrative ``golden parachute'' severance agreements with 15 of its most
highly compensated members of management (including defendants Pankratz, Boeker
and Hinrichs). Despite the fact that Magma entered into the "golden parachute"
agreements on the same day that Boeker and Pankratz stated their refusal to meet
with
31
<PAGE>
CECI to discuss a possible combination of the companies, Magma has claimed in
press reports that it was merely a "coincidence" that these agreements were
suddenly entered into immediately before CECI delivered its September 19th
proposal to Magma, asserting that it had been considering them since November,
1993.
104. Magma's October 11, 1994 filing on Schedule 14D-9 also reported that
at its September 20, 1994 Board meeting, the day after CECI's September 19th
proposal was received by Magma, the Magma Board authorized the company to enter
into broad indemnity agreements with each of the defendant members of the Magma
Board. The Board members then immediately executed such agreements.
105. Further, the October 11, 1994 filing on Schedule 14D-9 described
Sections 78.411 through 78.444 of the General Corporation Law of Nevada (the
"Nevada Merger Moratorium Statute"). Noting that Magma had not opted out from
the coverage of that statute, the Schedule 14D-9 commented that "[u]nless, the
Board of Directors approves [CECI's Tender Offer] prior to its consummation,
California Energy will be unable to effect a merger with the Company for a
period of three years from the consummation of the Offer . . . . "
CECI'S TENDER OFFER FOR MAGMA'S COMMON STOCK
--------------------------------------------
106. As noted herein, faced with Magma's refusal to negotiate a
transaction, on October 6, 1994, CECI and CEAC commenced the Tender Offer to
purchase 12,400,000 shares of Magma common stock (and associated Poison Pill
Rights) at a price of $35 net per share in cash. The purpose of the Tender Offer
is to acquire majority control of Magma as the first step in an
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acquisition of the entire equity interest in the company. CECI and CEAC's Offer
to Purchase, then scheduled to expire at 12:00 midnight, New York City Time, on
November 3, 1994, reiterated its desire to negotiate a definitive acquisition
agreement with Magma.
107. The Tender Offer is conditioned, among other things, on Magma entering
into a definitive merger agreement with CECI providing inter alia that (a) the
----- ----
Nevada Merger Moratorium Statue does not apply to the Tender Offer or the
proposed second step merger, and (b) the Rights issued pursuant to the Poison
Pill do not apply to the Tender Offer or the proposed second step merger.
Although the Offer to Purchase reflects that CECI may determine, in its sole
discretion, to waive the merger agreement condition, the Offer to Purchase
states that CECI does not currently intend to waive such condition unless it
determines, in its sole judgment, inter alia, that (a) the Nevada Merger
----- ----
moratorium Statute is invalid or otherwise inapplicable to the Tender Offer and
proposed merger.
108. The Tender Offer constitutes a major transaction in interstate
commerce. The Tender Offer is being advertised nationally by the use of the
national financial press and by interstate mail and telephone services. The
Tender Offer is being distributed to Magma shareholders throughout the country
by use of the mails and other instrumentalities and facilities of interstate
commerce.
33
<PAGE>
109. The Tender Offer is governed by and has been commenced pursuant to the
detailed and substantive disclosure requirements of federal law, including the
Exchange Act and the Williams Act, amendments thereto, and the detailed rules
promulgated by the Securities and Exchange Commission thereunder.
THE FEDERAL STATUTE
-------------------
110. In 1968, Congress amended the Exchange Act by adding new subsections
15 U.S.C. (S)(S) 78m(d), (e) and 78n(d)-(f). These amendments, referred to as
the Williams Act, were designed to regulate interstate tender offers for
securities of corporations regulated by the SEC. CECI and CEAC's Tender Offer is
within the purview of the Williams Act and the rules promulgated by the SEC
thereunder.
111. In adopting the Williams Act, Congress recognized that tender offers
perform beneficial economic functions by, among other things, providing
investors with an opportunity to sell their shares at a premium over prevailing
market prices, and by providing a check on inefficient management. The
language and legislative history of the Williams Act demonstrate the intent of
Congress that the success or failure of a tender offer should be left to the
informed investment judgment of the individual shareholders of the offeree
corporation, free of undue influence from either the offeror or offeree's
management.
112. Accordingly, the Williams Act affords neither the offeror, nor
incumbent management of the corporation whose securities are being sought, an
unfair advantage. It is designed not to defeat or discourage tender offers, but
to establish neutral an even-handed regulation by requiring disclosure of
34
<PAGE>
material information to investors who are then free to make their own informed
investment decisions.
THE NEVADA ANTI-TAKEOVER STATUTORY SCHEME
-----------------------------------------
113. The State of Nevada has adopted two main anti-takeover laws, the
Nevada Merger Moratorium Statute and Sections 78.378 through 78.3793 of the
Nevada General Corporation Law governing the acquisition of controlling
interests (the "Control Share Statute"). Magma has taken the position that the
Control Share Statute does not apply to the Tender Offer and proposed merger,
apparently because that statute's jurisdictional requirement that there be 100
stockholders of record who are residents of the State of Nevada and that the
corporation does business in Nevada, is not met.
114. The Nevada Merger Moratorium Statute purports to accord Nevada
corporations such as Magma an additional layer of insulation from the
inconvenience of shareholder democracy. The Nevada Merger Moratorium Statute
purports to regulate mergers, consolidations and other transactions involving
any "resident domestic corporation" defined in the statute to be a Nevada
corporation that has 200 or more stockholders ((S)78.427).
115. The Nevada Merger Moratorium Statute provides that any resident
domestic corporation may not engage in any merger, consolidation or other
transaction with any "interested stockholder" (defined as an owner either
directly or indirectly of 10% or more of the voting power of the stock of the
resident domestic corporation ((S)78.423)) for a period of at least three years
from the date the interested stockholder acquired its shares, unless the
combination or merger is approved by the
35
<PAGE>
resident domestic corporation's board of directors before the date on which the
interested stockholder acquired its shares or the acquisition of shares by the
interested stockholder which first resulted in the stockholder becoming an
interested stockholder was itself approved by the board of directors ((S)
78.438).
116. The Nevada Merger Moratorium Statute provides that it does not apply
if an amendment to the resident corporation's articles of incorporation is
approved by a majority of the stockholders excluding the acquiror. However, the
amendment is not effective until 18 months after being passed ((S) 78.434), and,
as a practical matter, any such effort to amend the articles of incorporation
must be initiated by action of Magma's Board of Directors. Thus, in the context
of a tender offer, this provision is not a viable option, and only pre-approval
of a tender offer before the take-down date by Magma's Board of Directors would
render the statute inapplicable.
117. Section 78.439 further provides that even after three years, an
interested stockholder still may engage in a merger or other combination with a
resident corporation only if (a) the combination is approved by the Board of
Directors before the acquiror became an interested stockholder or the
acquisition of shares by the interested stockholder which first resulted in the
stockholder becoming an interested stockholder was itself approved by the board
of directors, (b) the combination is approved by the vote of the holders of the
majority of the stock excluding the interested stockholder at a meeting called
no
36
<PAGE>
earlier than three years after the acquiror became an interested stockholder or
(c) a "fair price" formula is satisfied.
118. Under the "fair price" formula, non-tendering stockholders are to be
paid the higher of (a) the highest of (1) the price per-share paid by the
interested stockholder for any stock acquired within three years immediately
before the date of announcement of the combination, (2) the price per-share paid
for any stock acquired within three years prior to that period of (3) the price
per-share paid for any stock acquired in the transaction in which the person or
entity became an interested stockholder, or (b) the market value of the stock on
the date of announcement of the combination or on the interested stockholder's
date of acquiring shares. In addition, the stockholders must be paid interest
compounded annually from the date on which the price calculation is made
((S) 78.441). Under this rigid statutory formula, the price which must be paid
by an interested stockholder for shares not previously tendered will almost
always be greater than the price paid to tendering shareholders, and in many
cases will be substantially higher.
119. The Nevada Merger Moratorium Statute is intended to, and does, in
fact, erect a virtually insurmountable barrier to takeovers of Nevada
corporations by depriving the tender offeror of the benefits of gaining control
of such corporations, namely, the ability to effect a merger or other
significant transaction involving the assets of the corporation after the close
of the tender offer. The statute thus endows the management of Nevada
corporations with de facto veto power over any takeover, prohibiting the
-- -----
consummation of a tender offer on a
37
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hostile basis in virtually all circumstances, irrespective of the interests of
the corporation's shareholders. As such, the statute effectively insulates
incumbent management from the scrutiny of the free and efficient market. The
statute therefore frustrates the purposes of Congress embodied in the Williams
Act, and invades and conflicts with the regulations promulgated pursuant
thereto, all in violation of the Supremacy Clause. In addition, the statute
imposes a burden on interstate commerce in violation of the Commerce Clause.
120. The Nevada Merger Moratorium Statute unreasonably burdens the
national market for securities. By obstructing tender offers for Nevada
corporations, the statute interferes with the efficient allocation of corporate
resources and reduces the incentive for incumbent management to perform well.
The statute encourages inefficient management practices to the detriment of
stockholder and general economic welfare. Its three-year moratorium freezes the
movement of assets and prevents many potentially value-enhancing changes in
corporate policies. The statute thus impedes the free flow of corporate assets
in interstate commerce.
121. The Nevada Merger Moratorium Statute does not protect stockholders of
Nevada corporations from coercive takeover proposals. Rather, it insulates
incumbent management of Nevada corporation from changes in control. The
substantial burdens that the Merger Moratorium Statute imposes on interstate
commerce are thus excessive in relation to any legitimate local interest that
statute serves.
38
<PAGE>
MAGMA'S REJECTION
OF THE TENDER OFFER
-------------------
122. On October 10, 1994, Magma announced that its Board of Directors had
determined that CECI's Tender Offer was not in the best interests of Magma's
stockholders. The next day, Magma filed its Schedule 14D-9 detailing its
purported reasons for failing to recommend CECI and CEAC's Tender Offer to its
stockholders. In the Schedule 14D-9, Magma knowingly made numerous false and
misleading statements of material facts and omitted to state material facts
necessary to make other statements in the Schedule 14D-9 not misleading. For
example, the Magma Schedule 14D-9:
(a) falsely states that "California Energy is trying to buy Magma at a
bargain price that does not remotely reflect Magma's intrinsic value and the
long-term strategic promise of which California Energy is well aware," when in
fact CECI's Tender Offer price reflects a substantial premium over the price at
which Magma's stock was trading prior to the announcement of CECI's September
19th proposal, and when, in fact, such statement contradicts public statements
made by the president of Magma in August 1994 that Magma's value was fairly
reflected in its stock price;
(b) falsely states that the Magma Board of Director's recommendation to
reject the Tender Offer is based on the factors listed in Item 4(b) of the
Schedule 14D-9, when in fact, in breach of their fiduciary duties, Magma's
directors oppose CECI's offer in order to preserve their entrenched positions
and the interests of Dow at the expense of Magma's other shareholders;
39
<PAGE>
(c) fails to adequately disclose the special relationships between Dow and
Magma and its directors and the impact of those relationships on the Magma Board
of Directors' determination to reject CECI's Tender Offer;
(d) fails to adequately disclose the differences between Dow's economic
interest and those of other Magma stockholders considering the Tender Offer and
proposed merger. In addition, the Magma Schedule 14D-9 contained numerous false
and misleading characterizations of CECI and other aspects of its proposal to
acquire Magma;
(e) in the October 10, 1994 press release that is an exhibit to the 14D-9,
falsely promises a "bright and profitable future" for Magma and otherwise
wrongfully projects future profitability in violation of federal securities laws
disclosure requirements.
123. On October 13, 1994 Magma filed Amendment No. 1 to its Schedule 14D-9
("Amendment No. 1") containing a slide show presentation given as part of a
series of meetings orchestrated by Magma to oppose the Tender Offer and proposed
merger. The slide show presentation is replete with false and misleading
statements of material facts and omits to state material facts necessary to make
other statements contained therein not misleading, including Magma's purported
projections and predictions as to international expansion, targets for
profitable growth, reduced operating costs and the status and likelihood of
completion of various purported international projects and Magma's comparisons
of its own business and prospects of those of CECI.
40
<PAGE>
124. On October 17, 1994, Magma filed Amendment No. 2 to its Schedule 14D-9
("Amendment No. 2") which contains numerous further false and misleading
statements of material facts and omits to state material facts necessary to make
other statements contained therein not misleading with respect to the Tender
Offer, the Offer to Purchase and the preliminary Request Solicitation Statement.
For example, Amendment No. 2:
(a) falsely asserts that CECI is not honoring its disclosure obligations;
(b) falsely asserts that Magma has brought its instant Complaint to
protect its stockholders, rather than to attempt to deprive those stockholders
of a fair opportunity to consider the Tender Offer; and
(c) falsely asserts that CECI is seeking to call a special stockholders
meeting to ask stockholders to consider and vote upon proposals to increase the
size of Magma's Board by four seats and to elect CECI's nominees to fill those
seats and to amend Magma's ByLaws in certain respects in order to gain some kind
of competitive advantage over Magma, rather than to facilitate CECI and CEAC's
ability to consummate the Tender Offer and the proposed merger as CECI has
disclosed;
(d) falsely asserts, in the advertisement which is included as exhibit to
Amendment No. 2 and which was published as a full page advertisement in the
Wall Street Journal on October 17, 1994, that (i) (as it falsely has repeatedly
- -------------------
stated) CECI's $35 per share offering price "does not remotely reflect" Magma's
value, (ii) that "Magma is a leader in the fast-growing international geothermal
industry" when, in fact, its statements
41
<PAGE>
as to existing and expected prospectus are grossly overstated, and (iii) it will
be able to dramatically cut costs for all its new, larger-scale plants when, in
fact, it has admitted in other statements that its cost-cutting technologies may
not be effective with respect to international projects; and
(e) makes other false and misleading statements disparaging CECI and
purportedly comparing CECI to Magma.
125. In addition, Magma has made numerous other false and misleading public
statements in opposition to the Tender Offer and proposed merger. For example,
in an interview given to the Dow Jones Investor Network on October 18, 1994,
Magma's president, among other things:
(a) falsely asserted that he had been "misquoted" in August 1994 when he
said Magma's value was at that time fairly reflected in its stock price;
(b) falsely asserted that Magma's equity commitments for international
projects totalled some $1 billion when such projects have not been contracted
for and falsely implied by stating that equity commitment level that Magma has a
$4 billion backlog of current international projects when, in fact, Magma has
never closed an international project financing;
- -----
(c) made false and unsustainable projections regarding Magma's future
profitability;
(d) falsely asserted (again) that the timing of Magma's "golden parachute"
severance agreements was just a coincidence; and
(e) falsely implied that Magma has a highly successful business plan to
support its representations to its stockholders
42
<PAGE>
that they will remain better off as stockholders in an independent Magma, when
the substance and details of any such plan have never been disclosed in filings
under the federal securities laws or otherwise.
126. The sole purpose of Magma's allegations is to mislead its
shareholders into thinking incorrectly that the Schedule 14D-1 and Offer to
Purchase and the preliminary Request Solicitation Statement should not be relied
upon, thus masking the entrenchment activities of management.
CECI INCREASES ITS
OFFER FOR MAGMA
---------------
127. On October 21, 1994, CECI announced that it had increased its
acquisition proposal for Magma to $38.50 per share, consisting of $28.50 per
share in cash and $10.00 per share of CECI stock. CECI also announced that in
connection with this enhanced proposal, it had increased the cash price it was
offering for 51% (or 12,500,000 shares) of the common stock of Magma in the
Tender Offer to $38.50 net per share and was extending the expiration date of
the Tender Offer to November 4, 1994.
128. On October 21, 1994, CECI announced that it had received
Hart-Scott-Rodino clearance from the Federal Trade Commission and the United
States Department of Justice with respect to its proposed acquisition of Magma.
MAGMA'S FURTHER STEPS TO ILLEGALLY
DENY ITS SHAREHOLDERS THE OPPORTUNITY
TO CONSIDER CECI'S OFFER
------------------------
129. Even as CECI was announcing its enhanced $38.50 per share proposal to
Magma shareholders, Magma's entrenched
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<PAGE>
management was apparently taking new and more desperate measures to deny
Magma's shareholders the opportunity to consider the merits of CECI's offer.
130. On October 21, 1994, shortly after CECI announced the enhanced price of
its offer to acquire Magma, Magma issued a false and misleading press release
claiming that its local joint venture partner on one of its two proposed
development stage projects in Indonesia, the Karaha project, had terminated its
joint venture with Magma, purportedly because of concerns about CECI and its
acquisition proposal. Contrary to the information set forth in the press
release, Magma's determination to scuttle the Karaha project was based on its
own concerns, not on CECI's acquisition proposal. In fact, Magma unilaterally
offered this termination right which caused Magma to lose its substantial
investment in developing such project without obtaining any commensurate benefit
for Magma's shareholders. This "scorched-earth" action clearly was detrimental
to the corporation and its shareholders and a waste of corporate assets.
Further, Magma failed to disclose the termination of such agreement promptly,
and failed to disclose its acts in inserting such a clause, which caused the
joint venture to be so illusory that Magma should have disclosed any such terms
to the public as part of the description of the Karaha project made in its
filings pursuant to the federal securities laws.
131. In addition to its false and misleading disclosures with respect to the
Karaha project, and the actions which it took with respect to that project to
its shareholders detriment, Magma is also taking additional steps designed to
44
<PAGE>
allow its other international joint venture partners to withdraw from their
commitments if CECI succeeds in acquiring control of Magma. Specifically, Magma
has unilaterally offered its joint venture partners the opportunity to add
"change of control" provisions to their existing arrangements with Magma without
any consideration and without any motive other than to harm Magma so as to make
Magma less attractive to CECI.
132. Magma management's further steps in response to CECI's acquisition
proposal represent scorched-earth tactics designed to defeat CECI's proposal
without regard to the harm to Magma and its stockholders which such actions will
cause, and constitute breaches of the fiduciary duties owed by Magma management
and its Board of Directors to Magma stockholders. Unless Magma is enjoined from
taking these further steps or from orchestrating other similar scorched-earth
tactics, Magma's shareholders and CECI will be irreparably harmed.
133. In view of the summary rejection of CECI's Tender Offer by the Magma
Board of Directors, it is highly unlikely that the Magma Board, absent action by
this Court, will revoke the Poison Pill, redeem the rights issued pursuant
thereto, revoke its Bylaws amendment eliminating action by written consent,
invalidate the "golden parachute" and indemnification agreements, correct its
false disclosures, cease to attempt to undercut CECI's proposal by attempting to
damage its international joint ventures in Indonesia and elsewhere, or take such
actions as necessary to opt-out of the Nevada Merger Moratorium Statute prior to
the time when the Tender Offer is scheduled to close. Accordingly, Magma's
stockholders will never have the opportunity
45
<PAGE>
to make their own decisions concerning Magma's offer. Similarly, if Magma is not
required to correct its false disclosures, Magma shareholders will not learn the
true facts concerning CECI's Tender Offer and CECI will be damaged in its
ability to pursue the offer.
134. Absent judicial intervention, defendants will continue to entrench
themselves in office, continue to protect the interests of Dow at the expense of
Magma's other shareholders, continue to inequitably and illegally deprive the
Magma stockholders of their right to realize a full and fair value for their
shares at a substantial premium over the historical market price, and will
continue inequitably and illegally to deprive CECI of its opportunity to acquire
the stock of Magma.
COUNT I
-------
(Breach of Fiduciary Duty - Unlawful Amendment of Bylaws)
135. Plaintiffs repeat and reallege each of the allegations contained in
paragraphs 1 through 134 hereof as if fully set forth at length.
136. The sole purpose and effect of the Magma Board's elimination of the
Magma stockholders' right to take certain actions by written consent was to
cause a gross interference with stockholder democracy. Indeed, it could have no
other purpose. The Magma Board acted to eliminate the right to vote by consent
at a time when CECI, a stockholder of Magma owning 200,000 shares of stock, had
already announced publicly its intention to solicit consents. The sole purpose
of the amendment was to prevent CECI, a stockholder of Magma owning 200,000
shares of stock, from
46
<PAGE>
soliciting written consents to take various actions to facilitate its September
19th proposal.
137. The Magma Board's elimination of the stockholders' right to take
action by written consent served no legitimate corporate purpose and was for the
purpose on entrenching management, in breach of their fiduciary duties to the
Magma stockholders.
138. Plaintiffs intend to request that the Magma Board of Directors take
actions necessary to restore the right of the Magma stockholders to take action
by written consent. It is anticipated, however, that the Magma Board will not
take such actions which would allow plaintiffs to solicit written consents to
take action to allow the Tender Offer and the proposed merger to proceed. The
Board's refusal to do so is clear evidence of their use of the corporate
machinery for entrenchment purposes, at the expense of the stockholders' voting
rights. Moreover, the Dow board members' conflict renders all such action
invalid under Nevada law.
139. Accordingly, the Bylaws amendment is invalid, and was enacted in
breach of the Magma directors' fiduciary duties.
140. Plaintiffs have no adequate remedy at law.
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<PAGE>
COUNT II
--------
(Breach Of Fiduciary Duty - Adoption Of
Unlawful Poison Pill)
141. Plaintiffs repeat and reallege each and every allegation contained in
paragraphs 1 through 140 hereof as if fully set forth at length.
142. The Magma Board adopted a Poison Pill for the sole purpose of
deterring CECI's takeover by requiring CECI or any other potential acquiror not
welcomed by the Board, unless approved by the Board (dominated by Dow members),
to incur staggering monetary penalties. The Poison Pill serves no valid
corporate purpose, is so extreme as to constitute a waste of corporated assets,
and is an unlawful device the purpose and effect of which is to entrench and
enrich incumbent management.
143. In light of the severity of the penalties imposed by the Poison Pill,
it is clear that the Poison Pill was not adopted, and cannot be defended, as a
reasonable response to a purported threat posed to Magma by plaintiffs' offer.
The Poison Pill has no economic justification, serves no legitimate purpose, and
is invalid. Moreover, the Dow board members' conflict renders all such action
invalid under Nevada law.
144. Accordingly, the Poison Pill is invalid, and was enacted in breach of
the fiduciary duties of the Magma directors.
145. Plaintiffs have no adequate remedy at law.
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<PAGE>
COUNT III
---------
(Breach Of Fiduciary Duty - Failure To Redeem Rights
146. Plaintiffs repeat and reallege each and every allegation contained in
paragraphs 1 through 145 herein as if fully set forth herein at length.
147. Plaintiffs intend to request that the Magma Board of Directors redeem
the Rights so as to enable plaintiffs to complete the Tender Offer. Based upon
their prior entrenchment activities, it can be expected that the Magma Board of
Directors will refuse to redeem the Rights in response to the Tender Offer. The
refusal of the Magma Board to redeem the Rights in response to the Tender Offer
can have no purpose other than to entrench the incumbent directors and
management in violation of their fiduciary duties.
148. If the Rights are not redeemed, plaintiffs will be effectively
thwarted from purchasing the shares of tendering shareholders because of the
dilutions caused by the discriminatory effects of the "flip in" and "flip over"
features of the Poison Pill. Accordingly, unless the rights are redeemed,
Magma's stockholders will not be able to receive the benefit of the Tender
Offer.
149. Accordingly, Plaintiffs request that the Magma Board be enjoined from
enforcing the operation of the Poison Pill or, alternatively, that an injunction
issue to require the Magma Board of Directors to redeem the Rights so as to
enable the Tender Offer and proposed merger to be consummated, free of the
punitive consequences of the Poison Pill.
150. Plaintiffs have no adequate remedy at law.
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<PAGE>
COUNT IV
--------
(Breach Of Fiduciary Duty--Unlawful
"Golden Parachute" And Indemnity Agreements)
151. Plaintiffs repeat and reallege each of the allegations contained in
paragraphs 1 through 150 hereof as if fully set forth at length.
152. The purpose and effect of the Magma Board's authorization of lucrative
"golden parachute" agreements was to continue to entrench themselves or, if they
could not ultimately do so, to unfairly enrich themselves at unfair expense to
Magma's shareholders.
153. The "golden parachute" and broad indemnity agreements serve no
legitimate corporate purpose, and merely entrench management, in breach of their
fiduciary duties to Magma's stockholders.
154. Plaintiffs intend to request that the Magma Board revoke these
agreements, but it is anticipated that it will not do so.
155. Accordingly, plaintiffs request a judgment declaring that the "golden
parachute" agreements and indemnity agreements are invalid, and were enacted in
breach of the Magma directors' fiduciary duties. Moreover, the Dow board
members' conflict renders all such actions invalid under Nevada law.
156. Plaintiffs have no adequate remedy at law.
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<PAGE>
COUNT V
-------
(Breach of Fiduciary Duty -- Attempt to
Harm International Joint Ventures)
157. Plaintiffs repeat and reallege each and every allegation contained in
paragraphs 1 through 156 hereof as if fully set forth herein.
158. The sole purpose and effect of the actions taken by Magma management
and its Board of Directors to harm its international joint ventures, including,
but not limited to, by encouraging or permitting the collapse of the Karaha
project in Indonesia, and by unilaterally offering "change of control"
provisions to its other joint venture partners, is to deter CECI's takeover at
the expense of Magma stockholders. Such actions constitute a waste of corporate
assets and are a further device designed to entrench incumbent management.
159. Unless such activities are enjoined, Magma stockholders may be denied
the opportunity to accept or reject CECI's offer on its merits and Magma's
corporate assets will be severely wasted.
160. Plaintiffs have no adequate remedy at law.
COUNT VI
--------
(Unconstitutionality Of The Merger Moratorium Statute
Under Supremacy Clause)
161. Plaintiffs repeat and reallege each and every allegation contained in
paragraphs 1 through 160 hereof as if fully set forth herein.
162. This claim for relief arises under the Supremacy Clause of the United
States Constitution, U.S. Const. Art VI, cl.2 and Section 14(d) of the Exchange
Act, 15 U.S.C. (S) 78 n(d).
51
<PAGE>
163. The Nevada Merger Moratorium statute empowers the incumbent board of
directors--not the stockholders--of a Nevada corporation effectively to veto a
tender offer by withholding approval of the tender offer and subsequent business
combination, with the effect that the stockholders are deprived of the
fundamental right to decide for themselves whether to accept any particular
tender offer. In so providing, the Nevada Merger Moratorium Statute frustrates
the purposes of the Williams Act by thwarting stockholder autonomy and by
impermissibly and decisively tipping the balance between bidders and targets in
favor of target management.
164. The Nevada-Merger Moratorium Statute is unconstitutional because it
substantially frustrates the basic Congressional purposes and objectives and
impinges on the exclusive province of the regulatory scheme embodied in the
Williams Act. The Nevada Merger Moratorium Statute therefore is preempted by the
Williams Act and violates the Supremacy Clause of the United States
Constitution.
165. Accordingly, the Nevada Merger Moratorium Statute violates the
Supremacy Clause and is unconstitutional.
166. Plaintiffs have no adequate remedy at law.
COUNT VII
---------
(Unconstitutionality Of Merger Moratorium Statute
Under Commerce Clause)
167. Plaintiffs repeat and reallege each and every allegation contained in
paragraphs 1 through 166 hereof as if fully set forth at length.
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<PAGE>
168. This claim for relief arises under the Commerce Clause of the United
States Constitution, U.S. Const., Art. I (S)8, cl.3.
169. Plaintiffs' Tender Offer to Magma stockholders, including any living
in Nevada, necessarily employs interstate facilities in its communication. The
Tender Offer, if accepted, will result in transactions occurring across state
lines.
170. The Nevada Merger Moratorium Statute purportedly imposes substantial,
direct and adverse burdens upon interstate commerce including, but not limited
to, the following:
(a) the statute purportedly hinders and effectively precludes unsolicited
tender offers for Nevada corporations, which invariably involve transactions
occurring in interstate commerce. As such, the statute interferes with the free
interstate securities market that Congress sought to preserve by enacting the
Williams Act;
(b) the statute purportedly inhibits the making of a tender offer to
stockholders of Magma having no connection with Nevada and residing in other
states;
(c) the statute deprives stockholders of Magma residing in Nevada and
elsewhere of the opportunity to sell their stock at a premium;
(d) the statute impedes the infusion into interstate commerce of large
amounts of capital that would occur through purchases and sales of securities of
Nevada corporations and interferes with the efficient allocating of economic
resources; and
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<PAGE>
(e) the statue impedes the free flow of corporate assets in interstate
commerce.
171. The substantial burdens imposed on interstate commerce by the Nevada
Merger Moratorium Statute are excessive in relation to any putative local
interests the statute advances. To the extent the statute is designed to protect
stockholders from abusive or coercive takeover tactics, it goes much further
than is necessary, since it deters all hostile tender offers, whether or not
they are coercive or abusive.
172. At the same time, the Nevada Merger Moratorium Statute provides no
protection at all from abusive or coercive tender offers, leveraged buyouts or
other transactions made by or approved by the target company itself or with
management approval. These exemptions from the statute's coverage reveal that
the statute's true purpose is the protection of incumbent management, no
shareholders.
173. Accordingly, the Nevada Merger Moratorium Statute violates the
Commerce Clause and is unconstitutional.
174. Plaintiffs have no adequate remedy at law.
COUNT VIII
----------
(Breach of Fiduciary Duty - Utilization Of
Merger Moratorium Statute)
175. Plaintiffs repeat and reallege each and every allegation contained in
paragraphs 1 through 174 hereof as if fully set forth at length.
176. Plaintiffs' Tender Offer is fair and at a price representing a
substantial premium over the historical price of the Magma stock, uninflated by
takeover speculation. Although the
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<PAGE>
Tender Offer seeks less than all of the stock of Magma, non-tendering
stockholders will have the right, in connection with the proposed merger, to
receive the consideration in cash and stock of the same value as is received by
tendering stockholders, and to participate in substantial up-side potential.
177. The Board of Directors of Magma and each of them owe a fiduciary duty
of loyalty, due care and good faith to all stockholders of Magma.
178. Plaintiffs intend to request that the Magma Board take certain steps
necessary to render the statute inapplicable. Based upon their prior
entrenchment activities, it is anticipated, however, that the Magma Board will
refuse to take those steps. Their refusal to take steps necessary to render
inapplicable the Nevada Merger Moratorium Statute, permitting the Tender Offer
to go forward, can have no purpose other than to entrench the incumbent
directors and management in violation of their fiduciary duties to the Magma
stockholders. Moreover, the Dow board members' conflict renders all such actions
invalid under Nevada law.
179. The Magma Board should be enjoined to take such steps as are
necessary to cause the Nevada Merger Moratorium Statute to be inapplicable to
the Tender Offer, so as to allow plaintiffs to consummate the Tender Offer and
contemplated merger.
180. Plaintiffs have no adequate remedy at law.
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COUNT IX
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(Violations of Section 14(e) Of The Exchange Act)
181. Plaintiffs repeat and reallege each and every allegation contained in
paragraphs 1 through 180 hereof as if fully set forth herein.
182. As detailed herein, Magma has violated and is continuing to violate
Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. (S)78(e), and
the rules and regulations promulgated thereunder.
183. Plaintiffs have no adequate remedy at law.
IRREPARABLE INJURY
------------------
184. Unless preliminary and permanent injunctive relief is granted,
plaintiffs will be irreparably harmed because they will be denied the
opportunity to have their Tender Offer and the proposed second step merger
considered by Magma's stockholders, and Magma's stockholders will be irreparably
harmed because they will be denied the opportunity to consider and, if they so
choose, to accept Plaintiffs' Tender Offer and the proposed merger.
185. Plaintiffs will be irreparably harmed in at least the following
additional respects:
(a) Plaintiffs will be denied the opportunity to consummate the Tender
Offer and the proposed merger;
(b) Magma's management will hold a decided and unlawful advantage in
opposing the Tender Offer and the proposed merger;
(c) Plaintiffs will be compelled to terminate their efforts to acquire
control of Magma due to the economic and
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financial uncertainties posed by the Nevada Merger Moratorium Statute and the
Poison Pill;
(d) Magma stockholders will be discouraged from tendering their shares to
plaintiffs because of the economic and financial uncertainty created by the
Nevada Merger Moratorium Statute and the Poison Pill;
(e) Plaintiffs will be deprived of the opportunity to acquire control of
Magma, a unique business;
(f) Plaintiffs will suffer a massive dilution of their equity and voting
interest in Magma, pursuant to a discriminatory and unlawful Poison Pill;
(g) Plaintiffs will be subjected to unnecessary and unreasonable delay in
obtaining the approval of the incumbent directors and management of any
business combination, which could prevent them from consummating an acquisition
of Magma; and
(h) Plaintiffs will be deprived of the ability to carry out their
intention to acquire Magma stock.
186. Unless preliminary and permanent injunctive relief is granted, Magma
stockholders, including any residing in the State of Nevada, will be irreparably
harmed by losing their right to sell their shares to plaintiffs at a premium.
WHEREFORE, plaintiffs respectfully request that this Court enter an order:
(a) dismissing Magma's Complaint in its entirety;
(b) declaring that (i) the amendment to the Magma Bylaws enacted by the
Magma Board of Directors, which prevents the Magma stockholders from taking
certain actions by written consent is void and ultra vires, and (ii) that the
----- -----
Magma Board of
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Directors breached their fiduciary duties to Magma and its stockholders by
adopting the amendment;
(c) preliminarily and permanently enjoining the Magma Board of Directors
to rescind the Bylaws amendment, and preliminarily and permanently enjoining
Magma and its directors, and their officers, agents, servants, employees, and
attorneys, and those persons in active concert or participation with them, from
amending Magma's Bylaws in any further respects that are violative of
stockholders' rights;
(d) declaring (i) that the discriminatory Poison Pill stockholder rights
agreement enacted by the Magma Board is void and ultra vires, and (ii) that the
----- -----
Magma Board of Directors breached its fiduciary duties to Magma and its
stockholders by enacting the Poison Pill;
(e) preliminarily and permanently enjoining the operation of the Poison
Pill and enjoining Magma and its directors and their agents, servants,
employees, and attorneys, and those persons in active concert or participation
with them from taking any action in furtherance of the Poison Pill or the Rights
issued thereunder;
(f) declaring the Magma directors to be in breach of their fiduciary duties
if they fail to redeem the Rights issued pursuant to the Poison Pill, and
directing the Magma Board of Directors to redeem the Rights;
(g) preliminary and permanently enjoining Magma and its directors, and
their officers, agents, servants, employees and attorneys, and those persons in
active concert or participation with them, from taking any actions in
furtherance
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of its plans to (i) take actions designed to damage its international
development projects, including the Karaha project, or (ii) take any other
actions designed to waste corporate assets and to block CECI's offer to purchase
Magma and to deny Magma's shareholders an opportunity to fairly consider that
offer on its merits;
(h) enjoining Magma and its directors and their agents, servants,
employees, and attorneys, and those persons in active concert or participation
with them to rescind the illegal "golden parachute" and indemnity agreements;
(i) declaring pursuant to the federal Declaratory Judgments Act, 28 U.S.C.
(S)(S) 2201-2202, that Sections 78.411 through 78.444 of the Nevada General
Corporation Law, on their face and as applied, violate the Supremacy Clause,
Art. VI, cl.2, and the Commerce Clause, Art. I, (S) 8, cl.3 of the United States
Constitution;
(j) preliminarily and permanently enjoining (i) the operation of Sections
78.411 through 78.444 of the Nevada General Corporation Law; (ii) Magma,
defendant members of the Magma Board of Directors and their officers, agents,
servants, employees, and attorneys, and those persons in active concert or
participation with them, from taking any action invoking the terms of Sections
78.411 through 78.444 of the Nevada General Corporation Law; and (iii) the Magma
directors by requiring them not to obstruct the Tender Offer or proposed merger;
(k) preliminarily and permanently enjoining Magma to correct all false
statements, non-disclosures and omissions of material facts concerning the
Tender Offer and proposed merger in
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Magma's Schedule 14D-9 (and the exhibits thereto) and any amendments thereto,
and preliminarily and permanently enjoining Magma and its directors, and their
officers, agents, servants, employees, and attorneys, and those persons in
active concert or participation with them, from directly or indirectly further
violating Section 14(e) of the Exchange Act of 1934, or any of the rules or
regulations promulgated thereunder;
(l) awarding plaintiffs their costs and disbursements in connection with
this action, including reasonable attorneys fees; and
(m) granting plaintiffs such other and further relief as this Court may
deem to be just and proper.
Dated: October 25, 1994
LIONEL SAWYER & COLLINS
By: /s/ Jeffrey D. Menicucci
--------------------------
Richard W. Horton
Jeffrey D. Menicucci
50 W. Liberty Street
Reno, Nevada 89501
(702) 788-8666
Attorneys for Defendant and
Counterclaim Plaintiff
and Additional Plaintiff
on Counterclaims
Stephen W. Greiner
Jeanne M. Luboja
WILLKIE FARR & GALLAGHER
One Citicorp Center
153 East 53rd Street
New York, New York 10022
(212) 821-8000
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