UNITED STATES OF AMERICA
|In the Matter of
|ORDER INSTITUTING PUBLIC PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND- DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against E.ON AG ("E.ON"), formerly known as Veba AG ("Veba").
In anticipation of the institution of these proceedings, E.ON has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, E.ON, without admitting or denying the findings set forth herein, except as to the Commission's jurisdiction over it and over the subject matter of these proceedings, which is admitted, consents to the entry of this Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing A Cease-and-Desist Order.
On the basis of this Order and E.ON's Offer of Settlement, the Commission makes the following findings:
Veba, one of Germany's five largest industrial holding companies with securities registered with the Commission under the Exchange Act, engaged in a month-long, deliberate pattern of issuing materially false denials concerning merger negotiations with Viag AG ("Viag"), another large German company.1 Beginning July 29, 1999 and continuing until August 31, 1999, Veba made a series of statements in which it falsely denied press reports that it was engaged in merger negotiations with Viag. In fact, as of July 29, the two companies had, among other things, executed a confidentiality agreement, retained investment bankers and legal advisors, exchanged financial forecasts, and engaged in high-level talks concerning proposed deal structures, valuation methods, corporate governance and other merger issues.
Veba's repeated denials were widely disseminated in Germany and were also reported in the United States. Certain denials, drafted by Veba in both German and English, were made with the expectation that the denials would be published by the U.S. press and read by U.S. investors. Veba's denials were made pursuant to a policy of "absolute denial." This policy was implemented in June 1999 at the direction of Veba's CEO and the Chairman of its Board of Management ("Chairman"). The policy was maintained until August 31, 1999. On September 1, 1999, Veba publicly acknowledged for the first time that it had been engaged in merger negotiations and had agreed with Viag on the framework of a merger.
E.ON AG, formerly Veba, is a German corporation that was formed as a result of the merger between Veba and Viag. The combined entity is Germany's third largest industrial holding company encompassing industries such as energy, chemicals, real estate management and telecommunications. In 1997, prior to its merger with Viag, Veba registered with the Commission pursuant to Section 12(b) of the Exchange Act and began to list its ADRs on the NYSE. The total number of ADRs outstanding in 1999 fluctuated between 1.3 and 1.6 million. Worldwide, Veba had approximately 500 million
shares outstanding. According to Veba's 1999 Annual Report on Form 20-F, U.S. investors owned approximately 11 percent, or $3.3 billion, of Veba's outstanding share capital. Veba's shares were listed on all eight German stock exchanges, as well as those in Amsterdam, Vienna and Switzerland.2 E.ON's executive offices are located in Dusseldorf, Germany.
Veba's market capitalization in July 1999 approximated $30 billion. Total revenues in 1999 exceeded $50 billion. Veba had a significant presence in the U.S. In 1999, companies under Veba's control had 12,300 U.S.-based employees, and Veba derived approximately $4 billion, or eight percent of its 1999 revenues, from its U.S. operations. Veba also owned a controlling interest in MEMC Electronic Materials, a NYSE-listed company.
C. The Status of Merger Negotiations as of July 29, 1999
In April 1999, Veba's Chairman, and Viag's CEO and Chairman, met to discuss a possible merger of the two companies. Substantive, high-level merger discussions followed this April meeting and intensified in June 1999. Veba's Chairman, along with Veba's Chief Financial Officer ("CFO") and its Chief Legal Officer ("CLO"), were directly involved in and responsible for these merger discussions on behalf of Veba.
By July 29, Veba and Viag had retained investment bankers and legal counsel to advise on the merger negotiations, exchanged financial forecasts, executed a confidentiality agreement, advised the German Cartel Office of the potential merger and engaged in high-level discussions concerning proposed deal structures, valuation methods, corporate governance and related merger issues.
D. Veba's Corporate Communication Policies
One month earlier, on June 28, 1999, Veba and Viag reached a mutual understanding concerning potential inquiries from the press. Veba and Viag agreed that until further notice they would deny absolutely the existence of any merger negotiations. Veba's Chairman implemented this policy of "absolute denial" within Veba. The policy was implemented because Veba was concerned that disclosure might decrease its ability to obtain the support of labor, government officials and German state governments, particularly the support of the Free State of Bavaria which had the ability to veto the merger (the merger required 75 percent shareholder approval and Bavaria owned 25.1 percent of Viag's stock).
Veba's Chairman, Veba's Director of Corporate Communications ("Director of Communications"), and Veba's Spokesperson ("Spokesperson"), were the only persons authorized to speak or issue statements to the press on behalf of Veba. Generally, the
Spokesperson reported to the Director of Communications who reported directly to Veba's Chairman. All of Veba's communications with the press concerning Viag were pre-approved by or coordinated with Veba's Chairman, CFO or CLO.
Veba monitored the press closely, including selected U.S. publications such as the Wall Street Journal and Newsweek. Twice a day, clippings of news articles discussing Veba were distributed to the Chairman and others within Veba. In implementing its policy of denying merger negotiations, Veba knew and expected that the company would be covered by U.S. publications such as the Wall Street Journal. On several occasions noted below, Veba prepared denials in English in anticipation of inquiries from the English-speaking press.
E. Veba Falsely Denies that it is in Merger Negotiations
1. Veba's First Denial
The first press inquiry regarding merger negotiations between Veba and Viag occurred on Thursday, July 29, 1999. On that day, a reporter for the German newspaper Handelsblatt advised Veba's Spokesperson that he had information that Veba and Viag had delivered a so-called "Voranfrage" or preliminary request to the German Cartel Office seeking the preliminary approval of a merger. Veba was asked to comment. After consulting with the CLO, the Spokesperson accurately told the reporter that a preliminary request had not been delivered to the Cartel Office. When asked how he explained this information, the Spokesperson responded "I've got the impression that it's one of many speculations in the air at this time."
Undeterred, the Handelsblatt reported on July 30 that Veba and Viag were planning a merger and that they had sought preliminary approval of the merger from the German Cartel Office. The Handelsblatt article also contained the Spokeperson's comment that the information was "one of many speculations." That day, Veba's press department distributed the Handelsblatt article to the Chairman, the CFO and the CLO as part of Veba's daily press clippings.
On that same morning, the Director of Communications was called into a meeting with the Chairman, the CFO and the CLO. Veba's senior management was very upset about this article, and ordered the Director of Communications to deny the existence of any negotiations. She was also instructed to contact her counterpart at Viag to "get a common understanding" on a statement. Despite inquiries from the Director of Communications, senior management refused to provide any further details about the merger negotiations.
A statement of denial consistent with these specific instructions was prepared in English as well as German. The English version of the statement, which was drafted by Veba for the express purpose of responding to inquiries from the English-speaking press, read as follows: "VEBA denies merger talks with VIAG. In the new competitive situation brought on by the liberalization of Europe's power markets, all market participants are in contact with one another. Veba is not in merger talks or negotiations with VIAG or any other market player."
Veba issued the English and German versions of this statement to the press, including wire and news services. Veba's statement was carried by a number of publications, and was quoted in a Wall Street Journal story dated August 2, 1999. These articles were disseminated within Veba as part of the daily press clippings and Veba's senior management, including its Chairman, were aware that Veba's initial denial was being reported in the press.
2. Veba's Subsequent False Denials
a. The August 16 Handelsblatt Article
On Monday, August 16, Veba's Chairman and its CFO met with their counterparts at Viag to discuss the terms and conditions of the proposed merger. On the same day Handelsblatt published an article quoting the chief of the German Cartel Office as stating that under certain circumstances his office would look favorably on mergers in the electrical energy markets, and confirming that Veba and Viag had conducted preliminary discussions with his office concerning a possible merger.
In response to the August 16 Handelsblatt article, the Director of Communications again met with the Chairman, the CFO and the CLO. During the meeting, she was instructed to draft a press statement to respond to inquiries concerning the Handelsblatt article
. That statement, translated into English, stated that: "[w]ithin the framework of the liberalization of the electrical energy markets we, as the entire German energy branch, need to talk regularly with the Cartel Office. We know nothing of preliminary discussions about a merger between Veba and Viag."
This statement was reviewed and approved by the CLO. It was also provided to the Chairman and the CFO and then widely disseminated outside the company. The German Press Agency ("DPA") picked up the denial and ran a story. Reuters also picked up the denial and ran a story in English. Copies of the Reuters article were distributed within Veba. No one within Veba raised any objections to the denial.
b. The Manager Magazine Article
On August 19, the Chairman met with the chairman of Veba's Supervisory Board, and advised him of the negotiations with Viag. That same day, Veba received an advance copy of the September issue of Manager Magazine. The Manager Magazine
article reported that Veba and Viag were quietly negotiating a merger and that a management team had been discussed for the new company. Later that day, senior management instructed the Director of Communications to prepare a statement consistent with the company's policy of absolute denial for use in responding to any press inquiries resulting from the article. That statement, drafted in both English and German and approved by the CLO, stated that: "[w]e stand by our recent statement: VEBA stays in contact with a number of market players. There are no concrete merger negotiations with Viag. We do not comment on details of the Manager Magazine article."
Reuters carried Veba's August 19 statement that same day. DPA also released the statement over its wire service. The August 19 statement was quoted by the Wall Street Journal in two articles published on August 20, 1999.
c. The Wirtschaftswoche Article
On August 23, an article was posted on the website of Wirtschaftswoche, a weekly business newspaper. The article claimed that the Bavarian government had confirmed the existence of discussions with Veba and Viag, and that Bavaria would sell its interest in Viag to Veba. The author contacted Veba's Spokesperson and asked for a personal statement from the Chairman concerning the "real" status of discussions between Veba and Viag.
After consulting with the Chairman, the Spokesperson drafted a statement for his review. The Chairman made certain revisions to the statement and authorized its release. The revised statement read as follows: "We are not carrying on negotiations about a merger with Viag or acquiring a stake in Viag. In the context of the coming consolidation in the German and European energy industry, we are naturally talking with many companies in order, among other things, to explore the possibilities for future cooperative agreements."
Negotiations between Veba and Viag continued throughout this period. For example, later that same day, the Chairman advised Veba's Board of Management about the status of negotiations and the contemplated structure and timing of the transaction. Then, on August 26 and 27, the Chairman, the CFO and the CLO, together with their counsel, met with senior Viag officers to discuss terms of the proposed memorandum of understanding. The parties agreed upon a basic framework for a merger during these meetings.
d. The Focus Magazine Article
On Saturday, August 28, the weekly magazine Focus publicly announced its intention to publish an article on Monday, August 30, stating that Veba and Viag were close to a merger and that the Board of Management of the new company would have five members. A Reuters reporter then asked for a statement. Veba's Spokesperson consulted the Chairman and asked whether Veba should continue its denials or whether Veba should issue a comment. The Spokesperson was advised not to comment on "speculations like this" and to continue to deny the existence of merger discussions or negotiations. The Spokesperson then called the Reuters reporter and provided the following statement: "[t]here continue to be no merger negotiations with Viag. We do not comment on individual speculations." On August 28, the Reuters reporter disseminated an article with this inaccurate statement.
On August 29, the Spokesperson was contacted by DPA for a statement. DPA was provided a similar statement denying negotiations with Viag. DPA then used the statement in an article discussing the Focus magazine article. Reuters picked up the DPA article and issued another story carrying the same statement.
F. Veba Begins to Say "No Comment" in Response to Press Inquiries
On Monday, August 30, Veba's CLO and a Viag representative met with the Cartel Office in Berlin. That same day, the Chairman met with the Director of Communications. After discussing the matter and Veba's policy of denial, the Chairman advised the Director of Communications that she could respond to future press inquires about merger negotiations by stating that Veba had "no comment." This change was made because the Chairman believed that the likelihood of the merger being completed was much greater and because the press was asking questions about specific aspects of the merger. There was no discussion concerning whether Veba's past statements should be corrected. On August 31, Veba made its first statements to the press using "no comment
G. Veba and Viag Publicly Confirm Merger Discussions
On September 1, the Chairmen of Veba and Viag met with the Premier and other officials of the Free State of Bavaria to discuss the proposed transaction and a possible sale of some or all of Bavaria's stake in Viag. The two Chairmen were confronted by reporters as they emerged from the meeting, at which time they acknowledged for the first time that they had agreed on the basic outline of a merger.
On September 2, the Wall Street Journal published an article referencing the comments of the two Chairmen made on September 1. This article, which was distributed within Veba, stated in part: "After weeks of speculation and investor confusion because of the companies' repeated denials, trading in Veba and Viag shares soared Wednesday." There were no discussions within Veba at any time concerning whether to correct its past statements.
On September 26, Veba's Supervisory Board approved the Memorandum of Understanding between Veba and Viag. On September 27, Veba and Viag signed the Memorandum of Understanding and held a joint press conference to announce the merger.
H. Veba's Denials Caused Investor Confusion
Throughout the month of August 1999, Veba received between 10 and 30 press inquiries per day concerning the rumored merger. Veba consistently responded to each of these inquiries by denying the existence of any merger discussions. In addition, Veba responded proactively by drafting and providing statements to the press denying any negotiations. Veba's senior management was directly involved in drafting and approving public statements that they knew were false.
Veba's policy of denial caused a period of investor confusion that continued through September 1. Over the month of denials, the price of Veba's ADRs fluctuated between 59 ½ and 66 ¼.
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit an issuer from making public statements that are false or that fail to include material facts necessary to make the statements made, in light of the circumstances under which they are made, not misleading. See, e.g., SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-2 (2nd Cir. 1968) (en banc), cert. denied sub nom., Coates v. SEC, 394 U.S. 976 (1969); Schlanger v. Four-Phase Systems, Inc., 582 F.Supp. 128 (S.D.N.Y. 1984). Where a corporation denies the existence of merger negotiations, or makes a partial disclosure of information, it is under a duty to disclose material facts necessary to make the statements not misleading. See, e.g., Basic v. Levinson, 485 U.S. 224, 239 n.17 (1988); Taylor v. First Union Corp., 857 F.2d 240, 243 (4th Cir. 1988); Schlanger v. Four-Phase Systems, Inc. 582 F.Supp. at 133. See also In the Matter of Carnation Company, Exchange Act
Release No. 22214 at 1031-32 (July 8, 1985). In addition, an issuer has a duty to correct statements made by its corporate representatives which it learns were misleading or inaccurate when made. See, e.g., Backman v. Polaroid Corp., 910 F.2d 10, 16-17 (1st Cir. 1990); Ross v. A.H. Robbins Co., 465 F.Supp. 904, 908 (S.D.N.Y.), rev'd on other grounds, 607 F.2d 545 (2nd Cir. 1979), cert. denied, 446 U.S. 946 (1980); SEC v. Mesa Ltd. Partnership, Lit. Release No. 12637 (Sept. 27, 1990).
Veba violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by deliberately issuing a series of materially false and misleading statements over a month-long period in which it denied the existence of any merger discussions or negotiations with Viag. These statements, which were drafted and provided to the press at the direction of Veba's senior management, were made at a time when the negotiations had advanced to a point where they were material. In fact, as of July 29, 1999, investment bankers and legal counsel had been retained to advise on the merger, negotiations had occurred at the highest corporate levels, financial forecasts had been exchanged, a confidentiality agreement had been signed and the German Cartel Office had been advised of the discussions relating to a potential merger between Veba and Viag. Moreover, Veba drafted certain statements in English in anticipation that such statements would be carried by the English-speaking press. Indeed, during this period, Veba had direct contact with publications such as the Wall Street Journal, which published Veba's denials in the United States. These articles were then disseminated to Veba's senior management, which failed to correct the false and misleading statements.
The Commission recognizes that disclosure practices and laws regarding the existence of merger negotiations may differ in other jurisdictions. Where jurisdictional requirements are met, however, there is no safe harbor for foreign issuers from violations of the antifraud provisions of the U.S. federal securities laws. The Commission will not apply a different standard with respect to foreign issuers commenting on merger discussions or negotiations. When a foreign issuer voluntarily avails itself of the opportunities in the U.S. capital markets, it must adhere to the U.S. federal securities laws.
The Commission has long emphasized "[t]he importance of accurate and complete issuer disclosure to the integrity of the securities markets . . . . To the extent that investors cannot rely upon the accuracy and completeness of issuer statements, they will be less likely to invest, thereby reducing the liquidity of the securities markets to the detriment of investors and issuers alike." In the Matter of Carnation Company, Exchange Act Release No. 22214 at 1030. This fundamental principle applies to statements made by foreign issuers just as fully as it applies to statements made by domestic issuers. Compliance with this principle will serve to ensure transparency, foster investor protection and confidence, and thus, enhance the liquidity of the U.S. capital markets.
Based on the foregoing, the Commission finds that E.ON AG (formerly Veba AG) committed violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Based on the foregoing, the Commission deems it appropriate to accept the Offer of Settlement submitted by E.ON AG (formerly Veba AG) and accordingly,
IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act that E.ON AG (formerly Veba AG) cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
By the Commission.
Jonathan G. Katz
1 On June 16, 2000, Veba's merger with Viag was consummated. The combined entity was renamed E.ON AG. Effective June 19, 2000, Veba's American Depositary Receipts ("ADRs") continued trading on the New York Stock Exchange under the name E.ON AG. When referring to conduct in 1999, the Commission's Order will refer to the Respondent as Veba.
2 Veba's shares ceased to be listed on the Amsterdam and Vienna stock exchanges in October 1999.
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