Foreign Issuers Beware! Your Statements Overseas May Violate U.S. Securities Laws

October 30, 2000 Advisory


The Securities and Exchange Commission ("SEC") brought and settled administrative civil fraud charges against E.ON AG, formerly Veba AG, for making materially false and misleading statements in which it denied the existence of ongoing merger negotiations with Viag AG. SEC Release No. 43372 (September 28, 2000). The SEC found that foreign issuers must comply with the anti-fraud provisions of U.S. federal securities law when they take advantage of opportunities in U.S. capital markets. Once jurisdictional requirements are met, foreign issuers are subject to the antifraud provisions of U.S. securities laws to the same extent as U.S. issuers.

The Facts

Over the period from July 29, 1999 through August 31, 1999, Veba made several materially false statements by denying press reports that it was engaged in merger negotiations with Viag. In fact, during such period senior management of the two companies were deep into merger negotiations, the companies had already executed a confidentiality agreement and each company had already retained investment bankers and legal advisors, exchanged financial forecasts and discussed key issues such as deal structures, valuation methods, corporate governance and related merger issues. Veba had adopted a policy of "absolute denial" implemented by its Chairman because of its concern that premature disclosure would diminish its chances of getting key support for the merger. Veba's senior management made no effort to amend the false statements, which management knew were being reported in the English-speaking press. The SEC found that Veba's repeated denials about the merger created investor confusion.

Veba and Viag merged on June 16, 2000 and the successor entity was renamed E.ON AG. E.ON AG is Germany's third-largest industrial holding company. Prior to the merger, Veba listed American Depositary Receipts on the New York Stock Exchange. During the period when Veba was making the materially false denials U.S. investors owned 11% or $3.3 billion of Veba's outstanding share capital, companies controlled by Veba employed 12,300 U.S.-based employees and Veba received 8% or $4 billion of its revenue from U.S. operations.

The Law

The SEC found that Veba violated Section 10(b) of the U.S. Securities Exchange Act and Rule 10b-5 thereunder. These anti-fraud provisions of the Exchange Act 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. Veba violated these provisions of the Exchange Act by deliberately issuing a series of materially false and misleading statements over a month-long period in which it denied the existence of ongoing merger discussions with Viag.

Although the SEC recognized that disclosure laws and practices differ in other jurisdictions, it was not willing to apply a different standard to foreign issuers. Once jurisdictional requirements are met, foreign issuers are subject to the antifraud provisions of U.S. securities laws to the same extent as U.S. issuers.

The SEC noted that "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." Veba's ADR's were listed on the NYSE and it had Exchange Act reporting obligations, so it clearly availed itself of the U.S. capital markets. The anti-fraud provisions of the U.S. securities laws, however, apply to all transactions in the U.S. capital markets, including exempt transactions by private U.S. or foreign based companies involving U.S. investors. Therefore, the SEC's findings in this matter would similarly apply to foreign issuers who are availing themselves of the private U.S. capital markets through 144A offerings and other private placements.

Practical Advice

Foreign issuers must be mindful of the anti-fraud provisions of the U.S. Securities laws if they issue securities in the U.S. markets. Even if a foreign issuer is not listed on a U.S. national securities exchange or NASDAQ or is not subject to the reporting obligations of the Exchange Act, these anti-fraud provisions are applicable to the issuer if the issuer is engaged in a securities transactions in the U.S. markets such as a 144A offerings or other private placements of securities.

A global communications policy should be implemented by foreign issuers to ensure compliance with the anti-fraud provisions of U.S. Securities laws. The geographic location of a company's spokesperson is irrelevant since the internet, newswire services, television and other communication mediums have eliminated all boundaries.

Companies should also consider adopting a "no comment" policy. Under this policy, spokespeople are instructed to respond "no comment" to inquiries from reporters or others about a contemplated transaction. The key to the "no comment" policy, however, is consistent maintenance of the policy. If an issuer ultimately does decide to make a statement, it must make certain that the statement is accurate, complete and not misleading.

If you have any questions or comments regarding this Client Advisory, or if you would like to speak with us about our corporate or securities law practice, please do not hesitate to contact Terry Jones (203.498.4324/[email protected]), Norm Fleming (203.498.4328/[email protected]), Mike Grundei (203.363.7630/[email protected]) or Lou Bevilacqua (203.363.7627/[email protected]). Please visit us on the web at