The opinion of the court was delivered by: Denise Cote, District Judge
A tender offer battle is ongoing in Spain, but not without active litigation in the Southern District of New York. German plaintiffs have brought suit against Spanish defendants, accusing them of violating United States securities laws when they acquired over 13% of a Spanish issuer's stock by purchasing it from investors in this country and abroad. The plaintiffs seek to have the defendants' buying program --- which ran for less than two hours --- declared an unconventional tender offer, even though it would not be classified as a tender offer in Spain. The plaintiffs hope to obtain court-ordered rescission of the sales and thereby neutralize the defendants in the tender offer battle for the issuer's stock that plaintiffs are waging in Spain.
The defendants have moved to dismiss the plaintiffs' claim, which is pleaded under Section 14(d), 15 U.S.C. § 78n(d) ("Section 14(d)") and Section 14(e), 15 U.S.C. § 78n(e) ("Section 14(e)") of the Securities Exchange Act of 1934 ("Exchange Act"). Most notably, the motion raises the issue of the extent to which the unconventional tender offer doctrine has survived the significant revisions made to the tender offer regulations in 2000, particularly in the context of a cross-border transaction in which an investor takes a stake in a foreign private issuer. As this Opinion explains, the plaintiffs have succeeded in showing that there is subject matter jurisdiction over this dispute, and have stated a claim under Section 14. The review of the merits of plaintiffs' claims and their request for rescission --- which defendants urge this Court to undertake now --- must await future proceedings.
The European companies are engaged in a battle for control of Spain's largest electrical utility, Endesa, S.A. ("Endesa"), a company whose shares are traded in the United States as American Depository Shares ("ADSs"). See E.ON AG, v. Acciona, S.A., No. 06 Civ. 8720 (DLC), 2006 WL 3357261, at *1 n.2 (S.D.N.Y. Nov. 20, 2006) ("November 20 Opinion") (describing ADS system). Plaintiffs E.ON AG, E.ON Zwölfte Verwaltungs GmbH and BKB AG (collectively "E.ON") are German power and gas companies that have announced their intention to make a tender offer for Endesa. Defendants Acciona, S.A. and Finanzas, S.A. (collectively "Acciona") are Spanish and international corporations engaged in the development and management of infrastructures, services, and renewable energies. They acquired over 10% of the equity of Endesa through a "block trade" on the Madrid stock exchange.
E.ON contends that Acciona was required to file a Schedule TO-T at the time of the stock acquisition because it constituted a tender offer. Among other things, E.ON requests a preliminary injunction enjoining Acciona from purchasing or making any arrangements to purchase any more Endesa securities, requiring Acciona to vote its Endesa shares in the upcoming tender offer battle in proportion to the votes cast by the remaining Endesa shareholders; and requiring Acciona to offer withdrawal rights, through an offer of rescission open for twenty days, to all shareholders who sold shares to Acciona in response to the alleged Acciona tender offer.
The battle for control of Endesa has already been described in the November 20 Opinion, 2006 WL 3357261, and in a second Opinion issued in a related case, Gas Natural v. E.ON AG, No. 06 Civ. 13607 (DLC), 2006 WL 3734425 (S.D.N.Y. Dec. 19, 2006) ("December 19 Opinion"). The following facts are drawn from the complaint in the instant lawsuit and the parties' submissions on both the defendants' motion to dismiss the plaintiffs' Section 14 claim and the plaintiffs' amended motion for a preliminary injunction. The submissions include five depositions,*fn1 an expert declaration on Spanish law by Juan Fernández-Armesto, Professor of Commercial Law at the Universidad Pontificia Comillas--Icade in Madrid; an expert declaration on Italian law by Carlo Amatucci, Professor of Commercial Law at the University of Naples Federico II; expert declarations from Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law and Director of the Center of Corporate Governance at Columbia University Law School;*fn2 and authenticated documents.
A. Gas Natural and E.ON Bids for Endesa
On September 5, 2005, Gas Natural SDG, S.A. ("Gas Natural"), the largest supplier of natural gas in Spain, announced an intention to commence a tender offer for Endesa at €22 per share, which was below the price at which Endesa's shares were trading at the time. Endesa strongly opposed Gas Natural's bid.
On February 21, 2006, E.ON announced its intention to launch a competing all cash tender offer for Endesa securities for €27.5 per share, worth a total of €29.1 billion. While Endesa has not made a formal recommendation on E.ON's proposed bid, on March 8, it filed with the Securities and Exchange Commission ("SEC") a Schedule 14D-9A in which it officially recommended that its shareholders reject Gas Natural's offer.
Between March 21 and April 26, Gas Natural's bid was enjoined by Spanish courts to resolve, inter alia, antitrust concerns.
On July 27, the Spanish National Energy Commission ("CNE") "approved" E.ON's bid subject to nineteen conditions. By November 4, the CNE had lifted each of the conditions to which E.ON objected and on November 16, the Spanish securities regulator, the Comisión Nacional del Mercado de Valores ("CNMV"), "approved" E.ON's proposed tender offer.
Since there are currently two bidders for Endesa -- Gas Natural and E.ON -- the CNMV is required by Spanish law to organize a closed envelope auction. The CNMV will issue a notice permitting Gas Natural and E.ON a single opportunity to submit simultaneously their final, sealed bids for Endesa's shares within five days from the date of the CNMV's notice. If there is more than one sealed bid, the CNMV will announce the winner of the sealed bid process the following day. The winner will then be permitted to commence formally its tender offer and acquire Endesa shares. The auction may occur as early as this month.
B. Acciona's Arrangement with Santander to Purchase Endesa Shares
On September 25, Acciona acquired over 13% of Endesa's outstanding stock for €32 per share, a price 9% above Endesa's closing price on that same day, €29.4. This was also significantly higher than both the Gas Natural and E.ON proposed bid prices. Banco Santander Central Hispano, S.A. ("Santander"), Spain's largest bank; Bear, Stearns & Co., Inc. ("Bear Stearns"), an American investment firm, and Fidentis Equities ("Fidentis")*fn3 assisted Acciona in identifying and securing sellers of Endesa securities in the United States and Europe during the course of several hours after the Spanish stock exchange closed on September 25.
Discussions between Acciona and Santander regarding the arrangements to purchase Endesa securities began at least as early as September 16. On September 19, Santander developed a script for its salespeople, which highlighted the "premium" price that an unnamed "Spanish industrial group" was offering for Endesa shares. Santander and Acciona agreed that if Santander's solicitation succeeded in attracting more than 10% of Endesa securities, Acciona would acquire the first 10% and the rest would become subject to a "Total Return Swap" in which Santander would hold the shares for eventual transfer to Acciona.*fn4
In a Stock Purchase Order ("Order"), Acciona directed Santander to "contact entities that, depending on their knowledge of the market, may hold packages associated with [Endesa] shares" and to "ask them to prepare sell offers indicating the number of shares they are planning to sell at the price in question." According to the Order, the book building procedure would take place between 5:40 p.m. on September 25 and 8:30 a.m. on September 26, Madrid time, through communications that would not be "substantially different" from a script outlined in Addendum 1 of the Order. The Addendum explained that:
- The operation consists of a book building of sell offers on ENDESA shares for up to 10% of its capital.
- The buyer is a Spanish Company of the first rate property sector. It does not have stock purchase agreements with any of the parties involved in the OPA Public Offering. It does not plan on formulating an OPA,*fn5 but rather to assume a strategic position.
- Price: 32€/share - Offer submission period: 5:40 a.m. [sic] on the 25th until 8:30 a.m. on the 26th, unless there is an extension or early termination.
- Offers may not be conditioned on more than the price and sale of the total number of shares included in it.
- Once the book building is closed, a determination will be made as to whether the goal has been reached (10% at 32 €/share) and if so, confirmation will be sent about the operation for it to be executed.
- The client reserves the right to terminate the process in the event of risk of having its identity disclosed before the operation is closed.
The terms contained in Addendum 1 were non-negotiable. The Stock Purchase Order indicated that if the required 10% minimum was not attained at the stipulated price of €32 per share, the order would be null and void. If successful, Acciona would pay Santander a commission of .8%. The Stock Purchase Order also specified that Acciona's identity must not be disclosed until the operation was completed.
An essential element of this mandate is, except for a legal requirement, the name of the mandator and of the group it belongs to are to remain confidential until the operation is successfully completed and even after the termination of the mandate, if the planned acquisition is not completed. Until the operation is announced on the market, should it be completed, through the corresponding disclosure, or if it is not successfully completed, you may only disclose said identity when required to by an applicable regulation and even in that case, you must inform us, provided that said regulation permits, of the need to do so. (Emphasis supplied.)
C. Santander Engages Bear Stearns
With the endorsement of Acciona, Santander sought the assistance of other financial institutions including Bear Stearns in New York and Fidentis in Europe to reach Endesa shareholders. Santander expected that these banks had institutional investors among their clients who held Endesa shares.
At 9:59 p.m. Eastern Standard Time (E.S.T.) on Sunday, September 24, Ignacio Peña Cavero of Santander's New York office contacted Steven Dearing of Bear Stearns in New York to invite Bear Stearns to act as the U.S. bookrunner or broker in the "book building procedure."*fn6 On September 25, Santander's Spanish and New York offices communicated with Bear Stearns' New York office via email and telephone to arrange the details for Bear Stearn's solicitation of Endesa shareholders in the block trade. They set the time for the block trade at 5:35 p.m. Central European Time (11:35 a.m. E.S.T.), "a few minutes after the Spanish market close[d]," and confirmed that Endesa shares were to be sold for €32 per share. After 10:00 a.m. E.S.T., Santander sent Bear Stearns four "talking points" which fixed the terms of the sale. These talking points mirrored the terms of Addendum 1 to the Stock Purchase Order:
Transaction: Buy order conditioned to a minimum of 9.99% of Endesa.
Buyer: Spanish industrial group. Acting alone and not in conjunction with any other Group. Will not launch a takeover offer.
Bookbuilding: 32 € / share / First come -- first serve Timetable: the book open now and will close before the opening of the Spanish market tomorrow (8:45 AM Madrid time).
Santander instructed Bear Stearns to "focus on U.S. institutions," that is, institutions "either covered by U.S. salespeople or actually domiciled in the U.S." It described the proposed transaction as one that was "fill or kill," which referred to the requirement that the trade secure 10% of the outstanding shares of Endesa. Sellers would be placed in the book on the basis of "[f]irst come-first served." Although the parties agreed that Santander would pay Bear Stearns a "success-based fee," which would depend on the percentage of Endesa securities Bear Stearns secured, this agreement was not reduced to writing.
Bear Stearns estimates that it contacted approximately 100 of its U.S. clients, by telephone and through electronic means. Bear Stearns sales personnel did not restrict their search geographically or by any class or different type of client. For example, sales personnel were not told to approach only institutional investors. While Bear Stearns salespeople were "given the sum and substance of the talking points," they were not explicitly restricted to them.
Even before the Bear Stearns sales team began to contact investors, "the word was already out on the street" that Bear Stearns was acquiring Endesa shares. It received calls from clients before it had time to contact them. Ultimately, only institutional investors sold shares to Acciona as a result of Bear Stearns' solicitation.
Approximately one hour after trading began, Santander called Bear Stearns with the news that the "book building" had reached the 10% minimum required for the block trade to go forward. Bear Stearns sold approximately 1.5% of the 10% of Endesa's outstanding shares that were acquired by Acciona. Even after receiving word that the 10% minimum had been reached, however, Santander told Bear Stearns to "keep going." Bear Stearns acknowledges that the decision to acquire more than 10% of Endesa's shares was "somewhat contradictory to the fill or kill and first come/first served" script. Bear Stearns continued to solicit sales and its salespeople "stuck to the script." Bear Stearns halted its sales efforts at approximately 1:25 p.m. E.S.T. upon the circulation of a final order book for sellers.
D. Santander's Buying Program
Santander began calling its own clients after the close of the Spanish market on September 25. It solicited between 200 and 300 Endesa shareholders through a mass electronic communication system known as the Bloomberg messaging system. Santander offered the opportunity to sophisticated institutional investors who were clients of the bank. Many of them had requested to "be informed of this type of opportunity" within the prior eighteen months. The message mirrored the terms of the Stock Purchase Order that Acciona sent Santander earlier that day and read as follows:
***** URGENT -- Secondary block purchase of ENDESA shares ***** *TRANSACTION: A block bid for a minimum of 9.99% of ENDESA. *PRICE: 32 Euros / share, on a first come, first served basis. *BUYER: A Spanish industrial group, with the aim of taking a significant long term stake in ENDESA, but at no time launch a full or partial bid for the company. * TIMETABLE: Starts 5.35 pm Madrid time 25/9, concluded by 8.45 am 26/9. *BOOKRUNNER: Santander Investment ***** Please contact your usual sales contact at Santander for more information ****** This message did not exclude Endesa shareholders who were residents or citizens of the United States.*fn7
At around 7:00 p.m. Madrid time, after approximately ninety minutes of soliciting shares and with an extra 3.692% of Endesa's shares over the 10% minimum having been acquired, Acciona halted the operation. It stopped because of an inquiry from the Spanish securities regulator, the CNMV, which had been alerted to the activity by a Bloomberg report that a large block of Endesa shares was being purchased. The CNMV "sent out a call" to inquire about the identity and intentions of the buyer. At that point, Acciona decided to stop the solicitations, speak with the CNMV, and prepare a "public presentation" of what it was doing.
Collectively, Santander, Bear Stearns, and Fidentis secured commitments to sell approximately 145 million Endesa shares representing 13.692% of Endesa securities, from sellers in the United States, Spain, and other European countries. Acciona directly acquired 10% of Endesa's shares. The additional 3.692% was held by Santander for future transfer to Acciona under the Total Return Swap arrangement. While sellers were solicited and the book for sales was compiled on September 25, the shares were technically acquired by Acciona via trades on the Madrid stock exchange within the next few days.*fn8
The parties have submitted several lists of investors who sold their Endesa shares on September 25. These lists include a "book" circulated by Santander on September 26, providing the name of each investor, its country of residence, the number of shares sold, the amount paid, and the manager -- Santander, Bear Stearns, or Fidentis -- that secured each sale. They also include a November 14 spreadsheet and a November 23 "recap sheet" including similar information. According to these lists, up to 45 million of the Endesa shares secured on September 25 may have been sold by shareholders based in the United States. Bear Stearns brokered sales from approximately sixteen U.S.-based investors, in addition to two proprietary Bear Stearns accounts. Santander brokered sales from at least eight, and possibly fourteen, additional U.S.-based investors, most likely through its New York office. None of these lists specifies whether the shareholders designated as U.S. residents are beneficial or record owners of Endesa shares.
G. European Regulatory Views
Acciona's block trade is not a "tender offer" under Spanish securities law. According to Spanish securities law expert Professor Juan Fernández-Armesto, this "off hours block trade" was fully compliant with Spanish securities regulations, and qualifies as a legal "extraordinary transaction" under Spanish law.
Spain has a system of mandatory public tender offers known as "OPA." If an investor intends to acquire over 25% of a Spanish issuer's share capital, it must formally launch a tender offer for at least 10% of the issuer's shares. The bidder must also file a prospectus, approved by the CNMV, and offer all shareholders the opportunity to sell shares.
Without launching a formal tender offer, a company may entrust a bank or stockbroker with the task of finding shareholders who are willing to sell their shares, i.e., to "build a book" of prospective sellers, and then execute the sale through an "extraordinary transaction." A stockbroker admitted to the Spanish stock exchange may engage in an "extraordinary transaction," and conclude it "without announcing [it] publicly through the electronic trading platform," if the transaction is performed while the electronic system is closed and the transaction meets certain requirements. Since Acciona's off-hours block acquisition was conducted after the close of the Spanish market and met these requirements, it qualifies as an "extraordinary transaction" permissible under Spanish law, rather than a tender offer.
Similarly, a block trade transaction "involving an Italian buyer and issuer, organized in Italy and executed on an Italian stock exchange" would not be considered a tender offer in Italy. Such a transaction would be "lawful under Italian rules" as long as the block trade "1) does not exceed the 30 percent threshold that creates a mandatory public tender offer under Italian law and (2) involved only transactions with sophisticated investors and thus does not create any filing requirements under Italian law."
Acciona disclosed its September 25 acquisition of Endesa securities in two Hechos Relevantes (Relevent Facts) filed with the Spanish securities regulator, the CNMV, on September 26 and 27. Acciona also filed a public note with the CNMV on ...