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E.On AG v. Acciona

February 5, 2007


The opinion of the court was delivered by: Denise Cote, District Judge


This is the fourth in a series of Opinions issued since November that address a foreign takeover battle. A tender offer for the shares of Endesa, S.A. ("Endesa"), Spain's largest electrical utility, is pending today. This litigation is brought by the bidder against Endesa's largest shareholders, Acciona, S.A. and Finanzas, S.A. (collectively "Acciona"), who vehemently oppose the tender offer. Acciona is a diversified Spanish company with historical roots in the construction industry. It has operations in thirty-eight countries, and entered the energy business in 2000. It is one of the largest wind energy developers in the world. It invested in Endesa for the first time this past September, anticipating this tender offer struggle.

Plaintiffs E.ON AG, E.ON Zwölfte Verwaltungs GmbH and BKB AG (collectively "E.ON") have moved for a preliminary injunction against Acciona on the grounds that the latter has violated Sections 13(d), and 14(d) and (e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m(d), 78n(d)-(e) ("Section 13(d)," "Section 14(d)," "Section 14(e)," and "Exchange Act"). The E.ON companies are German power and gas companies. They are the world's largest, investor-owned energy company. E.ON seeks to prevent Acciona from using its position as a substantial Endesa shareholder to block E.ON's tender offer for Endesa.

While important issues of American securities laws are at stake, the litigation implicates just as significantly principles of international comity and the ability of the American and foreign regulatory systems to coexist. E.ON has shown a substantial likelihood of proving at trial that Acciona has filed inaccurate and incomplete disclosures with the Securities and Exchange Commission ("SEC") regarding its acquisition of Endesa stock. E.ON seeks a broad range of relief, but emphasizes its request that Acciona be required to offer to those who sold their Endesa stock to Acciona the opportunity to rescind those sales. If the right of rescission is ordered, Acciona's opposition to E.ON's takeover bid will be neutralized.

This litigation has gone a long way toward achieving the primary goal of the laws on which this suit is based: full disclosure of material information so that Endesa's shareholders can decide for themselves whether or not to tender their shares. Based on the findings of fact and conclusions of law that follow, the motion for a preliminary injunction is granted, but only in part. Acciona is prohibited from making any further material misstatements or omissions in its SEC filings. The request for court-mandated rescission is denied.


The background for this dispute and the legal framework within which this suit is brought and on which this motion will be decided are set forth in three prior Opinions issued in this and related litigation. E.ON AG v. Acciona, S.A., No. 06 Civ. 8720 (DLC), 2006 WL 3357261 (S.D.N.Y. Nov. 20, 2006) ("November 20 Opinion"); Gas Natural v. E.ON AG, No. 06 Civ. 13607 (DLC), 2006 WL 3734425 (S.D.N.Y. Dec. 19, 2006) ("December 19 Opinion"); E.ON AG, v. Acciona, S.A., No. 06 Civ. 8720 (DLC), 2007 WL 62713 (S.D.N.Y. Jan. 9, 2007) ("January 9 Opinion").*fn1

Familiarity with these Opinions is assumed and they are incorporated here by reference.

Endesa's shares are traded in the United States as American Depository Shares ("ADS"). The tender offer battle over Endesa began in September 2005, when Gas Natural SDG, S.A. ("Gas Natural"), the largest supplier of natural gas in Spain, announced its intention to commence a tender offer for Endesa at an implied price of roughly €22 per share. On February 21, 2006, E.ON announced its intention to make a competing bid for Endesa at €27.5 per share. As described in considerable detail in the January 9 Opinion, Acciona entered the picture on September 25, when in the course of about two hours it and its banker acquired over 13% of Endesa's outstanding stock for €32 per share. January 9 Opinion, at *3.

Recently, Acciona publicly declared its intention to block E.ON's bid. It argues that Endesa is worth more as an independent entity and has outlined a proposal for a merger between the energy component of Acciona's business and Endesa that would create in Acciona's view a world leader in renewable energy. As of now, Acciona has acquired over 20% of Endesa stock, and may acquire up to 25%. As soon as Acciona's acquisition of a significant stake in Endesa on September 25 was disclosed, E.ON increased its announced bid price to €35 per share.

In late January, the Comisión Nacional del Mercado de Valores ("CNMV"), the Spanish securities regulator, began the process for a closed envelope auction of Endesa, a procedure that applies in Spain when more than one entity has disclosed an intention to make a tender offer for a Spanish issuer. Id. at *6. On February 2, Gas Natural and E.ON had the opportunity to submit simultaneous and final bids for Endesa's shares. Gas Natural decided not to submit a bid; E.ON submitted a bid of €38.75 per share.

Before the E.ON tender offer can proceed, however, Endesa must hold a shareholder meeting, which will likely take place in March, since E.ON's bid is contingent on Endesa changing its organizational documents to permit a shareholder to vote each of its shares. Without such a change, no Endesa shareholder is permitted to vote more than 10% of Endesa's shares. Therefore, for E.ON to win control of Endesa, Endesa will have to amend its organizational documents to eliminate the 10% cap and over 50% of Endesa's shareholders will have to accept E.ON's tender offer. At the close of trading on February 2, Endesa's shares were trading at €39.04 per share, which in the view of at least some analysts, signaled support for the E.ON bid.

October 5: Schedule 13D

With this brief overview of the tender offer battle, this Opinion turns to the disclosures that Acciona has made concerning its investment in Endesa, with particular emphasis on its evolving disclosures about the purposes of its investment and its plans for Endesa.*fn2 Acciona had considered acquiring Endesa shares as early as 2002. In September 2006, fully aware of the ongoing tender offer battle, it decided to attempt to obtain a substantial foothold in the company and become an accionista de referencia or key shareholder, entitling it to special rights under Spanish law including board representation on a proportional basis. Acciona is such a shareholder in three other publicly traded Spanish corporations, and Endesa was one of only a few major Spanish corporations that did not have such a shareholder.

As described in the January 9 Opinion, following the close of the Madrid stock exchange on September 25, Acciona and its banker Banco Santander Central Hispano, S.A. ("Santander") purchased shares and a few ADSs amounting to over 13% of Endesa's outstanding shares from institutional investors in New York and abroad at €32, a premium of 9% over Endesa's closing price on that day. This price was significantly higher than the Gas Natural and E.ON proposed bid prices. January 9 Opinion, at*3.

Acciona filed its first Schedule 13D with the SEC on October 5, 2006, reporting in its brief submission that it had acquired ADSs representing 10% of Endesa's equity through a market transaction financed through Santander. Acciona reported that it had acquired the ADSs for "investment purposes," and might acquire up to a total of 25% of the outstanding shares of Endesa. It denied that it had "any plans or proposals" relating to an extraordinary corporate transaction for Endesa, such as a merger or similar action. It announced that it retained the right to change its investment intent and to sell the shares.

By that date, Acciona and Santander, which was working cooperatively with Acciona to assist it in acquiring Endesa shares, had together acquired over 15% of Endesa's outstanding shares. The Schedule 13D contained numerous false statements and omissions. It failed to disclose adequately Acciona's arrangements with Santander, its plans to obtain approximately 5% of Endesa's outstanding shares which Santander had already acquired in connection with total return swaps it had executed with Acciona, and its intentions with respect to Endesa or the tender offer battle. Acciona has since admitted that statements in the Schedule 13D were not accurate.

E.ON Sues Acciona On October 12, E.ON sued Acciona, alleging that the Schedule 13D contained false and misleading statements and omissions in violation of Section 13(d). It promptly moved for a preliminary injunction. Acciona responded by obtaining new counsel, filing an amended Schedule 13D, and moving to dismiss the complaint.

October 19: Amendment No. 1

Amendment No. 1, dated October 19, was a very substantial revision to the Schedule 13D. It corrected the statement about the acquisition of ADSs and reported that Acciona had acquired 10% of the outstanding shares of Endesa through its broker Santander and with the assistance of an American broker. The filing reported that the acquisition of Endesa shares was for "investment purposes as part of [Acciona's] strategic interest in the energy sector." It extolled Endesa's potential, described the Gas Natural and E.ON announcements regarding their tender offer intentions, and concluded that Endesa's shares represented "a valuable investment" and that it was a "propitious" time to be a "significant shareholder" of Endesa. Acciona advised that it was continuing to evaluate its options and "may or may not choose to tender" its shares into the E.ON tender offer. It disclosed an intent "to become a key shareholder" of Endesa and to take an active role in its management and operations, and that it might seek representation on the board of directors or management team.

The amendment explained that Spanish law did not require the formulation of a tender offer so long as a shareholder did not acquire 25% or more of an issuer's shares. Acciona explained that it expected to acquire more Endesa shares but not enough to reach that threshold.

Acciona cautioned that it would continue to evaluate Endesa and that any proposals it might make for Endesa would depend upon its assessment of a number of factors. It reserved its right to dispose of its investment in Endesa, acquire more shares, seek board representation, seek to acquire control of Endesa, seek to enter into business "relations or transactions with" Endesa, engage in short selling, or take any other action.

Amendment No. 1 also declared that Acciona has "no present plans or proposals" to amend a provision of Endesa's organizational documents which provides that no shareholder may vote over 10% of the outstanding shares, for instance, in electing directors or in voting on a merger.*fn3 Spanish law does permit a shareholder to appoint a director, however, for every 7.692% of outstanding shares that are held where the company has thirteen directors, as is the case with Endesa. Therefore, the disclosure calculated that Acciona would be entitled to appoint two of Endesa's thirteen directors at Endesa's next shareholder meeting if it acquired over 15.3%, and three if it acquired over 23%.

Since October 19, Acciona has continued to file amendments, the most recent being Amendment No. 11, filed on January 25. These amendments have been filed to reflect and affect events in Spain and in response to the pressures exerted upon Acciona through this litigation to make disclosures required by American securities laws. As this series of amendments and other evidence reflects, among other flaws, the October 19 amendment did not accurately and completely describe Acciona's intentions -- either with respect to Endesa or with respect to E.ON's tender offer. E.ON has shown a likelihood of proving at trial that as of October 19, Acciona had no intention to tender into E.ON's announced bid, planned to present Endesa shareholders with an alternative vision for Endesa's future, and intended to oppose amendment of the 10% limitation on voting rights in Endesa's organizational documents. ...

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