The Securities and Exchange Commission yesterday issued a warning to U.S. corporations that lying about merger and acquisition plans would result in disciplinary action. Henceforth, corporations either must tell the truth or refuse to comment at all, the agency said.
The message was in the form of a response to Carnation Co., which was the subject of an investigation following its acquisition last year by the multinational corporation Nestle' S.A. The securities agency found that Carnation had made "materially false and misleading" public statements during the period when takeover negotiations were under way.
At the same time that top Carnation officials were meeting with Nestle' executives in Switzerland, Carnation's treasurer, Michael Malone, who was unaware of these activities, denied the takeover rumors circulating in the financial press. On Aug. 7, Malone was quoted as saying there were "no corporate developments that would account for the stock action." Carnation's stock price, which stood at 54 1/2 on May 25, increased 4 5/8 that day.
Again, on Aug. 21, Malone -- still unaware -- again denied the rumors of a Nestle' acquisition, telling the press, "We are not negotiating with anyone." Carnation stock slumped 1 7/8 in the next three days. Shortly thereafter, Carnation's chairman, H. Everett Olson, instructed Malone to answer further questions with "No comment."
On Sept. 4, a joint announcement was made that Nestle' would acquire all of Carnation for $83 per share.
Securities laws prohibit issuers from making statements that are false or misleading. The SEC found that Carnation's denials were indeed false and misleading because negotiations were already in progress. The agency quoted a judicial opinion to the effect that where a corporation wants to prevent premature disclosure of secret preliminary merger negotiations, the appropriate response would be "No comment."
The SEC response suggests a corporate responsibility to ensure that its officials or spokesmen do not mislead the public either wittingly or unwittingly under such circumstances.
The SEC reminded the company of its duty to disclose material information to stockholders. It continued, "Had Carnation disclosed in the Aug. 7 and Aug. 21 statements the contacts with Nestle' . . . the reasonable Carnation shareholder would have considered that information to be significant in deciding whether to buy, sell or hold the stock."
The SEC did not seek to levy a penalty on Carnation. Instead, it took the unusual action of concluding its response with a warning that it "will take appropriate enforcement action against issuers which fail to comply with these [disclosure] requirements."
The warning comes at a time when merger activity is at a peak. Consequently, said an SEC spokesman, "the problem [of misleading information] may be more pervasive in the marketplace than we know." The agency puts great emphasis on giving all stockholders equal opportunity. These new disclosure requirements could serve to dampen speculative activity by a few professional investors.