Carnation-Nestle Deal Cited : SEC Warns U.S. Firms on Merger Disclosures
A finding by the Securities and Exchange Commission that Los Angeles-based Carnation Co. made “false and misleading” public statements last August while negotiating its $3-billion acquisition by Nestle S.A. of Switzerland has prompted the regulatory agency to threaten U.S. companies who do likewise with “appropriate enforcement action.”
The SEC used the report on the conduct of Carnation officials to warn U.S. companies in general that they must give accurate comments when questioned about rumors or unusual market activity in their stock.
Firms must disclose “sufficient” information about any merger discussions so that their statements or responses to inquiries are not misleading, the report said.
Use of ‘No Comment’ Outlined
A “no comment” response to press inquiries is “appropriate” in some circumstances, the report said. But such a response would not be appropriate where information has already leaked and affected the stock market, it added.
The SEC report said top officials of Carnation and Nestle were actively engaged in negotiating a possible deal at the time that Carnation’s treasurer, Michael Malone, responded to public inquiries last Aug. 7 and Aug. 21 by saying that he knew of no reason for a sharp rise in the firm’s stock price. The Nestle acquisition was announced Sept. 4.
The report said that the SEC found no indication that Malone knew of the talks when he responded to the queries. However, the report said, other executives did know about the talks and Carnation had a responsibility to be sure that no misleading statements were issued on its behalf.
The SEC did not lodge a complaint against Carnation. The company consented to the issuance Monday of the report on the SEC’s private investigation of it without admitting or denying the statements made in it, an SEC spokesman said.
Deal Completed in January
Gary Lynch, SEC enforcement director, was quoted in a news report as saying that his office would not take action against Carnation “because it doesn’t exist anymore.” An inquiry to Lynch’s office was directed to the assistant director, Joseph Goldstein, who confirmed that position. Nestle completed the merger in January.
A spokesman at Carnation’s world headquarters here said of the report: “We don’t have any comment on it at all.”
In a footnote, the report added for general consumption that it “encourages public corporations to respond promptly to market rumors concerning material corporate developments.” However, it said, a firm that wants to prevent “premature disclosure of non-public preliminary merger negotiations” could appropriately make a “no comment” response to press inquiries.
However, the SEC said, when a corporation “makes a public statement or responds to an inquiry from a stock exchange official concerning rumors, unusual market activity, possible corporate developments or any other matter, the statement must be materially accurate and complete.”
The report specifically stated that this requirement applies to companies engaged in preliminary acquisition discussions, adding: “The commission will take appropriate enforcement action against (firms) which fail to comply with these requirements.”
Goldstein of the SEC said in a telephone interview that the comments were “an application of longstanding SEC policy” rather than new policy or interpretation. However, some Wall Street observers indicated that they believe that the language went further in decreeing public disclosure in certain situations.
‘Area of Great Abuse’
Guy Wyser-Pratte, an arbitrageur at Prudential-Bache Securities in New York, said he saw the language as “overall a favorable move.”
“This is an area of great abuse of the integrity of the marketplace,” he said. “I don’t think it should have any real effect on legitimate merger proposals made in good faith. . . . They are replacing discretion with regulation.”
