It has become increasingly common for public companies to use social media not only for marketing to consumers, but also for communicating with investors. In addition, as personal use of social media has soared, many executives of public companies have established a personal social media presence. While social media can provide a quick and easy way to communicate, its typically informal nature and the fact that social media posts can sometimes offer at least an illusion of anonymity can also lay a trap for the unwary.
Francesca’s Holdings Corporation announced on May 14, 2012 that it had terminated for cause the employment of Chief Financial Officer Gene Morphis. The termination followed an investigation by the board of Francesca’s into the CFO’s use of social media. The investigation showed that Morphis had been tweeting non-public information about the company, beginning shortly after his appointment as CFO in October 2010.
The tweet that seems to have triggered the investigation, and ultimately his termination, occurred on March 7. Notwithstanding the fact that the company was in a blackout on that date in anticipation of an earnings release scheduled for March 13, the CFO tweeted “Board Meeting. Good numbers=Happy Board.” While Morphis’s Twitter handle, @TheOldCFO, did not include his name, his other social media accounts, including LinkedIn and his personal blog, linked to his Twitter feed. As a result, it was not difficult for investment managers and analysts to make the connection between @TheOldCFO and Francesca’s. In the time between that tweet and the earnings release, the company’s stock jumped 15%.
When the company learned of Morphis’s tweet a few days later, it commenced the investigation with the assistance of outside counsel. The investigation turned up numerous prior tweets of non-public information including tweets about private meetings with the company’s investment bankers regarding an unfiled registration statement.
Tweets, or other social media postings, of material, non-public information raise a number of potential legal issues. First, the SEC generally does not consider tweets to be “public disclosures” for purposes of Regulation FD. To the extent that a tweet contains material, non-public information and the tweeter’s followers include securities industry professionals, the tweet is arguably a “selective disclosure” and a violation of Regulation FD. Second, if an officer or director discloses confidential company information through any means without proper authorization to do so, the disclosure likely constitutes a breach of fiduciary duty. Finally, passing along material, non-public information via social media could arguably constitute illegal “tipping” under the insider trading statutes and a violation of a company’s insider trading policy.
One would like to be able to assume that an individual who is otherwise qualified to serve as an officer of a public company, let alone a CFO, would have the common sense to refrain from disclosing non-public information via social media. The Francesca’s situation suggests that this is by no means a safe assumption. Therefore, given the proliferation of tweets, blogs, Facebook updates, etc., it would be prudent for public companies to consider adopting and communicating specific policies on the use of social media.
A public company adopting a policy specifically addressing the use of social media should consider including the following elements:
- a requirement that key insiders disclose to the company any social media handles, blog addresses or account names under which they communicate;
- designation of an employee in the investor relations function to monitor social media posts about, or by executives of, the company;
- an absolute prohibition on the communication of material, non-public information via social media;
- a requirement that any social media communication that directly or indirectly references the company must be pre-approved by the executive in charge of the company’s investor relations (or, if the post is by the head of investor relations, by the General Counsel or CEO);
- a prohibition on retweeting, reposting or linking to third-party tweets, posts or articles about the company (to avoid the appearance of endorsing the content of those tweets, posts or articles); and
- clear identification of a relatively small group of executives who can authorize posts on the company’s behalf on any social media accounts maintained in the company’s name or on its behalf.
Finally, to the extent that an inappropriate social media communication does occur, a company must immediately assess whether the communication may have constituted a violation of Regulation FD and, if so, take immediate action to publicly communicate the relevant information in order to mitigate the violation.