Friending Social Media

All businesses and organizations have a social media presence, intentionally or unintentionally, whether through formal investor communications or indirectly through postings by Board members, executives and employees and their families, or both. The following headline stories illustrate unintended consequences and legal risks of social media:

Premature Disclosure Of Earnings. Six days before a public company filed its annual report, the CFO tweeted, “Board meeting. Good numbers=Happy Board.” Apparently the Twitter account did not mention the CFO’s name, but it provided links to his personal Facebook page and personal blog, as well as his LinkedIn profile.

  • Result: After a two-day internal investigation, the CFO was fired for improperly communicating company information through social media, possibly in violation of Regulation FD (prohibiting selective disclosure of material nonpublic information by public companies). Contrast: Netflix (see below).

Milestone Posted Real Time. In a test case of social media under Regulation FD, the CEO of Netflix famously posted a statement on his Facebook page that Netflix had reached 1 billion hours of viewing. In a post and SEC filing, the CEO claimed that his Facebook page was effectively public with 200,000 followers (not a selective disclosure)—and anyway the post was not material. Netflix stock traded up on the date of the post.

  • Result: Netflix and the CEO received “Wells notices” of potential enforcement from the Securities and Exchange Commission (SEC) in December 2012. After a four-month investigation, the SEC announced that it would not pursue an enforcement action. The press release issued by the SEC stated that social media may comply with Regulation FD, but not if the access is restricted or if investors don’t know to turn to social media for the latest news.
  • The Netflix social media model: In a carefully worded public filing, Netflix announced their plan to communicate with subscribers and the public through social media and listed social media channels that speak for the company, including Netflix blogs, a Facebook page and a Twitter feed, as well as the CEO’s “public” Facebook page.

Premature Solicitation of Stockholder Votes.Shortly after announcing a merger agreement, the CEO of the target company expressed his enthusiasm for the deal by tweeting “@bostonglobe weighs in on the revolution we started” at the company, and linked to the newspaper report.

  • Result: Because the company had previously announced a merger that was subject to stockholder approval, the tweet was deemed to have solicited stockholder votes. To comply with SEC rules, the company rushed to file the tweet as well as the newspaper article. The company was able to cure the violation, but the materials filed with the SEC lacked risk factors and other protective wording. Contrast: In September 2013, the Los Angeles Times reported Twitter’s tweet heard around the Twitterverse: “We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.”

Security Breach. Congratulations appeared online for the new head of secret British intelligence agency MI6—posted on his wife’s Facebook page. The Facebook page was not protected by privacy settings, and family photographs and other posted information were available to millions of users in the open-access London network, as well as being searchable on Google.

  • Result: The Facebook page was swiftly taken down, amid concerns for the security of the incoming Chief of MI6, his family, his friends and the agency. Opposition politicians claimed that the Taliban get 80% of their intelligence from Twitter and Facebook.

Viral Food Licking Prank. An employee of a fast food restaurant was pictured on a personal Facebook page licking a stack of taco shells. The photo went viral.

  • Result: On its website, the company posted a response, explaining that the food was used in training and never served to customers. The website stated that the franchisee was responsible for the conduct of the employee, who was suspended and later terminated. Contrast: A 2013 decision under federal labor laws held that a company had unlawfully fired employees who used Facebook to discuss complaints about their supervisor’s conduct and other work-related concerns.

Leak of Author’s Secret Pseudonym. A partner at a firm representing J.K. Rowling told his wife’s best friend that a new book written under the pseudonym of Robert Galbraith was really written by Rowling. The friend subsequently revealed Rowling’s identity to a Sunday Times journalist via Twitter.

  • Result: According to BBC reports in July 2013, Rowling brought a legal action against the partner and friend. The firm apologized and agreed to pay the author’s legal costs as well as a substantial payment to charity by way of damages. (The book promptly moved to the top of the best seller lists, leading to suggestions—denied by Rowling and the firm—that the leak was deliberate.)

Managing Legal and Ethical Risks

Using social media, every director, executive and employee (and family member) can reach the headlines before the company’s well-drafted press release or SEC filing. The use and misuse of social media create legal risks and squarely impact ethical responsibilities to maintain confidentiality of information and comply with laws and company policies. Executives and legal counsel are in a position to manage legal risks with the following specifics in mind:

Know the Use. Stay up to date with how top executives and employees—and their families—are using social media platforms. In advance of board meetings and internal status meetings, a “just in time” reminder can protect sensitive information from premature disclosure.

Know the Law. Know the law and anticipate how it may apply to social media. Uninformed use of social media by directors, officers and employees of public companies can implicate securities laws regarding selective disclosure, proxy solicitation, public offerings and insider trading. Labor laws protect most employee communications related to the terms and conditions of employment, and free speech principles also apply. In some states, social media privacy laws limit the use of social media in background checks and hiring.

Adopt and Adapt Policies. Most governance and ethics policies (for example, policies adopted by NYSE-listed companies) address confidentiality of information, proper use of company assets, and compliance with laws including insider trading. Social media policies and adaptations of existing policies can address legal risks posed by social media in the context of a company’s specific business and practices.

Courtney Butler
Isabel Crosby