Last August, the Department of Corporations approved the acquisition of Instagram, Inc. by Facebook, Inc. following a fairness hearing.  See DOC Calls It Fair.  According to this Los Angeles Times story by Salvador Rodriguez, Facebook officially closed the acquisition a few days later.  Although I would have expected that to have been the end of the matter, the Facebook fairness hearing leaped into the news again this week with this story by Jennifer Van Grove at Venture Beat and this story by Nick Bilton at The New York Times.  Both stories focus on the accuracy of testimony given by Instagram’s Chief Executive Officer in response to questions about the receipt of other offers.  Because I wasn’t there, haven’t read the transcript and haven’t spoken to the unnamed sources mentioned in the articles, I have no opinion on the substance of these allegations.  Rather, today’s blog will address some questions about fairness hearings that may provide some context to these stories.

Does the Department place witnesses under oath at a fairness hearing?   Yes.  10 CCR § 250.24.

Who asks questions of the witnesses?    The applicant, the target and other interested parties (typically security holders of the target) are each permitted to call witnesses.  In a typical fairness hearing, the applicant and the target will conduct the direct examination of their respective clients. 

Who presides at the hearing?  The Commissioner typically does not conduct the hearing herself but delegates this responsibility.  In the case of the Facebook/Instagram hearing, one DOC attorney acted as the hearing officer and other served as counsel to the Department.  The hearing officer has the authority to rule on the admission or exclusion of evidence and to take all necessary action to insure a fair and orderly hearing.  10 CCR § 250.24.  During the hearing, the hearing officer and the counsel representing the DOC may ask questions of the witnesses.  Following the hearing, the hearing officer decides whether the proposed transaction meets the fairness standards set forth in statute and the Commissioner’s rules.

Is it OK to lie at the hearing?  No. 

Witnesses testify under oath.  A person who testifies under penalty of perjury and who willfully states as true any material matter that he or she knows to be false, is guilty of perjury.  Cal. Penal Code § 118.  It is no defense to a prosecution for perjury that the accused did not know the materiality of the false statement made by him; or that it did not, in fact, affect the proceeding in or for which it was made.  It is sufficient that it was material, and might have been used to affect such proceeding. Cal. Penal Code § 123.  In addition

In addition, Corporations Code Section 25404 provides that it is unlawful for any person to knowingly make an untrue statement to the Commissioner during the course of any “licensing, investigation, or examination” with the intent to impede, obstruct, or influence the administration or enforcement of any provision of the Corporate Securities Law of 1968.   This statute was added in 2003 in response to the Sarbanes-Oxley Act and it remains to be seen whether it will be interpreted to apply to fairness hearings. 

What are the possible consequences of lying?  Perjury as defined in the Penal Code is a crime that is punishable by imprisonment.  Cal. Penal Code § 126.  A violation of Section 25404 may result in criminal prosecution pursuant to Section 25540, civil penalties pursuant to Section 25535 or administrative penalties pursuant to Section 25252. 

Is it possible to obtain a copy of the transcript of the Facebook/Instagram hearing?  Fairness hearings are transcribed by court reporters.  10 CCR § 250.23.  The Department posts the transcripts on Cal-EASI.  See California’s Big EASI.  In fact, the transcript of the Facebook/Instagram hearing is available here.

Do these allegations call into question the validity of the fairness hearing procedure?   No.  Whenever witnesses are called to testify before a tribunal, it is possible that someone will lie.  This possibility exists whether the witness is testifying in a court of law or in an administrative hearing.  To do away with fairness hearings because a witness might lie makes no more sense than eliminating the filing of registration statements with the SEC because registrants might misstate material facts.  More importantly, the DOC has a decades-long track record of conducting fairness hearings without any evidence of significant investor losses.

For more on fairness hearings, see the following posts or watch this video.

Finally, please check out my article, California Fairness Hearings: A Low-cost Alternative to Federal Registration in Acquisition Transactions, 15 Insights 23 (Feb. 2001).