There has been a renewed focus on social media guidelines and policies for public companies this past year. If you’ve been paying attention, you know that much of the attention stems from a single post by Reed Hastings, the CEO of Netflix, who disclosed the company’s monthly viewership results on his Facebook page. The SEC subsequently expressed concerns about a possible violation of Regulation FD, which prohibits companies from disclosing material nonpublic information on a selective basis to certain individuals (generally holders of the issuer’s securities that might reasonably be expected to trade based on the information and securities market professionals). After its investigation, the SEC issued new guidance for public companies regarding compliance with Regulation FD when releasing material inside information via various forms of social media. As such, there have been numerous publications in the last few months advising companies on the new guidance and how to best conform their social media practices to the guidance. (We published our own article on the SEC’s new Regulation FD guidance, which you can access here.1)
This is a great time to take a fresh look at your social media guidelines, with an understandable eye toward compliance with Regulation FD. From a securities standpoint, though, we’d like to remind you of one of the most inescapable principles of securities compliance in general – in short, don’t be misleading when it comes to material information. Because of the unique, and ever evolving, nature of social media, we believe prudent companies should take advantage of this opportunity to examine not just whether their disclosure controls related to social media channels are compliant with Regulation FD, but also whether they have properly structured them so that the company is protected from disclosure events that could lead to Rule 10b-5 fraud or insider trading claims.
One Size Does Not Fit All
Before we address how social media usage could potentially lead to material misstatements or omissions in violation of Rule 10b-5, and possibly to lawsuits, we want to make it clear that every company shouldn’t necessarily run from, or ban, social media. To be sure, investors (perhaps more quickly than many C-Suite executives) are becoming more comfortable with various forms of social media, and some companies may determine that they must embrace social media, if for no other reason than to provide better disclosure to the investment community. Each company, though, is unique and will necessarily choose different preferred methods for addressing social media use. Some companies may decide to prohibit their directors and employees from any discussion of the company on social media sites in order to minimize risk. Others, as we’ve seen with many technology-based companies, may wish to foster a culture that encourages its employees’ usage of these new and developing forms of communication.
Along with issues related to company culture and appetite for risk, each company must also consider a variety of laws, regulations and concerns in relation to its social media guidelines that fall outside of the scope of securities laws, such as employment laws related to the National Labor Relations Act, and various laws related to harassment and discrimination in the workplace, as well as general public relations concerns.
Because every company is distinct and subject to a wide variety of concerns related to this issue, we won’t advise a one-size-fits-all approach to social media usage. Instead, our intention in this publication is to prompt your thoughts with some of the unique ways that disclosure of company information via social media outlets might heighten risk related to general anti-fraud concerns for public companies.
We all know that context matters when it comes to whether the disclosure of material information is misleading or omits material information. In more traditional forms of disclosure, such as a current report on Form 8-K or a press release, context is easier to establish. For example, a typical earnings release would never just state “Annual Revenue Up 6%” in isolation. The disclosure would be surrounded by other important facts and quotes that provide a framework for understanding for the reader. Depending on the circumstances, investors may also be presented with information regarding company trends and forecasts so that investors can make informed decisions about whether they should expect revenues to continue to increase in the future. And speaking of the future, the press release would also likely include a forward-looking statement disclaimer to provide protection under the Private Securities Litigation Reform Act of 1995.
But what about a tweet?
If your company’s CEO simply tweets, “Annual Revenue Up 6%,” investors may have lost some perspective they would have otherwise had in a fuller press release, particularly if all of the company’s other financial information is negative and the trends point to diminishing revenue in future periods.
Below are a few more examples of hypothetical posts and tweets that might fail to give context for investors, and possibly lead to claims of a misstatement or omission of material information, followed by our suggested considerations for improving the disclosure:
- Facebook Post from your Chief Financial Officer – “Earnings release will go out soon. Record revenues for the third straight quarter!” (While the CFO has mentioned the earnings release that will likely provide context, it hasn’t been released yet. This post could be misleading if the later press release clarifies that future earnings comparisons are expected to be negative.)
- Multiple Tweets from your Chief Financial Officer in advance of earnings press release –
“Great results for quarter!”
“Revenue up 6% for year.”
“Revenue for quarter up 12% compared to same quarter last year!!!”
“New FDA approval received for new product!”
(All of these statements may be true. There may be other news, however, in the earnings release that is not as positive. For instance, costs may have also increased and led to a dip in earnings. Also, the new product that received FDA approval might take some time to successfully market and achieve revenues, which may have been addressed in the press release. A litigator in a 10b5-1 claim against the company would likely point out that the tweets, taken as a whole, create a very different, and misleading, picture of the company’s results of operations than what is actually true.)
- Investors will have better access to context if the tweet or post is accompanied with a link to a press release or filing with more complete information and disclaimers. Consider requiring all tweets and posts to provide a link or to provide necessary context if they precede a press release.
- Make sure your tweeting and posting presents a balanced and accurate view of the company.
Who Speaks for Your Company? And what is the Vetting Process for Disclosure of Material Information?
Another potential pitfall related to social media is that everyone can do it, and it’s instantaneous. With respect to traditional forms of disclosure, it’s very unlikely that one of your employees could end up “accidently” speaking for your company. We’ve never seen the VP of Sales end up with an unintended quote being published in a current report on Form 8-K. These disclosure documents are usually subject to multiple revisions, vetted to some degree by members of the company’s disclosure committee, the investor relations department, and inside and/or outside counsel, and access to filing codes or press release channels is generally controlled by the company
This is not necessarily so, of course, with social media. Here are some hypothetical examples:
- Facebook post from your head of sales – “Hate traveling, but this was the best sales trip of my life! Landed our biggest client ever.” (We obviously don’t have enough information to know if this is material and whether it might be misleading. There is potential in this scenario, though, that your employee just inadvertently disclosed material information that will impact your company’s future results of operations, or that may mislead investors by making them think this is more significant than it actually is.)
- Facebook Post from CFO – “Haven’t seen the finance team this happy while wrapping up the quarter in a long time. Easier to leave work on a day like today!” (This statement could be misleading. It implies that the results for the quarter will be positive and could lead to trading based on this potentially misleading statement. It would be better to present this type of information after careful vetting, rather than inadvertently after a long day at work.)
- As a general rule of thumb, if one of your employees is tweeting or posting information about your company online, then they could be deemed to be speaking for your company, with the company possibly liable. Train employees that might be privy to material information in regards to whether or not they may post online about the company and ensure that all permitted statements are properly vetted by investor relations and legal personnel.
- Designate exactly who in the company will be speaking for the company via social media.
- With respect to those individuals who may publish company information online, establish disclosure controls and procedures so that the information is properly vetted before it is published.
Republishing Previously Disclosed Information (and Adding Further Commentary)
While the initial disclosure of material information raises more obvious red flags, companies should also be wary of misleading posts and tweets by its employees and directors with respect to material information that has already been published by the company through the proper channels. Social media, particularly the republishing or reposting of material, generally allows for further commentary by the individual republishing the information, which could lead to material misstatements about the company or could convey the incorrect impression that the information continues to be true as of the date it is republished.
- Facebook Post from a Director – “Just read our earnings release that went out today. Don’t think it’s an understatement to call this our best quarter ever!” (This director has just essentially added language to the deliberately crafted earnings release. While quotes within the earnings release were fully vetted, this director may have just made a misleading statement by branding this the best quarter ever.)
- Tweet from your Chief Operating Officer – “Take a look at our 10-K: www.sec.gov/companyform10k. Our new clinical trial certainly looks promising! Big things ahead!” (As mentioned before, context matters. The new clinical trial was probably addressed in proper context in the Annual Report on Form 10-K. While the link to the annual report was provided, the COO in this tweet has highlighted one point of disclosure from what is likely a fairly lengthy document. Simply stating that big things are ahead because of the clinical trial, even though the news about the clinical trial has been disclosed, could be misleading out of context. In this scenario, we can’t be sure that the reader will click on the link and gain the needed context.)
- Companies may wish to consider limiting the republishing or reposting of previously disclosed company information by directors and employees.
- In the alternative, companies should clearly communicate in their social media guidelines exactly what is permissible and what is not permissible in terms of elaboration and additional language added to what the company has already disclosed in order to avoid materially misleading statements. Innocuous statements such as “Take a look at this press release” carry less risk than “Things are looking up for us,” even if the link to the press release is provided, but all repostings should be subject to proper disclosure controls and should be properly vetted.
Entanglement and Adoption – Avoid Letting the Words of Others Become Your Words
Directors and employees may wish to link to, post, like or tweet articles or third party reports about the company via social media. For instance, if the Wall Street Journal runs a favorable article on your company, it could be desirable to have your officers and directors publicize the good coverage within their various networks. However, companies should be aware that the statements of others in third party publications can be attributed to the company through the doctrines of entanglement and adoption.
Generally, when a company has publicly given its explicit or implied endorsement of a third-party statement about the company, courts at times have held that the company has essentially adopted the statement as its own. The related entanglement doctrine applies when a company is deemed to be responsible for third-party statements because it has tied up the third-party statements with its own disclosure or has assisted the third party in preparing its disclosure. In short, both theories serve to prevent a company from trumpeting or facilitating misleading, but positive, information, while avoiding responsibility simply because the company didn’t actually make the statement.
- Facebook Post from your Chief Executive Officer – “Look what this analyst has to say about us: www.analyst.com. And he’s one of the best in the industry.” (The CEO has essentially endorsed what this analyst has written and may be deemed to have adopted the report as the company’s own. Whether this will result in misleading statements being attributed to the company will depend on the details in the report; however, an outside party isn’t always in the best position to make accurate statements about a company, and the CEO should be sure that every statement in the article is accurate and not misleading.)
- Tweet from your Chief Financial Officer – “We’ve been telling you for a while that our new product has potential. Looks like someone else agrees: www.thirdpartysite.com” (In this tweet, the CFO has arguably adopted all of the third party’s views about the new product.)
- Facebook “likes” by a director – A company director continually “likes” the glowing reports and articles published by a third party, even though some of the information in the publications is inaccurate. (Even a “like,” or a consistent stream of them, could be an implicit statement of approval of the possibly misleading third-party content.)
- Companies would be well-advised to educate their directors and officers regarding the possibility of having the misleading statements of others applied to them. Social media guidelines should address exactly how the company wishes its directors and officers to address the republishing, and implicit approval, of third-party content via social media.
- Consider requiring pre-approval from legal counsel prior to the tweeting, posting or liking third party reports and articles.
While there is not a one-size fits all approach to handling social media as it relates to various companies, all companies should take the time to craft and regularly evaluate their social media guidelines so that company expectations of employees and directors are clear. Social media guidelines, of course, should also be drafted with an eye toward the company’s insider trading policy, its other corporate governance documents, and generally accepted social etiquette. Remember that compliance with Regulation FD does not mean that insiders are free to trade—the market must have had sufficient time to process the information before insiders may trade. And while we all are justifiably focused on compliance with Regulation FD, given the SEC’s recent guidance, don’t lose sight of the risk to a company when its employees make potentially misleading statements, regardless of the medium.