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By Frank Aquila and Sarah Payne, Sullivan & Cromwell LLP
Over the past few years, companies' use of corporate blogs and social media sites to communicate with members of the investment community has grown significantly, to the point that some companies have abandoned traditional media outlets for release of their earnings announcements.
Although the recent announcement by Netflix that it received a Wells Notice in connection with a Facebook post has put renewed focus on this area, use of these communications tools by a company's investor relations and public relations departments is likely only to intensify in the future.
Investor relations departments are rightfully focused on getting their companies' messages out clearly and quickly; as a consequence, they may be frustrated by legal restrictions that seemingly conflict with the corporate disclosure goals of transparency, clarity, and plain English.
At the same time, because these forums are real or near-time communications that can survive indefinitely, with little or no ability to fix errors, and are often in abbreviated formats, corporate legal departments need to work closely with IR and PR departments to craft appropriate guidelines.
Complicating matters is the fact that existing legal frameworks were not drafted with these new forms of communication in mind. This simply means that lawyers will often have to be creative in forging a path through social media that does not run afoul of legal requirements while at the same time meeting the company's investor relations objectives. Challenging for sure, but no doubt achievable.
This article briefly presents some issues for legal and investor relations teams to consider as they seek to increasingly use social media to communicate with investors.
One of the key challenges of many web-based forums and communications, whether it be corporate blogs, Facebook, Twitter, or other sites, is the focus on brevity. Brevity can of course enhance investor understanding and be consistent with plain English disclosures; messages that are too short, however, can be confusing and, when taken out of context, could be misunderstood by investors.
For example, Twitter limits each individual tweet to 140 characters, and although one could break up a message into multiple tweets, each tweet may be read separately and re-tweeted. Accordingly, each message should stand alone or be placed in a context such that it is clearly part of a longer message. Moreover, the summary nature of the communication should be obvious to readers; if it is not, a cautionary note (or link to a cautionary note) may be warranted. If the tweet or blog posting is commenting on or summarizing a press release or an earnings call, it may be helpful to include a link to the full text of the press release or the webcast itself.
On Dec. 6, 2012, Netflix announced that both it and its CEO, Reed Hastings, had received a Wells Notice from the Staff of the Securities and Exchange Commission indicating the Staff's intent to recommend to the SEC that it institute an enforcement proceeding against Netflix and Hastings for violations of Regulation FD, the SEC's rule regarding selective disclosure of material nonpublic information.
In June 2012, the company posted on its blog that Netflix members were enjoying “nearly a billion hours per month” of Netflix. In early July, Hastings publicly posted on Facebook to the subscribers who follow him (which he indicates is more than 200,000) that Netflix members had “enjoyed over one billion hours in June.”
The Wells Notice related to Hastings' July Facebook post. Hastings noted in his public statement regarding the Wells Notice that “there was press coverage as there are many reporters and bloggers among you, my public followers. Some of you re-posted my post . . .” and argued that not only did the statement not constitute “material”information, but even if it did, the Facebook post was a public, rather than selective, disclosure for purposes of Regulation FD.
Although it is too early to tell, the Netflix Wells Notice appears to signal a more aggressive stance in the area of Regulation FD, not only with respect to what constitutes material information, but also in terms of whether communications through social media constitute public disclosure. It remains to be seen whether the SEC will pursue this matter and if it does, whether it will be successful in demonstrating that the information was both material and disclosed on a selective basis.
The action highlights the need for SEC guidance in this area. Existing SEC guidance, contained in an August 2008 interpretive release, pre-dates the rapid rise of blogs and social media sites and focuses on the use of corporate websites. Certainly other forms of web-based communication that “blast” out the information to followers may be more effective in disseminating the information to the public than a website posting.
Nevertheless, in the absence of additional guidance, the 2008 release does provide some insight into how the SEC may view social media in the context of Regulation FD. The release provides the following nonexclusive factors for assessing whether information posted on a company's website is public for purposes of allowing a subsequent selective disclosure of that same information:
The release also indicates that companies should evaluate whether investors and the market have been afforded a reasonable waiting period to react to the information before making a subsequent selective disclosure of the information.
A company wishing to use communication tools such as Facebook or Twitter to make material information “public”for purposes of Regulation FD will want to consider factors similar to those set forth above, such as how the company will adequately inform the public that it intends to release material information through this medium (e.g., through its SEC filings and/or press releases issued well in advance of the actual disclosure), the extent to which the medium has a sufficient number and type of followers, how easily material information can be gleaned from the medium (e.g., is the material information buried in a sea of Twitter posts about topics the investment community would otherwise ignore), and the extent to which such information is quickly and widely picked up by the press.
The absence of specific SEC guidance, taken together with the SEC Staff's Netflix action, may result in many companies taking a wait and see approach before they rely on social media alone for disclosure of material information. This does not mean, however, that a company should abandon use of web-based communications.
Rather, companies should ensure that these types of communications are part of their Regulation FD compliance program, and as with any corporate communication, take steps to prevent disclosure of material nonpublic information in a manner that violates Regulation FD. As companies are well aware, this requires close and frequent contact among the legal, IR, and press departments to ensure that anyone who may be blogging or sending similar communications understands not only the information about the company that is already in the public domain, but also the type of information that may be viewed as material.
This is particularly important in the case of a company representative who may be live-blogging or tweeting an earnings call or other public announcement. In that environment, the individual may be creating statements real-time in response to an unscripted analyst Q&A session, as opposed to blogging about the company's prepared remarks that were provided to the representative in advance. It is crucial that the representative understand the types of company information that, if shared, could run afoul of Regulation FD.
Public blog entries, tweets, or other communications that disclose or repeat earnings or other financial information also will need to be monitored for Regulation G non-GAAP financial measure compliance. Even repetition of previously disclosed non-GAAP financial measures could be considered public disclosure of non-GAAP information, and companies will need to include the corresponding GAAP measure and appropriate reconciliations.
The SEC's rules do not specifically contemplate these types of communications and therefore do not address the required format or location of the reconciliation. Nevertheless, it should be reasonable to rely on links to the company's website that contain the required reconciliations.
Web postings by corporate representatives could subject companies to liability under the antifraud provisions of the securities laws, including Rule 10b-5 under the Exchange Act. The SEC's 2008 Interpretive Release cautions that companies cannot avoid liability for such statements by having employees who are acting as representatives of the company purport to speak in their “individual” capacities. Legal and investor relations departments should work together with corporate bloggers and others to ensure that an accurate and consistent corporate message is being published.
To the extent that errors are identified in corporate communications, including in blogs or Facebook or Twitter posts, steps should be taken to correct the communication or post an update as soon as possible. Especially in the case of earnings or other material announcements, investor relations departments should take steps to coordinate the various corporate communications so that sources (whether it be blogs, websites, or others) are aligned from both a content and timing perspective.
Companies seeking protection under the securities laws for forward-looking statements may also wish to include a forward-looking statement legend, or a link to a legend, in connection with their web-based communications.
Finally, executive officers and other company representatives should be mindful of these issues in all of their web-based (and other) communications. The ubiquity of social media means a greater overlap of an individual's personal and work lives, with increased opportunities to make statements that could embarrass, or worse, create liability for, the individual and the company.
In certain special situations, legal departments may have to place additional restrictions on corporate web-based communicators, consistent with restrictions placed generally on corporate communications. Given the interactive nature of many web-based communications, legal departments may find that it is more difficult to control these types of communications. Corporate bloggers and others also may find it challenging simply to ignore significant events happening in a corporation's life.
However, in situations such as securities offerings, proxy contests, tender offers or acquisitions, communicating about the event or, in the case of securities offerings, issuing communications that may be viewed as offers under the securities laws, could potentially be problematic in light of legending and filing requirements, or in some instances, strict prohibitions on such communications.
Accordingly, before any type of special corporate event, it will be important for all constituencies (legal, IR, and PR) to have a collective communications game plan, with sufficient guidance to help those on the public communications “front line”respond as appropriate on a real-time basis.
Although to some it can appear that legal limitations present significant challenges to reaping the benefits of social media, that need not be the case. With care, creative thinking and frequent communication among the legal, investor relations and public relations departments, new media can contribute to fulsome investor communications and improved corporate transparency. As the power of social media grows and expands, it will no doubt become increasingly relevant to businesses and their investors. As lawyers, we are key to facilitating the proper use of these new communication outlets to meet the company's investor relations agenda.
Frank Aquila (firstname.lastname@example.org) is a partner in the Sullivan & Cromwell LLP Mergers & Acquisitions Group, resident in the firm's New York office. His practice focuses on mergers, acquisitions, strategic alliances, and corporate governance matters for large multinational corporations. Mr. Aquila was an American Lawyer “Dealmaker of the Year”in 2009 and is the 2010 recipient of the Atlas Award as the “Global M&A Lawyer of the Year.” Mr. Aquila is a featured online columnist for Bloomberg BusinessWeek and has received Burton Awards for Legal Achievement in 2005 and 2010. He is also a member of the Council on Foreign Relations and the Leadership Council on Legal Diversity.
Sarah Payne (email@example.com) is a partner in the Sullivan & Cromwell LLP Mergers & Acquisitions and Securities Groups, resident in the firm's Palo Alto office. Ms. Payne has a broad-based corporate practice advising clients on corporate governance and regulatory compliance issues, as well as on a wide range of transactions, including public and private securities offerings, acquisitions of public and private companies, and takeover defenses.
The views expressed in this article are their own and do not necessarily reflect the views of Sullivan & Cromwell LLP or its clients.
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