BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.
To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.
To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.
The tweet-related problems created by Tesla Inc. co-founder and CEO Elon Musk, which include a Securities and Exchange Commission investigation, illustrates the importance of firms developing a social media policy, directors and officers liability experts say.
Policyholders should also anticipate a more intense scrutiny of their social media postings by D&O underwriters because of the problems faced by the Palo Alto, California-based electric carmaker and rocket firm.
Mr. Musk’s first in a series of Twitter postings was sent Aug. 7, when he said “am considering taking Tesla private at $420. Funding secured.” Tesla’s stock had closed at $341.99 on Aug. 6.
Tesla’s share price rose more than 10% after the tweet, but there were no accompanying regulatory filings, and soon the SEC stepped in with a formal investigation amidst growing skepticism as to whether funding had been secured. Mr. Musk subsequently said in a blog that he was in discussions with Saudi Arabia’s sovereign wealth fund and other potential backers, but financing was not yet confirmed.
It also led to at least four putative class action investor lawsuits filed in San Francisco and Oakland, California, which may be the first securities class action litigation based on disclosures made through social media (see related story). The litigation potentially could lead to D&O defense or settlement claims.
Mr. Musk later acknowledged his tweet had not been reviewed by anyone at Tesla. Further fueling the situation was an interview Mr. Musk gave to the New York Times in which he said he was under major emotional stress in the “most difficult year” of his life.
“We still don’t know for sure what really happened and what Elon Musk thought he was doing,” said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C., in Beachwood, Ohio. Taking a company private ordinarily requires “layers of scrutiny.”
Mr. LaCroix said other companies also use social media to communicate, although generally not as a primary means of communication.
“The SEC has made it clear that companies can use social media as a means of delivering information to investors as long as they inform investors in advance, so there’s nothing inherent about using social media that’s a problem,” Mr. LaCroix said.
But Mr. Musk was using his own twitter account. “It wasn’t an official tweet and was not subject to scrutiny or any type of filter,” Mr. LaCroix said.
The situation underlines the importance of making sure “people who are speaking on behalf of the company understand the ramifications of their legal duties when they are speaking,” said Teresa M. Goody, founder and CEO of McLean, Virginia-based consulting firm Goody Group P.L.L.C. and a former attorney in the SEC’s office of general counsel. “They can’t just haphazardly and whimsically put things out there.”
The difficulty now with social media is that “everyone has a megaphone,” and the release of information that previously would have had more minor ramifications can now be catastrophic, Ms. Goody said.
“Twitter is an informal method of communicating that should not be treated informally by corporate officers and directors,” said William Boeck, senior vice president at Lockton Cos. L.L.C. in Kansas City, Missouri.
“Directors and officers need to treat any communication through social media the same as other written communications at the company,” including its financial condition, its prospects and other relevant information to investors, said Dan A. Bailey, a member of law firm Bailey Cavalieri L.L.C. in Columbus, Ohio.
When a company has a conference call with analysts or files an SEC document, there is “careful thought” as to what is said and disclosed or not disclosed, said Mr. Bailey. “When you move over and make the same communications through social media, as I think we’re seeing in this instance,” people “can let their guard down,” he said. Feeling they do not need to be as careful with their social media communications is a “very dangerous mindset,” said Mr. Bailey.
“I’m hopeful that this experience will be a lesson to corporate America to be very careful when you start making comments on social media about the company,” he said.
“Companies really need to implement really responsible and strict social media policies,” said Ms. Goody. They “really need to be looking at their policies and their procedures and also make sure CEOs have sophisticated counsel they can rely on for advice, and also listen to them.”
There probably need to be some rules as to what can be posted without going through layers of review, said Mr. LaCroix.
Also, companies should have plans in place in situations such as this where information is released, and there should be a team in place to put together a response plan, he said. Tesla “seemed pretty flat-footed as to how they were going to handle it,” Mr. LaCroix added.
Consult outside counsel “who are well-versed in the law regarding corporate communications and interactions with shareholders,” said Mr. Boeck.
Meanwhile, in light of Tesla’s experience, D&O underwriters will be scrutinizing potential policyholders’ social media postings more closely, say observers.
“I think what underwriters will be looking at, basically, is what is the company’s social media policy, how it should be used and what authorization” the CEO or the chief financial officer has to make announcements about the company, said Joseph P. Monteleone, a partner with Weber Gallagher Simpson Stapleton Fires & Newby L.L.P. in Bedminster, New Jersey. “I think that’s going to be a key issue.”
Lawsuits filed against Tesla Inc. co-founder and CEO Elon Musk and Tesla by stock investors days after his surprise announcement via Twitter that he was considering bringing his company private may be the first class-action securities lawsuits based on disclosures made through social media.