Friending Social Media: How To Manage Legal Risks

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...