Is It Time to Restrict Your CEO’s Twitter Account?

Is It Time to Restrict Your CEO’s Twitter Account?

Well-known CEOs like Elon Musk, Richard Branson, and Mark Cuban have millions of Twitter followers. This evidences and enhances the strength of their brands, but also exposes them to liability.

Tesla founder and CEO Elon Musk recently drew the ire of the Securities and Exchange Commission (SEC) when he tweeted to his 22.3 million followers on Twitter that he was planning to take his company private. On August 7, 2018, Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” Following this tweet, Tesla’s stock price jumped by over six percent, a significant impact on the market that many attributed to the tweet. The impact was keenly felt by short-sellers, with whom Musk had been feuding.  Tesla later confirmed that a final decision about taking the company private had not yet been reached.

The SEC responded with an enforcement action against Musk and Tesla, alleging that Musk made false and misleading public statements about taking Tesla private in violation of Section 10(b) of the Securities Exchange Act of 1934. Pursuant to a settlement with the SEC, Musk and Tesla would be required to each pay $20 million penalties, and Musk must step down as Chairman of the Board for at least three years.  The settlement agreement is being reviewed.  Elon Musk’s further statements on Twitter, which were followed by a 2% dip in company value in after-hour trading, indicates he will continue to use Twitter in the same manner.  

Regulation Fair Disclosure

Musk isn’t the first CEO to make a social media mistake. In 2014, the SEC investigated a Facebook post by NETFLIX CEO Reed Hastings. The post stated: Congrats to Ted Sarandos and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!

The SEC subsequently issued a Wells Notice alleging that Netflix ran afoul of Regulation Fair Disclosure (FD). Regulation FD requires that a publicly traded company immediately release to the general public any material non-public information that it has disclosed to certain individuals outside of the company. The goal is to promote full and fair disclosure.

Acknowledging that there had been a great deal of uncertainty about how the rule applies to social media, the SEC elected to publish the results of its investigation into Hastings rather than take enforcement action. It also provided additional guidance. Under the SEC’s revised social media policy, companies can use Facebook and Twitter and similar sites to announce key information in compliance with Regulation FD, so long as investors have been alerted about which social media will be used to disseminate such information.

As the SEC explained, “[A]lthough every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer – without advance notice to investors that the site may be used for this purpose – is unlikely to qualify as an acceptable method of disclosure under the securities laws. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.”

SEC’s Settlement with Musk

In 2013, Tesla followed the SEC’s Regulation FD policy in announcing that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla. It said: “Tesla investors and others should note that we announce material information to the public about our company, products, and services and other issues through a variety of means, including Tesla’s Website, press releases, SEC filings, blogs, and social media.” Tesla specifically encouraged investors to review Musk’s tweets, advising: “Please follow Elon Musk’s and Tesla’s Twitter accounts: twitter.com/elonmusk and twitter.com/TeslaMotors.”

However, the SEC still found that Musk’s September 9 tweet crossed the line. According to the SEC’s complaint, Tesla statements were inadequate because the company had no disclosure controls or procedures in place to determine whether Musk’s tweets contained the information required to be disclosed in Tesla’s SEC filings.  In addition, the company allegedly lacked sufficient processes in place to ensure that Musk’s tweets were accurate or complete.

The SEC’s complaint further alleged that Musk’s Twitter statements were misleading. According to the SEC, despite his tweets suggesting that the going private transaction was nearly final, Musk knew that the potential transaction was uncertain and subject to numerous contingencies.

Musk and Tesla ultimately agreed to settle the charges against them without admitting or denying the SEC’s allegations.  Among other relief, the settlements require that:

• Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman.  Musk will be ineligible to be re-elected Chairman for three years;
• Tesla will appoint a total of two new independent directors to its board;
• Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
• Musk and Tesla will each pay a separate $20 million penalty.  The $40 million in penalties will be distributed to harmed investors under a court-approved process.

Lessons to Learn?

As the SEC’s enforcement actions against Company CEOs highlight, social media posts by CEOs and other top executives can be a risk center for a company.  Stock volatility, Regulation FD violation or other SEC disclosure violations, lawsuits and consumer complaints can result from CEO statements on social media.  Therefore, public companies (and even private companies) should be making sure they have:

• An understanding of the SEC legal requirements re: company information disclosure Carefully crafted social media policies, even for their CEOs
• Social media trainings
• Control processes for disclosing company information via social media

If you have any questions, contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Cassin, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.