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Social Media and Reporting Issuers
Posted in Securities

In our recent blog post discussing the publication of the Canadian Securities Administrators’ latest continuous disclosure compliance review, available here, we noted that the regulators remain concerned with some reporting issuers’ use of social media, particularly as a medium to disclose material information. On August 7, at 9:48 AM, Elon Musk, the Chair and CEO of Tesla, Inc., tweeted: “Am considering taking Tesla private at $420. Funding Secured.” Tesla is not a reporting issuer in Canada and is not directly subject to provincial securities laws relating to the communication of material information.[1] Nonetheless, the tweet serves as an interesting illustration of the risks of using social media to communicate with investors in Canada, and directors and executives of Canadian public companies should be aware of those risks.

In the Canadian context, a tweet of this type could potentially raise numerous issues. First, the securities regulators have made it clear that disclosure of material information on a social media website alone does not meet the requirement that it be “generally disclosed.” In other words, if material information is disclosed in a tweet, it remains in the category of non-public or “insider” information that can trigger penalties if traded on (known as “insider trading”) or shared (known as “tipping”). If the disclosure of the information is by the company itself, it could be considered improper selective disclosure. If the disclosure of the information is by a person in a “special relationship” with the company in question (which of course includes the CEO), it could be considered an illegal tip.

If a tweet constitutes a “tip”, any person who buys or sells shares after the tweet, but before the information is “generally disclosed” (normally considered, in Canada, to require a press release and sufficient time for the market to digest the information), could have a claim for losses suffered due to not having access to the material information. Similarly, if the statements in the tweet are not true, a buyer or seller of shares after the tweet could have a claim for misrepresentation, and there could be further liability for “market manipulation.”[2]

Further, a company could be exposed to liability for failing to disclose a material change. Securities laws in Canada require the issuance of a news release immediately upon the occurrence of a material change. It is not clear whether public musing by a CEO that he is “considering” taking the company private would constitute a “material change” in respect of the company for the purposes of securities laws. That would, in part, depend on the company’s involvement and reaction. In this case, Mr. Musk’s tweet was presumably made in his capacity as an investor, not a representative of the company; nonetheless, given his position, there would be a risk, and in Canada a board faced with a similar situation would be expected to react by issuing its own news release.

Finally, in Canada, an offer to purchase outstanding securities that would result in the offeror holding 20% or more of the class of securities that the offer applies to is a “takeover bid”, and therefore subject to formal rules that place disclosure and other obligations on the offeror - particularly where the offeror is an insider - and restrictions on timing, pricing and collateral arrangements. If a tweet that specifies a price could be considered an “offer”, the tweeter would be in breach of those rules.

Most of these considerations, which would only be triggered under the Canadian securities law regime, are not relevant to the Tesla tweet. The case is illustrative, however, of the risks inherent in the use of social media by public companies, and underscores the importance of a robust social media governance policy.

To discuss the disclosure of material information and the use of social media to do so, please contact any member of our Corporate Finance and Securities Group.

[1] Provincial securities laws relating to insider trading and tipping do apply in respect of any company whose securities are publicly traded, regardless of whether it is a reporting issuer in Canada. In theory, a tweet in respect of a non-reporting issuer could create liability under these rules, subject to statutory defences.

[2] A person cannot engage in any act - or attempt to engage in any act - that he or she knows or ought to know results in an artificial price for a security or that perpetrates a fraud. A public statement by a CEO that he intends to take a company private at a specified price and has secured the funding to do so, if not true, could create an artificial price.

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