Social media use is proliferating at an unprecedented rate. What many people once thought was a silly fad has now become a ubiquitous part of our daily lives. It is widely reported that there are 50 million “tweets” on Twitter and over one million ” check-ins” on FourSquare every day, over 24 hours of video uploaded to YouTube every minute and more than 700 status updates every second on Facebook.
Social media is a double-edged sword for public companies: if used properly, it can yield very positive results, but where it goes uncontrolled, the results could be damaging. Recently, public companies have been utilizing social media sites such as Twitter, Facebook and blogs to communicate information to the public about their business and operations. At the same time, public companies are particularly vulnerable to negative or misleading statements posted on social media sites and can also suffer damages resulting from inadvertent posts which can reveal confidential information about a company to the world.
The first part of this article will discuss the use of social media as a news dissemination tool and shareholder communication means while operating within the securities regulatory framework. The second part will discuss how companies can put in place policies and procedures to deal with potential bad press posted on social media sites and also govern the use of social media by directors, officers, employees and consultants.
I – Social Media for Shareholder Communications
Social media continues to be a bit like the Wild West: it is a place of opportunity, but should be entered with caution. The key is to remember that the same rules apply to social media that apply to all corporate disclosure.
A study published by the Ross School of Business at the University of Michigan in July 2010 entitled “The Impact of Managerial Dissemination of Firm Disclosure” (Ross Study) suggests that social media can help companies overcome a lack of media and analyst coverage while improving liquidity for their stock. With investors wanting real-time access to information as it happens, companies can benefit from harnessing the power of social media to connect with their current and potential investors.
Traditional news sources are limited as to the amount of information they can adequately provide to the public, and therefore tend to focus on larger, more visible companies. Social media, such as Twitter, can be utilized at minimal cost to overcome the dissemination constraints of the news services.
Twitter is one example of a direct access information technology that can distribute real-time information to the public. “Tweets” are not only visible to “followers”, but are google-searchable and can be accessed by any member of the public. The findings in the Ross Study showed that the bid-ask spread narrowed and market depths widened when companies tweeted their press releases, suggesting that Twitter use can compensate for lack of sell-side analyst coverage.
Facebook and blogs are slightly different: they are similar to the company’s website in that the public must choose to access the site in order to obtain the information. As a result, Facebook or blogs do not disseminate news, but are simply an online source for investors to obtain information about a company. Both sites are a good way for companies to post pictures of their projects or products and connect with the public, but neither is as useful as Twitter as a tool for news dissemination.
Social Media for Disclosure
National Policy 51-201 Disclosure Standards provides a framework for disclosure to investors and to the public. It is fundamental that everyone investing in securities has equal access to information that may affect their investment decisions. Companies must ensure that all material information is “generally disclosed” and must take precautions to prevent “selective disclosure”.
Selective disclosure occurs when a company discloses material non-public information to one or more individuals or companies and not broadly to the investing public. Selective disclosure can not only result in insider trading or tipping, but it also undermines a retail investor’s confidence in the marketplace as a level playing field.
Electronic Disclosure as part of a Company’s Disclosure Record
The Canadian Securities Administrators recognize that the effectiveness of disclosure methods varies between companies and that alternative methods may be appropriate in order to disseminate material information in the manner best calculated to effectively reach the marketplace. Active and effective dissemination, which involves the “pushing out” of information into the marketplace, is central to satisfying the “generally disclosed” requirement under applicable securities laws.
Investor relations information that is disclosed electronically should be considered to be an extension of an issuer’s formal corporate disclosure record. Therefore, companies should ensure that information disseminated is not misleading, and does not otherwise contravene the disclosure requirements, including those that apply to offerings of securities to the public.
Method of Electronic Disclosure
Any electronic distribution of material information must be made after the information has been disseminated by traditional methods on a news wire service.
Companies should undertake every effort to ensure that documents distributed electronically are posted in their entirety. Documents can be uploaded in their entirety to Facebook; however, on Twitter, companies should post an excerpt which is not misleading and also provide a link directly to the document within the Tweet.
As described below in Part II of this article, companies should put in place a Corporate Disclosure Policy which includes a section addressing how to use electronic media and the corporate website. Any failure to properly disseminate news could result in suspension of trading or delisting of the company’s securities.
Posting Information Prepared by Third Parties
Companies should also take care when posting investor relations information prepared by third parties, unless the information was prepared on behalf of the company or is general in nature and not specific to the company. Posting information prepared by third parties could result in an issuer becoming “entangled” with the report and ultimately lead to legal responsibility for the content or to an obligation to correct the information if it becomes misleading.
If a company wishes to post a report prepared by a third party through its Twitter or Facebook accounts or on its blog, the company should first obtain permission to reprint the report, and then should identify it as representing the views of a third party and provide a link to the entire report in the Tweet, Facebook or blog post. Companies should include disclaimers which identify the third party information and state that the company is not responsible for the content, accuracy or timeliness of the third party content.
If a company chooses to post third party reports or media articles through its Twitter feed or on its Facebook page or blog, it must make every effort to ensure that all significant articles concerning the company are Tweeted or posted and that negative and positive articles are given similar prominence. Companies that disclose positive news but withhold negative news could find their disclosure practices subject to scrutiny by regulators.
Technical Information and Forward-Looking Information
A Tweet is limited to 140 characters. As a result, it is difficult to comply with certain mandated written disclosure requirements such as those in National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) in respect of technical mining disclosure or obtain the protection of safe harbour statements for forward-looking information using Twitter.
Best practices would prohibit any disclosure of technical mining information or other information that triggers mandated disclosure in a Tweet. However, if a company wishes to disclose such information, the company needs to consider how to address the mandated requirements, likely through the use of links. For example, if a company intends to disclose technical information through its Twitter account, at a minimum, the name of the qualified person who has prepared the technical information should be included, and a link should be provided to the source of that technical information. Any technical information disclosed on the company’s Facebook page or in a blog should also comply with the written disclosure requirements in Parts 2 and 3 of NI 43-101.
Disclosure of forward-looking information through Twitter or on Facebook or a company’s blog should also be avoided. If any forward-looking information is disclosed, the Tweet or posting should include a link to the news release or other disclosure document which contains appropriate safe harbour language for forward-looking statements and information.
Promotional or Market-Making Information
Companies should be aware that the delivery by Twitter or posting on Facebook or a blog of new information during a period of distribution may be construed as advertising under National Policy 47-201 Trading Securities Using the Internet and Other Electronic Means and this may be subject to restrictions in certain jurisdictions. The same rules apply to advertising through Twitter, Facebook and blogs as to advertising through traditional print media.
A company proposing a public offering needs to ensure that those individuals responsible for disclosure through social media do not indirectly contravene the pre-marketing prohibition. In addition, tweets or posts during a period of distribution could impact on a company’s ability to offer securities into the United States and other foreign jurisdictions. Companies will need to consult their legal advisors for advice if they wish to use social media during a period of distribution.
Companies using social media for promotional or market-making purposes should ensure that Tweets and postings on Facebook or blogs do not include any misrepresentations and that exaggerated reports or unnecessary details are avoided.
The rules governing proxy solicitation in National Instrument 54-101 Communication With Beneficial Owners of Securities of a Reporting Issuer (NI 54-101) apply to social media. The term “solicit” in NI 54-101 includes “requesting a proxy whether or not the request is accompanied by or included in a form of proxy and requesting a securityholder to execute or not execute a form of proxy or to revoke a proxy”. There is an exception for communicating for the purposes of obtaining the number of securities required for a securityholder proposal under applicable laws. Companies should ensure that they do not solicit proxies without sending the management information circular to shareholders first.
II – Controlling Social Media with Policies and Procedures
Even if a company is not interested in using social media for disclosure or shareholder communications, it would be naÃ¯ve to think that social media has no impact on its business or operations. Also, companies should acknowledge that their directors, officers, employees and consultants could be using social media for either personal or business use and should put in place precautionary methods such as a social media policy or updated corporate disclosure policy.
There is an unbelievable amount of information published every second through social media networks. As a public company, it can be daunting to try and sift through the information and determine if defamatory or damaging statements are being made about your company, management or operations. It has been reported that every negative comment shared via social media reaches at least 30 other people and negative information can go “viral” as a result of re-posting or re-tweeting. Collecting information and monitoring it to ensure that damaging information is not being posted is a full-time job and companies may wish to hire someone to undertake this task. If rumours or misleading statements are discovered which could have a negative effect on the market price of their securities, public companies should consider issuing news releases dealing with those rumours or misleading statements.
Information shared through social media sites could be damaging to both individuals and companies: misleading or malicious statements could be taken out of context or seemingly innocuous updates could reveal privileged or confidential information. This could result in selective disclosure and also possibly lead to tipping and insider trading. In the worst case scenario, breaches of confidentiality could lead to investigations by regulators and potential trading halts in order to give the company additional time to press release the leaked information.
Any unauthorized release or use of confidential information can directly harm a company, causing loss of competitive advantage and investor confidence, damage to relationships with suppliers and industry contacts and harm to employees. Proper procedures should be put in place to deal with any leak of confidential information.
Social Media Use by Directors, Officers, Employees and Consultants
Companies should put in place a Corporate Disclosure Policy which includes a section addressing guidelines around the use of social media. This Corporate Disclosure Policy should contain rules and guidelines for directors, officers, employees and consultants of the company who may inadvertently or maliciously post confidential, misleading or suggestive information about the company.
The policy should prohibit these individuals from discussing corporate matters on social media sites. This will help protect your company from the liability that could arise from well-intentioned, but sporadic efforts of directors, officers, employees or consultants to correct rumours or defend the company.
The policy should also require that these individuals report any discussion pertaining to your company they have come across on the Internet so that management can determine the best way of dealing with the posted information.
Companies are likely unable to restrict directors, officers, employees or consultants from using social media sites for personal use; however, they can prohibit these individuals from disclosing information on the company. Companies should also ensure that these individuals are not holding themselves out as authorized representatives of the company online. In addition, companies should educate directors, officers, employees and consultants on best practices for social media use in order to limit the potential for leaked confidential information.
Using Social Media to Understand Shareholder Concerns
Public companies have recently started using social media to reach out to shareholders and get feedback on what issues are important prior to conference calls. Companies can use Twitter, Facebook or blogs to collect questions in advance of earnings calls and use that information to tailor key messages around those issues on the call. This can decrease the number of follow-up calls received after the conference call is over.
Companies may also wish to tweet information in real time to the public during earnings calls. The best way to do this would be to set up the tweets in advance based on the earnings release and script and then tweet during the call. These tweets are google-searchable and can reach a much larger market than those interested parties who have joined in on the earnings call.
Companies can no longer ignore the positive and negative impact of social media. Companies wishing to implement a social media strategy for disclosure purposes should remember that the same rules apply to social media use as to all public disclosure. For those companies that do not wish to utilize social media networks, at a minimum, these companies should put in place policies to protect their organization and to control the use of social media by their directors, officers, employees and consultants.
Caroline E. Clapham | Vancouver http://www.fasken.com/en/caroline-clapham/
Caroline is an associate in the Securities and Technologies Practice Group, with a focus onÂ mergers and acquisitions, public and private offerings, and general corporate commercial transactions.
Caroline has assisted a variety of issuers with listing on the Toronto Stock Exchange and TSX Venture Exchange in connection with prospectus offerings, reverse takeovers and qualifying transactions. She also has experience advising public company clients on corporate governance and securities regulatory compliance.