Hit the Brakes: That Tesla Tweet and the Use of Social Media by Capital Markets Participants
August 20, 2018
A recent tweet by Elon Musk, the Chairman and CEO of Tesla, serves as an interesting case study of the potential risks involved in the use of social media by reporting issuers and other capital markets participants.
On August 7, 2018, Mr. Musk tweeted the following:
The tweet did not disclose the amount of funding Mr. Musk had purportedly secured, its source or any terms of the plan (although he subsequently tried to clean some of this up in a blog post - which may done more harm than good). To put it in perspective: initial reports valued such a transaction at US$70 billion, which would make it the biggest ever attempt to take a company private.
It is clear that Mr. Musk does not shy away from controversial statements. But this particular tweet was - at least from the perspective of a securities lawyer - stunning.
Some disclaimers first: Tesla is not directly subject to most Canadian securities laws. Many of the considerations discussed in this blog post would only be triggered under Canadian securities laws and are therefore not directly relevant to Mr. Musk's tweet. We are not speculating on the likelihood or merits of any claims or enforcement action which may or may not be brought against Mr. Musk or Tesla under the laws of any jurisdiction. It may turn out that Mr. Musk ultimately takes Tesla private (and in many ways this situation is a perfect example of why he wants to do so).
Having said that, we think it is worth noting that Mr. Musk's tweet could raise a number of interesting issues under Canadian law (in no particular order):
Securities laws in Canada require the issuance of a news release immediately upon the occurrence of a "material change". Canadian reporting issuers can be exposed to liability for failing to disclose material changes. The analysis of whether Mr. Musk's tweet would constitute a material change in respect of Tesla for the purposes of Canadian securities laws is complex and would require analysis of a number of factors. However, given Mr. Musk's role with Tesla, his tweet presents risks for the company. It would be prudent for a board faced with a similar situation to respond by issuing its own news release (and indeed, on August 8th, six of nine members of the Telsa board issued a statement regarding discussions with Mr. Musk about taking the company private).
The Canadian Securities Administrators (CSA) have previously made it clear that disclosure of material information on a social media website alone does not meet the requirement that it be “generally disclosed". Typically this disclosure obligation is met by issuing a press release and allowing sufficient time for the market to digest the information. So if material information is only disclosed in a tweet, it has not yet been publicly disclosed. A company could be engaging in improper selective disclosure by sending such a tweet.
Reporting issuers in Canada can be liable to investors under relevant securities law for damages for misrepresentations in a publicly disclosed communication. So if the statements in the tweet are not true, a buyer or seller of shares after the tweet could have a claim for misrepresentation.
Market manipulation involves efforts to artificially increase or decrease a company’s share price. Common examples of market manipulation include pump and dump schemes, high closing activities and volume manipulation. But a statement like the one made by Mr. Musk on Twitter could, if untrue, artificial increase the share price (and it certainly did significantly increase Tesla's share price immediately in this case). Such a tweet may be particularly risky where the CEO has publicly expressed hostility towards short sellers (for example, on August 11th, four days after the original tweet, Mr. Musk tweeted that Tesla would offer "short shorts" as merchandise).
⇲ We think a recent case brought before the Alberta Securities Commission (ASC) may signal that securities regulators are likely to increasingly focus on the use of social media by capital market participants going forward. In that case, the ASC panel dismissed an interim cease trade application brought by staff which had attempted to temporarily ban shortseller Marc Cohodes from trading in shares of Badger Daylighting Ltd. (Badger) or making any public statements about Badger. Around the time he acquired a short position in the company, Mr. Cohodes started making disparaging public comments regarding Badger on social media. ASC staff were particularly concerned about a tweet sent by Mr. Cohodes containing a picture of a Badger truck as support for his allegation of its illegal dumping of toxic substances. In an oral decision released on August 15, 2018, the ASC said staff failed to prove there was an urgent need for the interim order to control Mr. Cohodes' activity while a full investigation is undertaken. Written decisions of the ASC have not yet been released.
In simple terms, under Canadian securities law, an "offer" to purchase outstanding securities that would result in the offeror holding 20% or more of the class is a “takeover bid” (if made by an insider like Mr. Musk, it is an "insider bid" and additional rules apply). In Canada, we have a rather extensive set of rules in place to govern these types of offers. So far it does not appear that this question has been considered by a Canadian securities regulator - but if Mr. Musk's tweet was to be deemed an offer under the relevant Canadian rules, he would be in breach of those rules.
Tesla and Mr. Musk are now being sued by investors over the tweet. The SEC has launched an investigation into the matter, and reportedly served Tesla with a subpoena. It is not yet clear what, if anything, will come of the lawsuits and SEC investigation. But it is clear that this will continue to be a distraction for Tesla and Mr. Musk, and may have been avoidable. Indeed, it has been reported that Mr. Musk's tweet had not been cleared ahead of time with Tesla's board. At a minimum, this case highlights the need for boards of Canadian public companies to ensure that appropriate social media governance policies and disclosure practices are in place.