Post that blog or tweet at your peril
| Rapid changes in technology have seen law-makers battle to keep up with legislation dealing with the dissemination of company information
IT WAS inevitable that, where highprofile corporate executives have “one-click” access to the public through social media, the boundaries of the rules of disclosure would be tested.
In July 2012, Reed Hastings, CEO of Netflix, a company that allows subscribers to stream movies and television programmes online, posted this to his more than 200 000 Facebook followers: “Congrats to Ted Sarados, and his amazing content-licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When [TV series] House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!”
Between the post at 11am on July 3 and the close of trading on the next trading day, Netflix stock rose from $70.45 to $81.72.
Hastings was not the only executive to court controversy as the result of a social media posting. The former chief financial officer of online fashion retailer Francesca’s Holdings Corporation, Gene Morphis, was fired in May 2012 for “improper” use of social media to communicate company information. Among Morphis’s tweets was: “Board meeting. Good numbers=Happy Board.”
Another example is Elon Musk, Tesla Motors founder and CEO, who tweeted in December: “Am happy to report that Tesla was narrowly cashflow positive last week. Continued improvement expected through yearend.”
In the US, companies have been allowed to use their websites to communicate the equivalent of what the JSE calls “price-sensitive information” since 2008 when the Regulation Fair Disclosure, first published in 2000, was updated.
As a result of Hastings’s post, the Securities and Exchange Commission, the equivalent of our Financial Services Board, instituted an investigation. In April this year, it released its findings, detailing why it had decided not to institute charges against him for posting “material nonpublic information” about Netflix on his personal Facebook account.
At the core of the commission’s report is the imperative that information that could affect the share price of listed companies must be disclosed in a way that does not benefit one particular class of people. This broad principle is the basis for insider-trading laws such as South Africa’s Securities Services Act of 2004 and the newly enacted Financial Markets Act of 2012, as well as the JSE listing requirements, which require certain information to be disclosed in particular ways, primarily through the Stock Exchange News Service, or SENS.
The commission came to a common sense compromise about how Regulation Fair Disclosure would apply to social media. It said it supported “companies seeking new ways to communicate and engage with shareholders and the market”, but those methods had to be “reasonably designed to provide broad, nonexclusionary distribution of the information to the public”.
The personal social media accounts of company employees — such as the CEO’s Twitter account— are unlikely to meet this criteria. But the commission said that if “sufficient steps” had been taken to “alert investors and the market to the use of specific social media accounts to disseminate material nonpublic information”, those accounts could be used to transmit this information.
In South Africa, we are several steps behind these developments. In January, new JSE rules came into effect that allowed listed companies to publish a short format of their financial results in one newspaper, provided the long-form results are published on the company’s website.
But the JSE rules relating to publishing “price-sensitive information” — the sort of thing the commission dealt with in the Netflix case — remain unchanged.
What this means is that employees who use social media such as Twitter can still find themselves falling foul of insider-trading laws in South Africa. The Financial Markets Act, which came into effect last month, repealing the Securities Services Act, says that an insider who knows that he or she has “inside information and who discloses the inside information to another person” commits an offence.
An “insider” includes directors, employees, shareholders, or anyone else who obtains inside information through their position or profession. “Inside information” is something that has “not been made public”, was obtained from an insider and, if it were public, would have a “material effect on the price or value of any security listed on a regulated market”.
This new act has a specific idea of when information is “regarded as having been made public” and includes “when the information is published in accordance with the rules of the relevant regulated market”. This information, it says, must be made public through the SENS.
The nub of all this legalese is that if a director, employee or anyone else tweets or blogs about information that may affect the share price of a listed company before that information is published through the SENS, that person could fall foul of the act’s insider-trading rules.
But considering the constant changes in technology that allow company information to be made available easier, cheaper and faster, it would be prudent for the JSE to update its rules to allow this kind of information to be made available through certain websites — and social media. The times are changing and the law must catch up.
Wild is an associate at Webber Wentzel attorneys