While Musk’s last Tuesday’s tweets must have given a series of palpitations to those who were betting against Tesla’s stock, while many investors believed it to be a prank which is in line with the Tesla brand, SEC lawyers aren’t amused since these could potentially trigger non-compliance of disclosures.
Elon Musk’s proposal to take Tesla Inc private along with the company’s failure to promptly file a formal disclosure has sparked investor concerns as well as issues of governance.
Musk’s last Tuesday announcement on Twitter that he was considering taking Tesla private in a potential $72 billion deal whose “funding” has been “secured” has stunned investors.
Following the announcement, Tesla’s shares rose by 11% before retrenching following a Wall Street Journal report that the U.S. Securities and Exchange Commission (SEC) had asked Tesla why Musk announced his plans on Twitter and whether his statement was truthful.
So far, Musk as yet to provide any details of his funding; Tesla’s board also has yet to receive a financing plan from Musk, leaving investors and Tesla’s board clamoring for clarity as to the company’s future.
Leaving aside whether Musk misled anyone, the manner in which the announcement was made as well as Tesla’s failure to promptly clarify the situation with a regulatory filing amounts to a lapse in corporate governance and raises the issue companies using social media to move the market, said securities lawyers.
“Management buyouts or other take-private transactions already suffer from serious information asymmetry between management and public shareholders,” said Gabriel Rauterberg, a University of Michigan law professor.
SEC rules typically require companies to file an 8-K form within four business days of a significant corporate event.
Although securities lawyers opine that Musk’s tweets by themselves will not trigger such a compliance, such a filing would be prudent given the unusual circumstances, said David Axelrod, a partner at law firm Ballard Spahr LLP.
“An 8-K would provide some more details, it would say what stage negotiations are in, and provide more information than 53 characters in a tweet,” added Axelrod.
SEC guidelines published in 2013 allow companies and their executives to use social media to distribute material information, provided investors have been alerted that this is in fact is a possibility. Tesla did this in a 2013 filing.
However, all such disclosures have to be full and fair, meaning it should be complete and accessible to all investors of the company in question. Musk’s tweets may not have met this criteria.
“Twitter is not designed to provide full and fair disclosure. That doesn’t mean that you couldn’t, but in a series of 20 to 30 characters I’m not sure you’re getting full disclosure,” said Zachary Fallon, a former SEC attorney and principal at law firm Blakemore Fallon.
Further, according to SEC lawyers, there is also the question of whether Musk selectively disclosed information on the potential terms of the deal when he subsequently replied to his followers, two of whom claim in their handles to be investors.
Significantly, those tweets were not immediately visible to all of his followers until he re-tweeted them.
Incidentally, Musk has a history of using twitter to bait Tesla’s critics. This fact will to a large extent undermine Musk’s feed as a reliable source of information. Many investors initially believed Musk’s Tuesday’s tweet to be a prank.
“Musk’s irreverence and showmanship is part of the Tesla brand, I get that, but I don’t think the securities laws do,” said Fallon.