Pervasiveness of Social Media: Facebook Post Lands CEO in Trouble with the SEC

Wassem M. Amin

The use of social media to disseminate information has been a hot topic in the legal world for the past couple of years.  Previously, it has landed lawyers, jurors, and even judges in hot water.  Today, the impact of social media has reached the world of securities regulation.  The Securities and Exchange Commission (SEC), through Regulation Fair Disclosure, prohibits the selective dissemination of “material information” by publicly traded corporations.  Material information is information that has the ability to impact a company’s stock, otherwise known as Market Moving Information.

Yesterday, the SEC sent the CEO of Netflix, Reed Hastings, a Wells Notice for a Facebook post made by him to his nearly 200,000 followers.  A Wells Notice is a letter from the SEC warning a company or individual that it may file a civil claim or seek a cease-and-desist order.  The post under scrutiny by the SEC stated that Netflix members enjoyed over “1 billion hours in June, highlighting how strong [Netflix] content was.”

The SEC asserted that this information violated Regulation FD because it was material information and not disseminated publicly (via filing what’s known as an 8k with the SEC or through a press release).  Mr. Hastings–in another Facebook post–vehemently opposed the SEC’s assertions, saying:

I want to note a few things.

First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.

Second, while we think my public Facebook post is public, we don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hours of viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.

Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.

We remain optimistic this can be cleared up quickly through the SEC’s review process.

Whether or not the SEC will agree remains to be seen.  However, this new episode in the conflict between social media and the law reiterates the underestimated impact of this new communication medium.  Outdated statutes and regulations did not envision the ability of almost anyone to instantly communicate information to the public. As more of these cases are litigated, a new body of law around the use of social media will develop and flourish (there are even so-called social media lawyers!).

M&A: Meso Scale v. Roche: Reverse Triangular Mergers May Trigger Anti-Assignment Provisions in a Target’s Contracts.

By Wassem M. Amin

Reverse triangular mergers are a popular deal structure used to acquire all of the outstanding equity interests of a target company. In a reverse triangular merger, the acquirer forms a subsidiary which is merged with and into the target company with the target company surviving the merger, and the target stockholders receive cash, acquirer stock, or a combination of cash and stock. The end result is the same as a pure stock purchase, but reverse triangular mergers offer the advantage of requiring only the approval of a majority in interest of stockholders (unless a higher percentage is required by the target company’s governing documents), subject to statutory appraisal and dissenter’s rights, instead of the approval of all stockholders (or at least a sufficient amount of shares to qualify for a follow-on short-form merger).

M&A attorneys have long believed that a reverse triangular merger, like a stock purchase, does not involve an assignment of the target company’s assets and, therefore, does not trigger anti-assignment provisions in the target company’s contracts that restrict an “assignment by operation of law.”

However, in a case of first impression, the Delaware Court of  Chancery, in Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH, concluded that there was ambiguity regarding whether such a provision should apply in the context of a reverse triangular merger and denied defendants’ motion to dismiss, thus calling into question this long-held belief.

Good resources:

Shannon D. Kung, The Reverse Triangular Merger Loophole and Enforcing Anti-Assignment Clauses, 103 Nw. U. L. Rev. 1037, 1052 (2009).

H. Justine Pace, Anti-Assignment Provisions, Copyright Licenses, and Intra-Group Mergers: The Effect of Cincom v. Novellis, 9 Nw. J. Tech. & Intell. Prop. 263 (2010).

Elaine D. Ziff, The Effect of Corporate Acquisitions on the Target Company’s License Rights, 57 Bus. Law. 767, 785 (2002).

Kingsley L. Taft, Introduction to Patents and M&A, 931 Pli/Pat 211, 222 (2008).