Tesla Social Media Usage Raises Worries on Corporate Governance

The way Tesla Inc handled chief executive Elon Musk’s proposal to take the automobile company private and its failure to promptly file a formal disclosure have sparked governance concerns and worries over how companies use social media.

Musk surprised investors as well as followers last Tuesday when he announced on Twitter that he was considering taking Tesla private in a possible $72 billion transaction, adding that “funding” had been “secured.”

Tesla’s shares finished higher 11 percent before retreating after the Wall Street Journal reported that the US Securities and Exchange Commission (SEC) had inquired on Tesla why Musk announced his plans on Twitter, and whether his statements were true.

Musk gave no details of his funding and as of Thursday Tesla’s board had not been given a financing plan from Musk. This left investors and the broader market seeking more information from the company about the proposal and next steps it will take.

Looking pass whether Musk had misled anyone, the unusual way in which he broke the news and the company’s failure to immediately clarify the situation with a regulatory filing have been considered a corporate governance lapse that raises questions over how companies use social media to release market-moving news, securities lawyers said.

“Management buyouts or other take-private transactions already suffer from serious information asymmetry between management and public shareholders,” stated Gabriel Rauterberg, who is a law professor at the University of Michigan.

SEC rules normally require firms to file an 8-K form within four business days of a significant corporate event.

While several securities lawyers stated that Musk’s tweets alone did not trigger this obligation, a regulatory filing would be a prudent move due to the unusual circumstances, said David Axelrod, who is 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,” he also said.

SEC guidelines that were published in 2013 enable companies and their executives to use social media to spread out useful material information, as long as the investors have been notified that such a move is a possibility. Tesla did such a thing in a 2013 filing.

However, such disclosure is needed to be full and fair. This means that the information is complete and accessible by all investors at the same time. This may be a bar that the Tesla CEO may not have met.

“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, who is a former SEC attorney and principal at law firm Blakemore Fallon.

Securities lawyers said there was also a question mark over whether Musk selectively disclosed information on the potential terms of the deal when replied to followers, two of whom claim in their Twitter handles to be investors.

Such tweets were not visible right off the bat to all followers of Musk’s main feed until he had retweeted them.

The CEO’s long history of joking about Tesla and using twitter to bait his critics also seem to diminish the trust in Musk’s feed as a reliable source of company information, with many investors saying that they believe 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.

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