New To The Board: Thinking About Continuous Disclosure in the Age of Social Media

February 22, 2019

Social media can help businesses appear open and accessible to customers and investors. However, as we discuss in the fourth and final post in our “New to the Board” series, too much openness can sometimes land public companies on the wrong side of securities law disclosure rules.

  • Canadian public companies are subject to continuous disclosure obligations aimed at promoting the fair, complete and orderly dissemination of information that could affect investment decisions.
  • The requirements, which apply nationwide, are found in National Instrument 51-102 - Continuous Disclosure Obligations and National Policy 51-201 - Disclosure Standards.
  • There are two basic kinds of continuous disclosure: “periodic” (reports required on a regular basis) and “event-driven” (required in response to one-off “material changes”).
  • Canada’s continuous disclosure requirements create liabilities not only for the companies themselves, but also, in some circumstances, for their directors and officers.
  • Social media provides many opportunities to engage with the investors and the general public but, in the absence of well thought-out corporate policies, it can also create significant continuous disclosure liabilities that can directly affect you as a corporate director.

Types of Continuous Disclosure

As noted above, Canadian securities law distinguishes two types of continuous disclosure – periodic and event-driven:

  • Periodic disclosure, required on a regular basis, includes annual financial statements, MD&A, an annual information form, proxy circulars, business acquisition reports and material contracts.
  • Event-driven disclosure is required in response to “material changes”, which generally include changes in the business, operations or capital of the company that would reasonably be expected to have a significant effect on the market price of any of its securities.

Potential Liabilities

Under Canadian law, a corporation’s failure to comply with continuous disclosure obligations can have serious consequences for its board members, including sanctions, fines and even imprisonment under relevant provisions of the applicable Securities Act.

Of particular note is the fact that, under Canadian securities legislation, those who buy and sell securities in the secondary market are generally able to sue corporations and their directors (among others) with respect to certain continuous disclosure deficiencies. Specifically, any such person who bought or sold a security in the secondary market during a period in which the company was in breach of its continuous disclosure obligations is entitled to seek court approval to bring a lawsuit (generally a class action). The liability of the corporation in such a situation can potentially run into the millions of dollars, while directors and officers can be personally liable for up to $25,000 or half of their compensation for the previous 12 months (whichever is greater).

Social Media

Given the sensitive nature of corporate disclosure under Canadian securities laws, it is not surprising that the rise of social media, and its increasing use by businesses for marketing and investor relations purposes, has created new challenges for companies and regulators alike. In 2017, the Canadian Securities Administrators (CSA) published a review of the social media activities of 111 reporting issuers in Alberta, Ontario and Québec (see CSA Staff Notice 51-348 – Staff’s Review of Social Media Used by Reporting Issuers) in which it found that:

  • 72% of the issuers examined were actively using at least one form of social media; but, at the same time, that
  • 77% of issuers had not developed policies or procedures around social media governance that incorporated securities law issues.

Such findings suggest that, as recently as 2017, the social media activities of many Canadian organizations were outpacing the ability of compliance teams to monitor and control them. While this has begun to change, it is likely that a significant number of Canadian companies have yet to implement policies.

Can social media disclosure be “disclosure” for securities law purposes?

One key question is whether a corporation can ever use social media to make its initial public disclosure of information covered by continuous disclosure rules. In Canada, the general principles in National Policy 51-201 (“NP 51-201”) and the TSX Electronic Communications Disclosure Guidelines apply to social media communications as they do to other communications. Because the general principles were not designed specifically for social media, they can be challenging to comply with in that setting, but – provided that disclosure is compliant – there is no specific prohibition on the use of social media to satisfy continuous disclosure obligations.

What should a social media policy contain?

To the extent that a Canadian public company were to use social media channels for disclosure purposes, there are a number of issues to consider. It is important to create clear and robust information disclosure policies that address social media. While policies need to be tailored to the reality of each company and industry, they would generally include the following (among other things):

  • A pre-approval process for social media channels that clearly defines who in the company is authorized to post on social media;
  • Ensuring that more traditional avenues of disclosure, such as press releases and company websites, include a note identifying the social media platforms on which the company may make disclosures;
  • Ensuring that social media channels that may be used for disclosure purposes are availablewithout restriction to the public (this may require attention to account settings, for example); and
  • Content guidelines describing what is to be disclosed, and how – generally including rules to the following effect (among others):
    • Social media disclosure not to be made before the dissemination of the disclosed information to the public via a news release;
    • Authorized individuals to vet proposed social media postings with respect to the materiality of the information and its consistency with previous disclosure;
    • Authorized individuals to ensure that any proposed disclosure is not selective, misleading or overly promotional; and
    • Third-party links to be avoided for at least three reasons: (i) possible legal responsibility for the linked content, including possible obligation to provide updates; (ii) possible requirements for consent; and (iii) “balance” issues that could result from linking selectively rather than, say, to all analyst reports, both positive and negative (or from a potential failure to identify reports that were not independently prepared.)

Additional CSA guidance

On November 29, 2018, the Canadian Securities Administrators released CSA Staff Notice 51-356 Problematic promotional activities by issuers, in which they reiterated the importance of “rigorous social media disclosure controls” and of complying with the expectations of securities regulators that issuers all disclosures, “regardless of venue”, be “balanced and not misleading”. In the words of the CSA, achieving this requires that issuers:

  • Not make misleading statements;
  • Not exclude facts needed to avoid misleading readers;
  • Announce material changes in a factual and balanced way;
  • Disclose unfavorable news as promptly and completely as favorable news;
  • Avoid exaggerated reports or potentially misleading promotional commentary;
  • Appropriately disclose and use forward-looking information;
  • Do not cherry-pick analyst reports; and
  • Prominently disclose when reports and articles are paid for by the issuer.

Examples of potential regulator concerns

A survey circulated by one major regulator referred to a number of questions that could potentially be raised with respect to social media usage, including the following:

  • Does the company or any of its directors and officers use social media websites, online blogs, message boards or other online forums to provide any information about the company?
  • Does the company or any of its directors and officers use an alias or anonymous online name to post information about the company?
  • Does the company have a governance policy with respect to how it monitors or guides its directors, officers or other employees on the appropriate use of any type of online forum?
  • Was the post that appeared on Twitter the first public disclosure made about quarterly earnings? Did the company follow the guidance in NP 51-201 in posting this tweet? (Asked where it appeared that a company had tweeted about its earnings shortly before the relevant information had appeared on SEDAR).

Conclusion

While social media has the potential to be an effective disclosure tool, its use in some circumstances raises challenging questions to which Canadian public company boards should give thoughtful consideration.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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