In a now infamous August 7, 2018 post on his Twitter account, Tesla CEO Elon Musk stated that he was “considering taking Tesla private at $420. Funding secured.” This post and several subsequent messages ultimately were the subject of an SEC enforcement proceeding (later settled) as well as several securities class action lawsuits (later consolidated). On April 15, 2020, Northern District of California Edward Chen denied the defendants’ motion to dismiss the consolidated securities lawsuit, finding that the “take private” Tweet and other messages were false and misleading. Judge Chen’s opinion is of interest because of the high-profile nature of the allegations, but also for what it says about corporate securities liability exposure for executives’ social media statements. Judge Chen’s opinion can be found here.
On August 7, 2018, Musk set the securities markets and the business pages alight with an extraordinary series of Tweets on his Twitter feed, in which Musk stated, among other things, that he is “considering taking Tesla private at $420”; that “funding secured”; “shareholders could either sell to [SIC] sell at 420 or hold shares & go private”; and “Investor support confirmed.”
For months, Musk had been engaged in a war on Twitter and elsewhere with short sellers whom he believed were trying to drive down Tesla’s share price to profit from their short positions. For example, on August 2 2018, just days before Musk’s take-private Twitter storm, the Wall Street Journal ran an article entitled For Tesla’s Elon Musk, Twitter is a Sword Against Short Sellers (here).
In the subsequent securities class action lawsuit, the plaintiffs alleged that the various “take private” statements were false and misleading, and were made as part of Musk’s ongoing war against the short-sellers. The defendants moved to dismiss the plaintiffs’ consolidated complaint, arguing among other things that Musk’s communications were “implicitly conditional,” in that Musk said only that he was “considering” taking the company private.
The April 15, 2020 Opinion
In his April 15, 2020 Opinion, Judge Chen rejected the defendants’ arguments, holding that the “take private” tweet and several related statements were false and misleading.
Among other things, Judge Chen rejected the defendants’ argument that Musk’s statement about funding were conditional, noting that “the word ‘secured’ implicitly negates any condition.” He observed further that
Because Mr. Musk, the CEO of Tesla, included the highly-specific price of $420 at which shares would be bought for the going-private transaction, and because his tweet followed with ‘”funding secured,” a reasonable investor would have interpreted it as something more than a speculative amorphous opinion about future possibilities. Instead, it can be read as implying a more concrete state of affairs. … Mr. Musk’s subsequent colloquy with Twitter users confirmed the definiteness of his representation about the going-private decision being unimpeded by funding conditions.
Judge Chen concluded that “Plaintiff has pled that the statement was materially misleading: a reasonable stock investor could believe that Tesla has secured funding for the going-private transaction at $420 a share.”
Judge Chen also rejected Tesla’s argument that Musk’s social media statement were not actionable against the company because they were made on Musk’s personal account, over which the company had no control or authority. Judge Chen noted that the company had previously notified investors that it would use Musk’s account as a means of communicating with investors and that in fact that company did have a practice and custom of using Musk’s account to communicate with investors. He also noted that in the company’s subsequent statements on its website and blog did not contain any retraction from Musk’s Twitter communications.
Finally, Judge Chen found that the Plaintiff has adequately alleged that Musk’s statements were made with scienter. The consolidated complaint, he found, “contains numerous detailed factual allegations showing that Mr. Musk knew or should have known the funding was not secured” when he send his Twitter messages. Judge Chen found the inference of scienter was supported by the Plaintiff’s allegations that making his statements, Musk was motivated at least in part by a desire to disrupt short-sellers on the stock market.
Judge Chen’s opinion will undoubtedly be of interest to many simply because of Musk’s high-profile and the notoriety surrounding his “take private” Tweet.
For me, this opinion is noteworthy for a more specific reason. That is, this case now represents an example where a Court has held that a company can be liable under the securities laws for statements by its executives on social media.
I had long thought that it was only a matter of time before a corporate executive’s social media statements would serve as the basis of a securities lawsuit. The various complaints against Tesla and Musk represented the realization of this possibility. Judge Chen’s express ruling that Musk’s allegedly misleading social media statements could be actionable against Tesla further reinforce this possibility.
The court’s confirmation that a company can be held accountable under the securities laws for its executive’s misleading social media statements should be of concern for every company that uses social media to communicate with investors (which is probably just about every publicly traded company these days).
The danger for public companies is that social media communications by their very nature are informal and are by their very nature less likely to be as carefully crafted and scrutinized than more traditional investor communication methods. As this situation itself shows, the accessibility and immediacy of social media tools creates the possibility that for statements to be published that have not been sufficiently vetted.
To be sure, among the important reasons that Judge Chen said that Tesla could be held accountable for Musk’s statements is that the company had previously told investors that Musk’s personal Twitter account would be used for investor communications. However, it isn’t clear that the statements wouldn’t be actionable against Tesla even if the company had not previously told investors Musk’s account would be used for company communications. Judge Chen noted that the company had a custom and practice of using Musk’s account for company communications, and he looked at other surrounding circumstances to support his conclusion that the company was using Musk’s account for investor communications.
The Tesla case may be the first securities case based on allegedly misleading social media communications, but it surely will not be the last. Because of social media’s ease of use and the immediacy of communication it affords, companies and their executives will continue to use various forms of social media to communicate with investors and other constituencies.
As this case shows, companies’ use of social media comes with risks; among the risks is the possibility that the investors and others may subsequently claim that a social media statement was materially misleading. The very nature of social media- its informality, its ease of use, its immediacy – further exacerbate the risk of a company or one of its executives making a statement that has not been sufficiently considered or scrutinized.
For companies, these possibilities mean that the well-advised companies should have controls around their executives’ use of social media, with clear lines establishing when and how executives will use social media to communicate with investors.
For D&O underwriters, the possibility that social media communications could serve as the basis for securities law liabilities adds an additional layer of concern. It is simply not practical for D&O underwriters to scrutinize an applicant company’s executives’ social media practices. However, the underwriter may well want to understand the company’s policies and practices concerning executives’ social media practices.