Legal Implications of Social Media

May 4, 2011

Many companies have started using social media such as Twitter, Facebook and blogs in order to communicate with investors and clients.

At little to no cost, social media has the advantage of permitting real-time far-reaching communication with a broad audience. However, there are some significant risks that companies and their employees should be aware of when using social media.

A pro-active approach to mitigating risks of social media include implementing a social media use policy, an updated disclosure policy and, where appropriate, social media use training. These are increasingly important risk mitigation strategies – as well as potential reputation savers.

Legal counsel can play a key role in updating or drafting social media use policies that ensure companies are actively harnessing the opportunities presented by social media while identifying general and industry-specific risks. An effective corporate social media use policy will be drafted with the input of various stakeholders, including information technology, human resources, in-house legal counsel, sales and marketing personnel and any other departments that have a stake in how social media is used and by whom.  Individuals engaged in investor relations activities can benefit greatly from social media use education to ensure that their communications strategies are in compliance with applicable corporate and securities laws as well as with the rules any other regulatory bodies to which the companies for whom they act may be subject.

Depending on the nature of the social media, if only certain members of the public are receiving information about a company, that company may be disseminating information in an uneven way and may be in violation of the general disclosure rules. For instance, if the company makes disclosure to a predetermined group of people who have signed up to receive notifications from the company, but that information is not simultaneously also made available to the wider public, the company is engaging in selective disclosure.  Selective disclosure can give rise to insider trading and “tipping” issues which could prompt disciplinary action and potentially even cease-trade orders by securities regulatory authorities.

While allowing employees and executives to participate in social media enables these individuals to engage with the public and to potentially create brand ambassadors, this strategy also leads to a risk of improper disclosure of confidential information.  In certain instances, the disclosure of confidential information can trigger securities disclosure obligations or expose the company to liability for the disclosure of third party confidential information. Such disclosure might also jeopardize a company’s ability to apply for trademark protection of trade secrets if the company cannot show that it took reasonable measures to keep the information in question confidential.

Communications made by way of social media tend to be short and more colloquial than information that would otherwise find its way onto a company’s website and SEDAR. The more casual tone, however, does not excuse a company from complying fully with corporate and securities laws, the company’s own disclosure policy and industry best practices for disclosure. For instance, companies or employees using social media in a business context may omit cautionary language in respect of future-oriented financial information or “FOFI” and, as a result, be offside the disclosure requirements in National Instrument 51-102 – Continuous Disclosure Obligations.

By way of example, Tweets, the messages that are sent out via Twitter, are limited to 140 characters. The brevity of these real-time messages means that companies are at risk of making a statement containing forward-looking information without making the requisite warning about such forward-looking information. Additionally, mining companies and oil and gas issuers may run up against disclosure issues if Tweeting about exploration and drilling results in a way that is non-compliant with National Instrument 43-101 – Standards of Disclosure for Mineral Projects or National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities.

In the context of proxy solicitations, e-communications can constitute solicitations and trigger the proxy solicitation rules just as easily as a press release filed on SEDAR or a letter sent to shareholders. With more and more companies hiring social media experts to handle their social media profile and image, companies need to ensure that individuals handling these tasks are up-to-speed on issues facing the company and that such people are kept abreast of the law and their obligations.

Social media is valued for its quick, accessible and real-time dissemination of information, but the flip-side to this convenience is that a negative review or comment posted by a user can quickly “go viral” and, once that has happened, the damage to a company’s reputation or credibility may become hard to contain. Stories about videos uploaded to YouTube revealing poor customer service or chat sites dedicated to complaints about companies spread quickly. The incredible speed at which these negative links are shared over the Internet, the vast number of people these links can reach and the lasting impression that these viral events can have should be enough to prompt companies to establish policies to screen for, address and contain harmful or libellous statements. Such policies should also set out how the company will respond to any negative statements. Policies of this variety should consider which employees are authorized to address harmful on-line press and demarcate clear lines of responsibility to allow for a prompt and effective response that is compliant with applicable laws and with the company’s wider policies and goals.

Legal counsel can and should play a key role in the important job of drafting social media use policies and/or updating existing employee communication policies to ensure that industry-specific and company-specific risks are being managed while leveraging the incredible opportunities presented by social media.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

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