Tesla Inc’s handling of CEO Elon Musk’s proposal to take the automaker private and its failure to promptly submit an official disclosure has raised governance issues and sparked questions about how companies utilize social media.
Musk stunned investors on Tuesday by announcing on Twitter that he was thinking about taking Tesla private in a potential $72 billion transaction and that “funding” had been “secured.”
Tesla’s shares closed up 11 percent prior retrenching after the Wall Street Journal noted that the U.S. Securities and Exchange Commission (SEC) had asked the automaker why Musk declared his plans on Twitter and whether his statement was accurate.
Musk provided no information about his funding and as of Thursday Tesla’s board had no financing plan from Musk, leaving investors and the broader market clamoring for more details.
Putting aside whether the CEO misled anyone, the unorthodox manner in which he declared the news and company’s failure to promptly clarify the situation with a regulatory filing is a corporate governance lapse that raises concerns about how companies utilize social media to release market-moving news, securities lawyers stated.
“Management buyouts or other take-private transactions already suffer from serious information asymmetry between management and public shareholders,” stated Gabriel Rauterberg, a University of Michigan law professor.
SEC rules generally require companies to submit an 8-K form under four business days of a major corporate event.
Where as several securities lawyers stated Musk’s tweets alone did not caused this obligation, such a filing would be well judged given the unusual circumstances, David Axelrod, a partner at law firm Ballard Spahr LLP, stated.
“An 8-K would provide some more information, it would say what stage negotiations are in, and provide more information than 53 characters in a tweet,” he included.
SEC guidelines published in 2013 permit companies and their executives to use social media to circulate material information, provided investors have been informed that this is a possibility. Tesla did this in a 2013 filing.
However such disclosures have to be full and fair, indicating the information is complete and accessible by all investors at the same time, and that is something that Musk’s tweets may not have met.
Tesla and the SEC have not answered to the requests for comment on Sunday.