ABA Section of Business Law
ABA Section of Business Law
Business Law Today
July/August 1998
Don't get too comfy with that home page
Securities-law implications when a bit of prevention is worth a gigabyte of cure
By MARK A. METZ
Metz is a member of Dykema Gossett PLLC in Detroit.
You are at lunch with the CFO of one of your publicly owned clients. The CFO mentions between bites of his sandwich that the company established a home page on the World Wide Web. He tells you that the people in the marketing department put it together and that you, the company's legal counsel, probably need not worry about it. Unfortunately, as a lawyer, worrying comes with the territory. To keep your client from becoming roadkill on the information superhighway, you will need to know the answers to questions like:
- What types of information should or should not appear in the home page?
- Who should maintain the home page?
- How often, if ever, should the home page be updated?
- Are the contents of the home page affected if the company is in the process of offering securities?
Some problems. Just as any prudent lawyer would counsel a company not to publish projections of the company's future financial performance in paper or press release form, this information should also not be included in the home page. Including the information may be deemed a selective distribution of that information to those who call up the home page and could result in liability under Rule 10b-5 (Rule 10b-5) under the Securities Exchange Act of 1934 (the Exchange Act) to those who buy or sell company securities without receiving the projections if the projections prove to be correct and were not previously publicly disseminated, and could also result in liability to those who buy or sell company securities based on the projections if they prove to be incorrect.
Generally, the client should not include material information about the company, its plans or its prospects not previously made public through normal channels, such as by way of a press release. The mere inclusion of the information in the home page probably does not sufficiently disseminate the information to the extent necessary for it to be considered "public" as the term is used in the securities law context. As a result, those who have access to the home page and receive information not made "public" would arguably receive a "tip" of material, nonpublic information. The company, as a tipper, could be held liable under the Exchange Act to those who trade contemporaneously with the "tippees" who received the information from the home page.
Similarly, an analyst's report with respect to the company should not be included in a home page unless the company is prepared to take on liability for all the statements contained in the report. Case law involving Rule 10b-5 suggests that a company may be liable for false or misleading statements made about it in an analyst's report if the company has adopted the statements as its own by distributing the report to investors or shareholders or by being more than minimally involved in the preparation of the report. Because including an analyst's report (which often will contain projections) in a home page is functionally equivalent to distributing the report to those who access the home page, the company risks being deemed to have adopted the report and could be held liable for any false or misleading statements or omissions in the report and, potentially, for failing to update the report.
A related question is whether the home page could, in lieu of including an analyst's report directly in the home page, include a "hyperlink" to the report at the analyst's Web site. A "hyperlink" provides direct access to another Web site simply by clicking on a button in the home page. Though this method appears at first glance to be at least one step removed from distributing the report in hard copy to those viewing its home page, further scrutiny suggests that hyperlinks should be avoided.
The use of a hyperlink to a third party's Web site raises two potential problems for the company. The first is the same problem caused by including the report directly
use of the hyperlink may result in the report being treated as having been adopted by the company, leading to potential liability for misstatements or omissions in the report. The other problem caused by the hyperlink is that the report and other information hyperlinked from the broker's Web site are subject to change without notice to the company and without any opportunity on the part of the company to control content changes. The company's inability to control the contents of the hyperlinked Web site makes this alternative even less desirable than including the report directly in the company's home page.
Could the company include or hyperlink the report with a disclaimer? For example, could the company avoid liability if it included the following: "This report is being included for informational purposes only. The company is not adopting the statements contained in the report, does not warrant the accuracy of the report or the information contained therein, and undertakes no responsibility for updating the report." This disclaimer would put a reader on notice, but still calls into question why the company would include the report if it did not believe the report to be accurate.
It seems questionable that a disclaimer could overcome the strong inference created by including the report that the company believes the information in the report is accurate, worthy of investors' review and representative of the company's beliefs about the company's prospects. The disclaimer may be worth using nonetheless to lend some support to the company's position in any potential litigation that it did not adopt the statements in the included or hyperlinked report.
Companies should also avoid making statements in their home page that amount to solicitations to buy company stock. Statements such as "Now is the time to buy" or "Our stock is grossly undervalued" are just as problematic when contained in a home page as they are when contained in any press release or paper publication.
A more difficult question is whether public companies should include in a home page their Exchange Act reports, annual reports to shareholders, annual meeting proxy statements, press releases and other publicly available information. Because these documents are prepared by or under the supervision of the company, are publicly available and could subject the company to liability irrespective of their inclusion in the home page, there would seem to be no disadvantage to including them in the home page for the convenience of shareholders and investors.
However, including these documents substantially increases the administrative burden of maintaining the home page. The home page administrator will need to insure that an accurate copy of the final version of each document is included, include each report as it is filed and each release as it is disseminated, and frequently examine the home page to remove outdated or superseded materials.
Given the ready availability of Exchange Act reports from other sources, such as the SEC's Web site (http://www.sec.gov) and FreeEDGAR (http://www.freeedgar.com), and the availability of press releases online from service providers such as Lexis/Nexis, a company must determine whether the marginal benefit to shareholders and investors of having the reports and releases collected and available on the home page outweighs the administrative burden on the company and the potential for mistakes. A possible solution may be to include information on how to obtain the various reports and releases or to include a section in the home page allowing users to complete and submit a request form online.
Maintenance. Once a company has established a home page, it will need to establish procedures for maintaining and updating information. Who should be given that responsibility? While the proper person will vary depending on the size of the company and the content of the home page, the ideal person to periodically review the home page is probably someone in upper management who has knowledge of the company's plans and prospects and who has enough knowledge of securities law to know when an issue exists requiring legal assistance.
The advantages to having an upper-level person review the home page are several. First, such a person is likely to have a better appreciation for when information has become outdated or inaccurate. Second, such a person is also likely to have a broader knowledge of the company and should be better able to spot mistakes and potential liability issues than a lower-level person. Third, an upper-level person with some knowledge of securities law issues should be more likely to restrict the flow of potentially troublesome information at times when the company is required to be more cautious about disseminating information, such as prior to or during the course of a securities offering.
Finally, putting the responsibility at a higher level increases the likelihood that the responsibility will be passed on to a capable successor should the designee change jobs or leave the company. Once the periodic review is completed, the task of actually updating the home page may, of course, be delegated to a lower-level employee or to a third-party service provider.
The company's duty to update and correct the information contained in the home page is similar to its duty to update certain other publicly released information. The courts have determined that a company generally must correct information to the extent it was materially false or misleading when originally disseminated and must update information, to the extent the information is still "alive," if the information later becomes materially false and misleading as a result of subsequent events.
Because information contained in a home page is disseminated each time the home page is accessed, the company, in theory, must update the information almost continuously to prevent any one from accessing information in the home page that has become materially false or misleading. This seemingly daunting task can be made more manageable by limiting the inclusion of certain types of information. Assuming that any included historical data is accurate as of its date, the only information that should require correction or updating will be forward-looking statements and statements about current status. Keeping such statements to a minimum, scheduling regular reviews of the home page (weekly or monthly), reviewing the home page on the occurrence of material events and specifying in the home page the date of the last update should reduce the liability risk for failure to update the home page in a timely manner.
Companies should also consider including a disclaimer along with the date of the last update stating that the home page speaks as of the date of the last update and that although the home page is updated periodically, the company is not responsible for inaccuracies resulting from changes occurring after that date.
Securities offering. Several issues arise under the Securities Act of 1933 (the Securities Act) when a company with a home page is engaged in offering securities. Under Section 5 of the Securities Act, a company is not permitted to offer or sell securities, absent an exemption, unless a registration statement has been filed with the SEC. After the filing of a registration statement and prior to its effectiveness, written offers may be made only by means of a statutory prospectus. Efforts by issuers to facilitate a contemplated securities offering by generating unusual publicity about the company or its products or services have been held by the courts to constitute offers to sell securities in violation of Section 5. Although historically such activity generally has been accomplished by means of press releases, speeches and meetings with securities professionals, such unlawful "gun jumping" activity could be deemed to occur if the company establishes a home page, or if a significant amount of information is added to the home page, just prior to or during the registration process.
Extraordinary activity by employees in a "chat room" within the home page expounding the virtues of the issuer and its prospects may also constitute unlawful "gun jumping." A "chat room" is a section of the home page where comments regarding the company can be posted by anyone accessing the section. Participation by employees in "chat room" discussions at any time regarding the issuer should be discouraged because of the potential for leaks of material inside information and rumors that could require the issuer to publicly disclose such information prematurely, and should particularly be discouraged during the registration process. Unfortunately, such activity is difficult to regulate since participants are often anonymous. As a result, the prudent course of action is to not include a "chat room" in the home page and to establish a corporate policy prohibiting this kind of activity in other forums.
The contents of a home page may also affect a public or private company's ability to privately offer its securities. Care should be taken to avoid statements or activities that could be deemed a "general solicitation" of investors under Section 4(2) of the Securities Act and Regulation D promulgated thereunder. Investors with whom a relationship is formed as a result of general solicitation could be deemed to taint a purported private offering and cause it to fail to satisfy the conditions for the exemption.
As you finish your lunch, you tell your CFO friend several of the potential pitfalls associated with his home page and offer to do a brief review to head off any problems. You also obtain the phone number of the company's marketing director to discuss updating and maintenance procedures for the home page. The CFO is so happy about having headed off a potential problem, he picks up the check for lunch. Returning to your office, you breathe a little easier knowing that a bit of prevention is worth a gigabyte of cure.
