Managing Web Site Risks Effectively ^[1]
Micalyn S. Harris, Winpro Inc.

More and more companies are investing in electronic real estate, also known as web sites, as a cost effective way to communicate to shareholders, analysts and potential investors. Dissemination is instant and global, and the potential for enhanced publicity at minimal cost is hard to resist. But posting information on a web site is untargeted publication, and in the absence of legal review, such publication may subject a company to liability suits from the very audience it is targeting.

It follows that any information placed on an Internet web site deserves the same level of review as that type of information receives in connection with its traditional method of distribution. If traditional distribution is limited, then additional review is advisable, as it is for informational which is "made public." In additional, categories of information not subjected to legal review should be clearly defined and materials placed on the web site placed in those categories, and without legal review, should fall clearly within a defined category. It is necessary to define clearly those categories of information that aren't subject to legal review and are included in a web site. Whenever possible, it's advisable, at least in the beginning and until the parameters of various categories are clearly established, for legal counsel to review all materials posted on a company's web site.

Understanding the Risks of Press Releases

Press releases are the traditional means of disseminating information by publication. Posting them on a web site can be a good way to enhance dissemination; and particularly effective for small companies whose activities are not regularly covered in the press. When published in newspapers, press releases have a limited "life"; dissemination occurs, if at all, within a day or two of the date of the press release. When posted on a web site, there is no inherent limit on the duration of dissemination; it remains on the company's web site until it is removed.

Having a web site means, therefore, not only making a decision as to whether the company will post all press releases on its web site, but also how long press releases will be posted, when they will be removed, and on what basis Whether a policy is established to post all press releases for a certain number of days and then remove them, make a decision based on the contents of each release, or establish other standards with regard to web site postings, it is incumbent on the company to establish some policy for dealing with posting and removing press releases from the company web site.

Resolving the issue by not posting any press releases has its own risks to the extent that including them becomes standard either in a company's industry, or for domestic companies of similar size. Under such circumstances, if a company has a web site and there are no press releases on it, the absence of press releases may be seen as indicating there aren't any. To the degree their inclusion is expected, if they are not included, it may be advisable to have an affirmative statement that the company does not post press releases on its web site.

Whatever the specifics, having a web site requires a company to take responsibility for posting information, removing it in a timely manner, and for using methods which do not result in the removal itself creating misimpressions and rumors.

Minimizing the Risk of Class Action Suits Resulting from Web Site Postings Involving Financial Projections

In recent years, companies have been encouraged by financial analysts and the SEC to make financial projections. In some cases, projections are required, for example, to indicate the likely outcome of existing trends. (See e.g. Item 303 of S-K, and instructions for Management's Discussion and Analysis.) In addition, investment analysts make projections based on company filings, reports, meetings with analysts and press releases. Forecasts which turn out to be erroneous, particularly forecasts which turn out to be overly optimistic, may send the price of a company's stock plummeting, and give rise to disappointed investors filing class action lawsuits.

Consequently, the risks of web site publication include increased risk of shareholder lawsuits resulting from publication of allegedly misleading or inadequate information, particularly in connection with forecasts that turn out to be overly optimistic.

The increased risks connected to web sites arise in several ways. Included are intertwining sales and financial information, intertwining financial information and analysts' reports, and failure to update information which has become stale or inaccurate due to subsequent developments.

When a company's stock price plummets unexpectedly, plaintiffs' counsel in such suits is likely to scrutinize the allegedly offending company's web site for misleading or inadequate information. Attention must therefore be given to what such counsel is likely to find.

Often, a company will have its most recent SEC filings - reports on Forms 10-K, 10-Q and 8-K 0 - on its web site. A company may also post its annual report, often carefully not "filed" except for financial statements and MD&A. Particularly when the annual report is more than six months old, the CEO's letter to shareholders, and other semi-promotional descriptions of the company's business and operations, may be overly optimistic or inaccurate due simply to corporate or industry changes. Products may have been withdrawn, line extensions may have been added, divisions may have been sold, shrunk or acquired.

A web site which includes language separating promotional information from straight financial information, and clearly distinguishes between them, will have fewer risks than one which does not. Similarly, a web site which regularly removes stale information and updates information on its site will increase its accuracy and thus reduce the risk that its postings will be used against it.

Companies which are followed by analysts may wish to provide links to analysts reports, particularly favorable analysts reports. Doing so may be seen as "adopting" those reports with which it links, thus placing the company's imprimatur on their accuracy and providing a basis for plaintiffs' lawyers to argue that the company is responsible for a favorable report by an independent analyst, including any inaccuracies that the report contains.

One solution is to provide links to reports of all analysts who follow the company, regardless of whether the reports are favorable or unfavorable, with a caveat that such links are provided for the convenience of persons who may be interested, that the reports are written by independent analysts, and that the company takes no responsibility for such reports, including without limitation any inaccuracies which they may contain. Another solution is to provide a list of such analysts, but no links, again with warning language advising that the company provides the information for convenience and takes no responsibility for their accuracy. A third solution is to provide neither links nor a list.

Whether the benefits of linking only with favorable reports are outweighed by the increased risk of shareholder suits if the reports turn out to be overly optimistic is a decision best made in consultation with securities counsel. If there is to be linking by the company, a more conservative approach would be to link with all reports known to be available, emphasize that such linking is permitted for the convenience of interested persons but that such reports are made by parties independent of the company and the company takes no responsibility for analysts' reports, thus permitting web site visitors to choose which to view and how to evaluate them.

Whether or not a company chooses to provide links to analysts' reports may be irrelevant to the links being available. Unless a company takes steps to limit access to its web site, for example by requiring password identification, any web site may incorporate links to other web sites. Thus, affirmative disavowal of responsibility for analysts' reports, including any inaccuracies they may contain, is advisable whether or not the company provides links.

Where forward looking information is included on a company's web site, inclusion of risk factors is also advisable. If, for example, a company posts its10-K report on its web site, a reference or link to that section of the report which discusses risk factors may be advisable. Where the 10-K is not posted but promotional information is, it may be advisable to consider including risk factor information from the 10-K, particularly when a company's stock is known to be high risk, and the company anticipates that it will appeal to people likely to learn about it through its web site. This includes "high tech" companies or others who originally offered their stock for sale via a company web site, or anticipate doing so in the foreseeable future.

Recent informal statements by members of the SEC staff members indicate that general references to risk factors stated in a 10-K may be insufficient to bring a company within the "safe harbor" for forward looking statements. Accordingly, companies will want to consider carefully how to structure specific links and references.

Having a web site requires on-going attention to its contents, whether changed or unchanged. We live in a dynamic world. Information on a web site is continuously disseminated. Companies which have web sites which disseminate inaccurate, incomplete or inadequately current information can expect to find themselves at greater risk of suffering challenge from disappointed shareholders, prospective shareholders, and dissatisfied customers than companies which actively and thoughtfully manage their web sites to provide timely information to interested visitors.

Able management of corporate web sites includes being aware of not only securities law issues, but marketing issues, customer relations issues and other legal and related concerns. For example, confidential information which becomes available on the Web, and thus the Internet, is no longer confidential. Trade secret protection is not available to information once it is available on the Internet. On the other hand, publication on the Internet does not mean that copyright protection is lost.. Copyright laws apply when copyrighted materials are made available on the web, and thus permission to incorporate copyrighted materials of others as a part of a company's web site may have to be obtained.

Where a web site includes an interactive facility, enabling visitors to ask questions about a company's product or services, good customer relations requires that the company respond promptly to queries and complaints posted at its site. If a company cannot respond promptly, it may be better not to provide the facility and avoid the ill will resulting from long delayed responses to questions and comments.

Some Additional Thoughts on Risk

Additional risks may arise with regard to timing of disclosures, particularly when a company is in the process of making a public offering of securities. In this area, it has been suggested that having materials available on a web site might cause them to be included as part of informational presentations to prospective underwriters, thus exposing the company to liability for web site contents in the same way as if they had been made available at the presentation site. Such a position seems extreme, but to date, there are no formal guidelines on the point.

Other issues arise in connection with the extra-territorial effect of a web site. For example, clear guidelines remain to be articulated as to whether, and if so, to what extent, a U. S. parent company of a foreign subsidiary is responsible for monitoring the contents of the subsidiary's web site. Similarly, it is also unclear if a U.S. company makes a securities offering only outside the U.S., the SEC may take the position that the U.S. based web site is limited to reporting what could be placed in a U.S. newspaper based in a country in which the offering was being made. U.S. regulators have expressed concern regarding effective protection of U.S. investors when information which would constitute an "offering" in the U.S. is made available from a non-U.S. web site which can be accessed by U.S. investors, but acknowledge the difficulties of extra-territorial application of U.S. law. [Note: after publication of this article, the SEC issued several releases on this subject. See e.g. Release Nos. 33-7516, 34-39799 and International Series Release No. 1125.)

In short, a variety of legal issues remain unresolved. The technology is still evolving, too. The opportunity for assuring instant dissemination of accurate information relatively inexpensively makes it likely that the use of corporate web sites will increase. It will be a challenge to web site designers, corporate and securities lawyers, and more generally, companies and corporate issuers and underwriters, to utilize the expanding potential of web sites wisely and well.

FOOTNOTES

1Copyright 1997, Micalyn S. Harris; All Rights Reserved. Cite as: Micalyn S. Harris. "Managing Web Site Risks Effectively." 1 wallstreetlawyer.com No.1, June, 1997. This version may vary, in minor respects, from the final printed version.