Elon Musk SEC filing raises question: 'When did his intent change?' expert says

Dickinson Wright Securities Enforcement Practice Chair Jacob Frenkel joins Yahoo Finance Live to discuss Elon Musk's offer to buy Twitter and potential regulatory hurdles from the SEC.

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BRIAN CHEUNG: Let's stay on the theme of this and take a little bit of regulatory angle as well just given how important the SEC has been as part of all this. Jacob Frenkel is Dickinson Wright Securities Enforcement Practice Chair and then joins us now live on the program. Jacob, it's great to have you.

I wanted to ask you just as a quick reaction to the news that we got this morning-- this is not the usual way that you tend to see an investor that has certain thoughts in public about disliking a company would go about this type of thing. Any weird nuances to the way that these SEC filings-- it seems like every time a 13G or 13D drops, investors are ducking like there's bombs coming from the sky?

JACOB FRENKEL: Brian, listen, to your discussion with Akiko, I mean, you really hit on a lot of great issues. And I think they really highlight a lot of the questions and the uncertainty that's really in play here. To me, we've got several pieces. One is the one you identified, which is the board's consideration and the board's fiduciary duty to the shareholders.

We're going to get to regulatory in a second. But as I was thinking about as you were discussing it, there are two pieces to that. And that is the board's obligation is to maximize value for the shareholders. At the same time, there's a fundamental bigger regulatory question, which is when you're talking about a communications medium, a platform such as Twitter, I mean, should that be in the hands of an individual?

Is that part of the consideration for the board? That's a very interesting issue. But your question to me about regulation, per se, and in particular the SEC, what I'm looking at are a number of issues. Number one, there was the original 13G filing. You know, everybody was talking about that being tardy.

I looked at that tardiness as being a technical issue, one that would not be an issue-- of interest, per se, to SEC enforcement. SEC enforcement typically does not bring cases when a passive filing is a little bit late. Then you have the shift to the 13D. He's taking on an active role. I don't want to sound wonkish, but, in many respects, the most important section of the 13D is what we call the Item 4 disclosure, the purpose.

And that's the one that you were focusing on, Brian, In the introduction, which is, what is the purpose, what is the objective of the investor in making the investment? I don't want to get off into the private litigation that you were discussing yesterday, the lawsuit I think will be dismissed out of hand by a court because I don't think it has merit. But fundamentally, from a regulatory enforcement perspective, we're talking about whether the disclosures that Mr. Musk made were fair and correct at the time that they were made.

And the other thing that I don't hear people talking about is, is there anybody out there who knew what Elon Musk's plans were with respect to Twitter, you know, as he was acquiring shares? I could really see, depending on the activity, insider trading investigation here on both sides, as well as what may be happening on the short side.

AKIKO FUJITA: Well, and, Jacob, you kind of highlighted that this morning when we spoke. You said, when you look at the language of this filing and Elon Musk saying, my offer is best and final, bottom line-- was there a prior offer made? When did the intent change? I mean, what are the questions that regulators are going to be asking around that?

JACOB FRENKEL: Those are the questions. And I did go back and I took a look at the filing-- and you know, there was the collateral language about the exhibit-- I think it was the exhibit B to the filing. Listen, that was a very carefully crafted and presented filing.

This was not some off the cuff, let me get into the SEC because I have to. I mean, his language I think all the way through, despite the previous cases where Mr. Musk has the propensity to speak freely and openly, this was a controlled set of communications. The real question, in my mind, is, when did his intent change? Because once he became the 13D or even before he became the 13D filer, was his attempt to acquire?

Well, if it was at an earlier date, then there could be a disclosure issue of interest to the SEC that could bring things into the Section 10B anti-fraud category. From a regulatory perspective, the questions are, when did his intent change? What was that intent when it changed? What was the timeliness of the disclosure?

And I truly believe if you look at the market activity, that the question is going to be, did other people know? Did they have the ability to trade based on Elon Musk's intentions even before he made them publicly known? That's not the typical insider trading theory, but that goes back to almost the Martha Stewart case, where it wasn't about what did she know about Imclone, it's what did she know about the activities of the CEO of Imclone.

AKIKO FUJITA: Well, I mean, on that front, Jacob, there is the question about, number one, how serious the offer is and whether, in fact, Elon Musk is simply looking to see the stock price go up and say, you know what? I changed my mind. I walk away. I mean, he can sell at that point, right? If that's the case, how do you think retail investors who have shares in Twitter should be looking at this?

JACOB FRENKEL: That's a great-- that's a great question, because it comes back to why is somebody a shareholder. I mean, you know, here in 2022, you have people who are shareholders because they are principled-- they believe in the concept and message of the company. You also have retail shareholders who are strictly in for the value proposition. You know, is this stock going to go up? Is it going to go down?

And that's part of the dilemma, ultimately, you know, for the board. I mean, Mr. Musk has the right to sell his shares. That is not subject to any constraints. He has now disclosed publicly, if you don't take my offer, I may get out of this company. It was a well-crafted-- it was certainly a well-crafted filing.

So I think it presents a dilemma to shareholders, but I think some of the longer standing or mid-term shareholders, you know, could very well be in the process of looking to get out. But this, then, brings us back to the obligation of the board and a discharge of their fiduciary duties to the shareholders. Is it a value proposition or is it the messaging of the company?

And how do you assimilate those two issues in determining what is in the best interest of the company as directors? Some respects, I see this process more challenging for the board than for Mr. Musk or for retail investors.

BRIAN CHEUNG: Yeah. And, again, we'll have to see how the board responds-- seems like they're moving pretty quickly because they allegedly did convene about an hour ago. But Jacob Frenkel, Dickinson Wright Securities Enforcement Practice Chair and formerly of the SEC, thanks so much. Well, look, I mean, we've seen billionaires try to make moves on companies that they have beef with.