Defamation by investors
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Defamation by investor case where a shareholder was held liable for defaming a company
Shareholders who attempt to manipulate share price by spreading untrue rumours about the sate of affairs in the company and about the company’s leadership might find themselves facing a law suit for defamation.
In most cases, speech which relates to the company shares, performance and future prospects, particularly when exercised on the various online investment forums, would be considered protected speech if the statements convey the genuine opinion of the author. But even speech that is clearly designed to manipulate other shareholders, and to encourage them to either buy or sell shares in a company, this might still escape liability for defamation even if the defamatory statements are deliberate and even if the intention of the author was to smear. There are, however, situations where a line is crossed between protected free speech and defamation and this is where the defamatory statements contain personal allegations of corruption.
Corruption must be an action of individuals and therefore the defamatory statements alleging corruption will always be directed at the individuals who are responsible for the day-to-day operation of the company. These often will be company directors, company secretaries, company consultants and advisors, the accountants and the auditors. It might not be necessary to name names in those situations as legal responsibility to identify and prevent corruption is vested at the hands of the board of directors.
When considering whether to take legal action for defamation in relation to a company, there are two conflicting risks and desires, which become apparent. If the company allows the defamatory posts to go without an appropriate reaction, there is a risk that investors will assume that the defamatory posts are in fact true.
At the same time, if the company takes legal action with a view of removing defamatory posts from the internet, there is a risk that its actions will be perceived as an attempt to conceal legitimate (although unpleasant) information and to supress free speech. This could sometimes cause a far more serious damage to the company’s reputation than the defamatory posts the Board of Directors are trying to remove.
Resolving the various conflicts and risks that may be associated with legal action of this nature, requires a great deal of consideration, deliberation and experience. It was important for the company to act immediately, yet delicately, due to the potential additional reputational damage that legal action against an investor could have caused. The company therefore chose Cohen Davis to handle the matter.
Mainly, because of the unique and creative approaches we take to handling online defamation matters of this nature and due to our considerable experience in the field of reputational risks and reputational outcomes. In these sorts of cases there is likely to be additional media interest, which needs to be handled delicately, in order to protect the reputation of the company and to avoid negative publicity which could potentially result in a further decline in share prices.
The Board of Directors hold fiduciary duty to the shareholders of the company and as such, it is the Board’s duty to protect the company from legal threats whilst securing as much stability as possible. There are particular difficulties when the defamatory posts attribute dishonesty to member of the Board of Directors, because this attribution is both corporate and personal. If a member of the Board of Directors is being harassed or defamed online, because of the work he performs for the company, the company will, in many cases, be able to take legal action on behalf of the director and the director will be able to take legal action on his own accord. Therefore, it is likely that any legal action for defamation or for harassment that a company takes, will have a strong element of personal attack of the individuals who are involved with the day-to-day operation of the company.
In the case of RRR v Carp, following abortive attempts to bring the matter to an amicable conclusion, RRR eventually decided to take legal action against him, in order to protect member of the Board of Directors and the company’s investors. Following the issuing of legal proceedings, Mr Carp accepted that all his allegations were unfounded, apologised and agreed to pay compensation which the company’s Chairman donated to a charitable cause.
This was a particularly challenging case, which encountered a number of new legal precedents and therefore a fair degree of risk for our client.
The choice was simple, to allow the defamatory posts against the company to gather momentum, destroying the reputation of the company and that of members of the Board of Directors, or to take the unusual step of initiating legal action for defamation against a relatively small investor. Whilst the outcome was considered a success, it had to be handled with patience, delicacy and care. The lessons of this case to a company that suffers defamation on the internet are numerous.
Firstly, it is clear that a single investor can cause a huge amount of reputational and financial damage, even to a PLC, by posting untrue stories and unfounded speculations on the internet. Secondly, a PLC, despite its size, might become vulnerable to online defamation as much as a small, private limited company. Thirdly, the influence of online investment forums on individual and corporate investors must never be underestimated by companies of any size. Fourthly, the cost of online defamation to a large, public company is likely to be far higher than it is to a small private company because it has much more to lose. And finally, the company’s Board of Directors in this case did the right thing by instructing a niche law firm that specialises in online defamation and reputational law to handle this matter promptly and delicately from all angles.