Was Steve Jobs' Health Material?

The WSJ Law Blog notes a brewing controversy over whether Apple should have been mre forthcoming to investors about Steve Jobs' health:

Back in January, erstwhile Law Blogger Dan Slater chatted with former SEC chairman Harvey Pitt over whether execs at Apple had a duty to make a more forthcoming disclosure about Steve Jobs’s medical condition. 

At the time, we knew a lot less about Jobs’s condition than we know now, what with last week’s news that Jobs recently underwent a liver transplant in Tennessee. In January, we just knew that Jobs, according to Apple, had a “more complex” medical condition than had been originally disclosed. Still, Pitt called into question the company’s conduct. And so, it seems, did the SEC, which opened an investigation into the matter.

An LA Times article out today reprises the issue — what did Apple have the duty to disclose and did the company satisfy that duty? — in light of the liver-transplant news.

The LAT article lays out the law: Companies are not required to divulge medical details about executive, but they are required to disclose “material” information, which is defined as what a reasonable investor would need to know to make an informed decision on buying or selling stock. The Pitt Q&A also tells us that once a company decides to go forth and make a disclosure, it has a duty to get that disclosure right.

The question pending, then, is whether what Apple said in January was adequate — and accurate. In making this determination, the SEC (the status of whose investigation is currently unclear) might consider these facts: that the Tennessee doctor who led the transplant team said this week that Jobs was “the sickest patient on the waiting list” at the time a donor liver became available.

Apple has maintained that the initial statement was enough to satisfy disclosure rules imposed on publicly traded companies.

There are two distinct issues here that we need to avoid getting bollixed up. First, was Jobs' health material? Under the prevailing standard, we need to ask whether there is a substantial likelihood that the reasonable investor would consider the information to be important in deciding to buy or sell Apple stock (or vote on a proxy or whatever). Assuming that Jobs' health was uncertain and the effects of treatment speculative, we would need to use the Basic v. Levinson test of whether the magnitude of the event (Jobs' death or retirement for health reasons) and the probability of it happening are high enough that the information becomes material under the foregoing standard. 

At first blush, you might say that Jobs is so important to Apple that a reasonable investor obviously would consider the information to be important. Yet, there are a number of doctrines in the materiality context that might lead to a finding of immateriality here. For example, as I explain in my Corporation Law and Economics treatise, information about director misconduct frequently is deemed immaterial:

The biographical information required of director candidates by the proxy rules includes such matters as bankruptcies, pending criminal charges and prior convictions, securities violations, and the like. To what extent must a director disclose other personal peccadilloes? Actual or potential conflicts of interest generally must be disclosed. But what about matters that go not to the loyalty and honesty of the directors, but rather to simple mismanagement?

Where plaintiff complains of noncriminal conduct allegedly constituting mismanagement, courts have been unwilling to require disclosure. In Amalgamated Clothing and Textile Workers Union, AFL-CIO v. J. P. Stevens & Co., for example, plaintiffs argued that the board of directors had either knowingly violated the labor laws or, at least, failed to prevent management from doing so. According to plaintiffs, this alleged misconduct had harmed the corporation’s reputation and exposed it to liability. The failure to disclose these purported facts in connection with the election of the directors allegedly constituted an omission of material facts. In rejecting plaintiff’s argument, the court distinguished conflicts of interest from allegedly illegal conduct intended to benefit the corporation. Only the former need be disclosed, as it would be “silly” to “require management to accuse itself of antisocial or illegal policies.”

A similar standard was set forth in Gaines v. Haughton. Defendants were directors of Lockheed Corporation, a major aerospace and defense firm, who failed to disclose in their proxy solicitation materials that Lockheed had made over $30 million in foreign corrupt payments. Paying bribes to foreign officials so that the corporation can get contracts may be immoral or even illegal, the court opined, but such allegations are not material absent charges of self-dealing. In addition, the court stressed the lack of a causal nexus between the alleged misconduct and the matter put to the shareholders for a vote. Because the shareholders were asked only to elect the board, not to approve the allegedly improper bribes, the bribes did not need to be disclosed.

As these cases suggest, there is a second issue here; namely, whether the corporation has a duty to disclose the information. The Basic case makes clear that withholding material information from investors is not illegal unless the company had an affirmative duty to disclose. Just as courts have been reluctant to deem personal information about directors material, so they have also been reluctant to deem it a subject as to which a duty of affirmative disclosure exists.

A relevant example of how these doctrines might impact the Jobs situation is provided by U.S. v. Heron, 525 F.Supp.2d 729 (E.D.Pa.,2007), rev'd on other grounds, the court rejected the Government's position that information is material simply because investors would want to know it: "Under that expansive standard, information as trivial and potentially invasive as the health of the CEO's marriage would become material since reasonable investors might “want to know” if he or she is so distracted." If the health of the CEO's marriage is immaterial as a matter of law, perhaps his health would also be immaterial.

Neither the misconduct nor the marriage cases are on all fours with the Jobs case, of course. Neither the SEC nor the courts have provided clear guidance as to when disclosure obligations trump personal privacy in this areas. Given the social--and even constitutional--emphasis on personal privacy, surely it would be “silly” to “require management to accuse itself of [being ill].”