Chief executives of big public companies, like most everyone else in the U.S., are at risk of exposure to the Covid-19 virus—but if a CEO tests positive, experts say that’s probably a “material risk” to shareholders. The big question is: What must executives and directors reveal, and when?
The report quotes securities law professor Tom Lin who thinks “it would be prudent for any CEO who’s been diagnosed with Covid to disclose it to their board, at minimum, and probably to their shareholders.”
I concur. Setting aside the question of prudence, what must a company disclose--if anything--if its CEO comes down with the coronavirus?
In Hines v. Data Line Sys., Inc., 787 P.2d 8 (Wash. 1990), the Washington Supreme Court dealt with a case in which a company's private placement memorandum risk factor analysis had stated that:
Dependance Upon Key Personnel. The performance of the Company depends upon the active participation of its officers, including Dale L. Peterson ... The loss of any of these qualified personnel could have a material adverse effect upon the Company....
Investors sued, claiming that defendants had violated the Washington State Securities Act’s antifraud provision by failing to disclose CEO Peterson's health problems. The defendants did not deny that the health was a material fact. Instead, the defendants argued that plaintiff should have to prove loss causation. The court rejected that argument, holding that proof of transaction causation sufficed.
Perhaps defendants felt they had to concede the materiality of the CEO's health in light of the risk factor disclosure. Absent such a trigger, however, would a CEO's health be a material fact that the company has an affirmative duty to disclose?
A 2018 corporate governance advisory (Corp. Gov. Adv. 777862 (C.C.H.), 2020 WL 777862) observes (in my view, correctly):
U.S. securities laws do not specifically mandate disclosure of a CEO's illness or other health-related information. Public disclosure of a CEO's health condition becomes necessary only when there is “a present duty to disclose” and the information is considered “material”—the framework applicable to non-public information generally. ...
... the determination of whether an executive's health issue is material is generally left to the board's judgment. Even then, there appears to be a gloss on the materiality test that weighs against disclosure when it comes to health information. Academics and commentators disagree about when a CEO's illness becomes material to investors and whether the U.S. Securities and Exchange Commission should mandate its disclosure.
There is a dearth of case law on point; neither courts nor the SEC have concluded that adverse information about a CEO's health was so material that (in hindsight) it should have been disclosed.
... Existing case law indicates that just because investors might like to know about the CEO's health, that does not mean the information is material.
Even if the CEO's health is material, a company could only be held liable for disclosing that information if there was a duty to disclose it. This is because, under the securities laws, "[s]ilence, absent a duty to disclose, is not misleading ...." Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Hence, for example, if the company put out a press release containing misleading information about the CEO's health, it would have a duty to correct that statement. But simply remaining silent about the CEO's health should not result in liability, because there is no SEC rule requiring disclosure or any caselaw imposing a duty to disclose such information.
Having said all that, there are some academic who think there should be such a duty, although they recognize that the law has not yet imposed such a duty. See, e.g., Jayne W. Barnard, Sovereign Prerogatives, 21 J. Corp. L. 307, 321-28 (1996) (discussing Time-Warner's failure to disclose Steve Ross's heart attack and prostate cancer); Tom C. W. Lin, Undressing the CEO: Disclosing Private, Material Matters of Public Company Executives, 11 U. Pa. J. Bus. L. 383, 387 (2009) (favoring "more meaningful, material disclosure and less privacy for executives").
I see arguments on both sides and am not convinced that there is a clear right answer. FWIW, my gut reaction favors privacy, but that's certainly not a compelling argument.
Thoughts?
