Today's Money Stuff email from Matt Levine informs us that:
- Every bad thing that happens to a public company is also securities fraud.
- Getting beaten up is bad.
- Mark Zuckerberg getting beat up is probably bad for Meta Platforms Inc. “If Mr. Zuckerberg were to become unavailable for any reason,” says Meta in its securities filings, “there could be a material adverse impact on our operations.” For instance if he got beat up real bad.
- Therefore Mark Zuckerberg getting beaten up is securities fraud.
He notes that a Bloomberg reporter wrote that:
Meta’s Mark Zuckerberg has become increasingly obsessed with formal mixed martial arts fighting, and is training for a competitive fight next year. But the chief executive officer faced a major setback: He tore his ACL in training and underwent surgery to repair it. ...
there is a serious consideration here about whether Meta Platforms Inc.’s co-founder, CEO and controlling shareholder has a duty to disclose his MMA activities to investors, particularly if formal contests are in his future. What if it’s worse next time? Zuckerberg posted about his surgery on Instagram, and there was no filing or company statement.
“It’s a question of materiality,” said Bryan Westhoff, an attorney at Polsinelli PC. “Is it material to a reasonable investor to know what the executives are doing? Is there danger and uniqueness to it? MMA is something that most of us don’t do."
Really? "A serious consideration"? Seriously?
Back to Levine:
The corollary to “everything is securities fraud” is that everything is also insider trading, and there are obvious applications here. What if you show up at a Brazilian jiu-jitsu tournament to find that you are fighting Mark Zuckerberg? If you knock him out, can you run to your Robinhood account and short Meta stock before the ambulance gets there? (Can you short the stock before the match if you just know that you’re huge and will knock him out? Do you then fight dirty?) Brazilian jiu-jitsu tournaments now have a unique ability to create material nonpublic information about Meta stock; what if someone uses it?
There is noting new under the sun, of course. To the contrary, there has been occasional academic speculation about when a CEO's health becomes a matter for discloure to investors. Before diving into that topic, however, let us pause to recall that a Friends episode presciently deal with this precise topic:
Back to the law. My friend Joan Heminway wrote about this back in 2007. Joan MacLeod Heminway, Personal Facts About Executive Officers: A Proposal for Tailored Disclosures to Encourage Reasonable Investor Behavior, 42 Wake Forest L. Rev. 749 (2007).
Joan argued that:
Personal facts about an executive may be important to a reasonable investor or have a significant impact on available public information because they may indicate the possibility that the corporation will be without the executive's services either temporarily or permanently. ... Investors may find an executive's unavailability especially important in making an investment decision as to a corporation's securities if the executive has a unique expertise or specialized skill critical to the corporation's successful operations.
Joan further argued that executives and companies are likely to err on the side of non-disclosure, not least because of privacy concerns.
She made two proposals:
First, the SEC should establish baseline mandatory corporate disclosures of executives' personal facts in the 1933 Act registration statements and the 1934 Act periodic reports (Form 10-K or Form 10-Q). These mandatory disclosures would establish, at the outset of public company status or an individual's service as an executive and on a periodic basis during the executive's term of office,186 the corporate significance of the executive's service and other attributes (e.g., name-as-the-brand or other elements of iconic status)--importance to operations, financial condition or results of operations, or other aspects of firm value.
My problem with this proposal is that no CEO is going to want the company to disclose that s/he is not essential.
Next, the SEC should provide specific guidance on event-based and transaction-triggered corporate disclosures of executives' personal facts in current reports (on Form 8-K) under the 1934 Act. These disclosures would be prompted only when a personal fact impacts a specific executive's articulated importance to the company, as identified in the corporation's baseline disclosures about the executive (as the same are updated from time to time) and could be simply implemented as an addition to the items required to be reported on Form 8-K.
My problem with this proposal is how one defines "impacts." Should Zuckerberg have to disclose his MMA involvement even before he loses time to an injury? Should a CEO have to disclose their chronically high cholesterol? That s/he bought a McLaren and take it on high speed track meets every weekend? After all, a disclosure mandate that only kicks in after the CEO dies by slamming the McLaren into a flaming crash at 200 mph is too little too late.
I would also recommend Tom C. W. Lin, Undressing the Ceo: Disclosing Private, Material Matters of Public Company Executives, 11 U. Pa. J. Bus. L. 383 (2009), to the interested reader. Tom proposed:
a model approach that would first require principle-based disclosure by senior executives of material private information to their board of directors or appropriate committee. Second, the approach requires that such disclosure be made available to the investing public within the current federal securities framework after the board independent of the disclosing executive determines that such disclosure is material and should be disclosed. ...
Examples of the type of information that should be disclosed about senior executives are diagnoses of a fatal illness, certain threatened criminal investigations, and certain meaningful outside investments.
But there remains a serious line drawing problem.
Personally, I have long been rather dubious of requiring disclosure of matters relating to a CEO's personal life. Between privacy concerns and the difficulty of drawing lines between what should and should not be disclosed, the game is not worth the candle.
