The board must stay on top of a CEO’s illness. It is difficult for a public company to know whether and when to disclose that the CEO (or another executive) is seriously ill, because no US security law or case creates an explicit duty to do so. The company must fall back on the general requirement regarding all nonpublic information: Disclosure is necessary if there is “a present duty to disclose” and if the information is “material.” The complex determination of materiality is usually within the board’s discretion, explain attorneys Mike Dicke, Susan Muck, David Bell, and Alison Jordan. Information that a reasonable investor would be likely to use in deciding whether to purchase or sell company stock is material. Adding to the complexity is the conflict between the CEO’s right to privacy and the company’s disclosure duties. Still another difficulty is the “half-truth” doctrine, under which a company that makes any voluntary disclosure has to provide all the information needed to assure the disclosure is not misleading. While neither the regulators nor the courts have ever applied this doctrine to medical information, they might eventually do so, and medical disclosures have triggered shareholders’ derivative suits.
A wide swing in the extent of disclosure. Absent legal guidance, how much companies tell about a CEO’s illness varies greatly. One choice is full disclosure, the impetus for which can be adherence to high standards of corporate governance, promotion of transparency in investor relations, an assessment that the facts will ultimately become public, or a tendency to err on the side of caution. After full disclosure, the authors advise, the board ought to take three steps:
- Make sure all disclosure is comprehensive and true.
- Set up formal or informal controls on health updates from the CEO to facilitate ongoing materiality assessments and resultant changes to the disclosure.
- Prevent trading by insiders who know material nonpublic information before it is disclosed.
To block a revelation is to skate on thin ice. A company might choose partial, rather than full, disclosure. Five
steps are then advisable:
- Enhance disclosure with substantive qualifications concerning the CEO’s prognosis.
- Set up controls on updates from the CEO, as with full disclosure.
- Condition disclosure on a medical professional’s corroboration of the CEO’s illness.
- Explicitly deny any duty or plan to give updates.
- Do not opine on third-party rumors.
The company’s third choice, the authors suggest, is nondisclosure, after which it should do four things:
- Set up short- and long-term plans for succession, and review both yearly.
- Consult counsel about the plans.
- Think about disclosing the plans to calm stakeholders’ anxieties and to avert stock-price plunges, both of which could occur if the CEO unexpectedly announces an illness or goes on a leave of absence.
- Update the next Form 10-Q’s risk factors on key persons.
Do not play in-house hide-and-seek. The apparent consensus among academics and commentators is that the CEO has a legal duty to tell the board about a severe health problem so the directors can establish a suitable succession plan and that the company’s other officers must tell the board if the CEO does not. Officers who withhold information might violate their duty of good faith, the authors warn. The directors can decide what health information, including periodic updates, they want from the CEO and convey that requirement informally in talks or formally in a bylaw, the corporate code of ethics, or an employment agreement. If clear signs show that the CEO is ill, the directors have a duty to investigate. Any representations that they, the officers, or the corporate spokespeople make which contradict known facts about the CEO’s health might breach US securities laws.
Abstracted from Insights: Corporate & Securities Law Advisor, published by Wolters Kluwer Law & Business, 4025 W. Peterson Avenue, Chicago IL 60646. To subscribe, call (800) 638-8437; or visit www.wklawbusiness.com/store/products/insights-corporate-securities-lawadvisor-prod-ss08943524/paperback-item-1-ss08943524.
Abstracted from: Disclosing A Senior Executive Illness
By Mike Dicke, Susan Muck, David Bell, and Alison Jordan
Fenwick & West, San Francisco CA (MD and SM) and Mountain View CA (DB and AJ)
Insights: Corporate & Securities Law Advisor
Vol. 34, No. 1, Pgs. 12-18
Editor’s note: For an analysis of a public company’s disclosure and other obligations, including SEC filings and succession planning, with respect to executive officers’ and directors’ illnesses during the coronavirus crisis, see Managing coronavirus/COVID-19: Illness in the C-suite— Disclosure and other considerations for public companies from Covington & Burling.
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