July 25, 2008

A Delicate Disclosure Issue: Steve Jobs' Health

Lately, there have been plenty of rumors about the health of Apple CEO Steve Jobs and whether he remains healthy. Until Apple finally clarified the situation on Wednesday, the company's stock price had taken a hit since the market believes he is key to the company's future (actually, the company didn't clarify - rather, it was reported in this NY Times' article based on comments made by Jobs to some of his "associates").

And the market was wary of statements from the company that Jobs had a "common bug" or that "the matter was private" because the company has a history of not being upfront about his medical condition (Jobs had a rare form of pancreatic cancer four years ago; the company waited nine months to disclose it). In fact the company is still not being forthright, this reporter had to put clues together to come up with his own diagnosis of what surgical procedure Jobs recently had.

So the securities law issue arises: does Apple have a duty to disclose Jobs' current condition? This is not a new issue and one that pops up periodically on our "Q&A Forum" in all shapes and sizes. Under the SEC's rules, companies typically don't have an affirmative duty to disclose unless a Form 8-K is triggered or a periodic report (eg. 10-Q or 10-K) is due (I say "typically" because there are other 'disclose or abstain' circumstances to consider).

On the other hand, the company may have a duty to update if they have an outstanding statement that the CEO's health is sound. Given that an Apple spokesperson said Jobs' gaunt appearance at a recent event was due to a "common bug," there is an argument that the company had a duty to update (or was misleading to begin with).

Clearly, Jobs is very important to investors and many articles have been written that essentially argue that by taking the job of CEO, you relinquish your right to privacy; here are articles from the Financial Times; TheStreet.com; and below is an excerpt from this San Mercury News article:

No hard rules guide how companies handle health issues of their executives. But corporate governance experts say companies need to be forthcoming when health issues affect the ability of executives to perform. That does not mean, though, that Jobs has to submit details of his health simply to allay the worries of investors, said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. "If his health is such that he can't carry out his job, the company must disclose that," he said. "It's only material if it affects his ability to carry out his responsibilities. Up to that point, it's up to him."

But it is the board's role to keep tabs on the health of its chief executive and have emergency, and long-term, succession plans in place, said Nell Minow, editor of the Corporate Library, a corporate governance research group. "The primary issue is, the board needs to be on top of it," she said. In general, such information is best kept private, otherwise "it can create more uncertainty than is necessary," Minow said. However, she was critical of Apple CFO's Oppenheimer's response that "Steve's health is a private matter."

"That's what we in Washington call a non-denial denial," Minow said. "It's very important that investors are confident of his health. He is responsible for a large part of the company's success. He's the one who holds up the iPhone and says, 'Here's what I did.'"

Looking beyond the SEC's rules, companies also need to consider the rules of the stock exchange where their stock is listed. Since Apple is listed on Nasdaq, Rule 4310(16) requires the company: "except in unusual circumstances, a Nasdaq-listed issuer shall make prompt disclosure to the public through any Regulation FD compliant method (or combination of methods) of disclosure of any material information that would reasonably be expected to affect the value of its securities or influence investors' decisions. The issuer shall, prior to the release of the information, provide notice of such disclosure to Nasdaq's Market Watch Department if the information involves any of the events set forth in IM-4120-1." Under this guideline, the importance of disclosing a CEO's illness would depend on the "materiality," which would take into consideration a mix of factors including the relative importance of the CEO and the magnitude of the illness.

In comparison, Section 202.05 of the NYSE Listed Company Manual states that companies are "expected to release to the public any news or information which might reasonably be expected to materially affect the market for its securities." However, the SROs rarely enforce their own listing standards, particularly in this area where "materiality" remains relatively subjective.

The reality remains that since someone's health is such a sensitive topic, there isn't a standard practice - but that companies must take care not to be misleading nor create a duty to update. And I won't go down the path of when a CEO's health is so debilitated that their responsibilities are diminished to the point that they don't truly function in the position of that officer, which arguably could trigger a Form 8-K under Item 5.02...that's another kettle of fish to fully analyze...

California Finally Resolves Conflict with E-Proxy

On Tuesday, California Gov. Schwarzenegger signed Senate Bill 1409 into law, which amends Section 1501 of the California Corporations Code so that California's annual report delivery requirement piggyback's on the SEC's eproxy rules and resolve the conflict I've been blogging about for some time. It seemed like this bill would be signed back in February; obviously, not a high priority.

Specifically, the bill states that the California annual delivery requirement "shall be satisfied if a corporation with an outstanding class of securities registered under Section 12 of the Securities Exchange Act of 1934 complies with Section 240.14a-16 of Title 17 of the Code of Federal Regulations, as it may be amended from time to time, with respect to the obligation of a corporation to furnish an annual report to shareholders pursuant to Section 240.14a-3(b) of Title 17 of the Code of Federal Regulations."

This bill has been approved as an urgency statute and is effective immediately; obviously too late for the past proxy season but "good to go" for next year. Hat tip to Paul Blumenstein of DLA Piper and we have begun posting memos on this development in our "E-Proxy" Practice Area.

Lifehack: Enhance Your Productivity

Check out the website called "Lifehack" for some ideas about how to live your life. Here is a blurb about "10 Overrated Business Books & What To Read Instead." And my favorite is "How to Write in a Thousand Words or Less" - that's my philosophy for all our newsletters...

- Broc Romanek