August 7, 2008

More on Steve Jobs and Disclosure of Health Issues

I got quite a few responses to my blog on whether Apple should have handled its disclosure issues related to CEO’s Steve Jobs differently. In fact, NY Times’ reporter Joe Nocera wrote a great column on the topic the day after my blog.

Here are excerpts from several responses from members:

– The Jobs situation is a good illustration of the affirmative-duty-to-disclose question, which a lot of junior lawyers have a hard time grasping,

– Interestingly, some companies create problems for themselves when they throw in a risk factor about dependence on key management personnel, largely to stroke the ego of their CEO who could be replaced without much difficulty.

– The health disclosure question comes to a head when the CEO/CFO certifications must be filed. At what point is someone else effectively functioning as PEO or PFO? Let’s imagine a PEO/PFO is in a car accident or a coma, or just “out of sorts” for a couple weeks. Should companies start thinking about implementing procedures like the 25th Amendment to the US Constitution? That would be the logical extension of the Form 8-K Item 5.02 and certification issue.

I’ve done the analysis about whether a company could have an obligation to disclose health problems of its CEO and I normally would have agreed with your suggestion that Item 5.02(b) (retirement, resignation or termination) might be triggered if a CEO became so debilitated that he wasn’t truly functioning in that position. However, I keep coming back to the recent SEC Staff guidance that Item 5.02(b) is not even triggered when the CEO dies in office (see Interpretation 217.04 of Form 8-K CDIs)! How bizarre is that!

– One might consider whether information concerning Steve Jobs’ health something that a reasonable investor would want to know in making a buy/sell decision regarding Apple stock (and thus would be considered “material” under a TSC v. Northway analysis) as contrasted with mere intrigue surrounding a celebrity CEO (which is not particularly relevant to investors). If the former, one would think it is difficult for Apple not to disclose in connection with, say, a Form 10-K or 10-Q filing because its contains MD&A, which has broad materiality-based disclosure requirements. If the latter, there should be no disclosure obligation.

As a policy matter, query whether the investing public is better served by all companies including a risk factor stating that from time to time key personnel may have illnesses, which could be serious, might interrupt service to the company and that the interruption might be permanent. Further consider if anyone is served by a disclaimer of any duty to update info about the health of key personnel to the extent disclosure occurs.

Your Take: What Should Have Apple Done?

Here is a poll where you can anonymously provide your legal analysis:

Online Surveys & Market Research

– Broc Romanek