Corporate Law Considerations: The Disclosure of a Chief Executive Officer’s Personal Information
Introduction
Is there a time for a CEO when conditions might exist that could spark a debate over the disclosure of his/her personal information and the shareholders’ right to know of such information? Surely a chief executive does not forfeit his or her right to privacy merely because they have been elected to the office. While most significant occurrences involving CEOs are unique, it is possible for example, that a CEO’s public disclosure of divorce is the conclusion of confidential dissolution proceedings, with the distribution of all marital property and monies already agreed to in a settlement, and with any corporate impacts having been legally mitigated. Or likewise, the corporate impact of a CEO’s public disclosure of a terminal diagnosis has been dealt with privately, the market has already priced in the outcome based on speculation, and the announcement of the CEO’s condition is sadly the acknowledgement of a certain outcome. With the recent publicity surrounding the announcement by Jeff Bezos, Amazon’s founder and CEO, of his divorce from wife of 25 years (MacKenzie), questions are again being asked as to whether the marital status, health, or any other aspect of a chief executive officer’s life should be subject to disclosure. Similar lines of inquiry received some attention after Steve Jobs, founder and then CEO of Apple, announced his health status to shareholders and employees. There are many other recent examples as well involving health concerns, divorces or dissolutions, and other personal conditions. Although the factual distinction between the health of a CEO and a marital break up are very different for certain, both sets of circumstances could potentially affect business organizations that are led by CEOs with potentially significant personal issues. Current jurisprudence has the benefit (increasingly) of hindsight regarding substantive issues such as discussed above to help inform philosophy and law with respect to shareholders, events impacting CEOs, and a corporation’s duty to inform its shareholders. Thousands of pages of scholarly research have been written analyzing the pertinent facts of such situations, board actions and inaction, and the legal implications with respect to corporations and shareholders, among other related things. That is not the intent of the few words that follow. Rather, the purpose of this very short article is to invite the reader to briefly ponder the possible implications resulting from a fact pattern such as a CEO’s catastrophic health announcement or divorce on a company and its shareholders.
Security and Exchange Commission’s (SEC) Required Disclosure
When is the marital, health, or other condition affecting a chief executive officer required by the SEC to be disclosed? It is not required. Primarily, the legal concepts that frame disclosures are the prohibitions on materially false statements and ‘half-truths’ imposed by SEC 10b-5. The securities industry uses what is known as an integrated disclosure system. There exists a myriad of forms and regulations prescribed by the Securities Act of 1933 and the Securities Exchange Act of 1934 that are used to accomplish everything from registration of a company (Form S-1), to comprehensive quarterly reports of a company’s performance (10-Q), and reports on transactions with related persons, promoters and certain control persons (Reg S-K.) [See https://legcounsel.house.gov/Comps/Securities%20Act%20Of%201933.pdf and https://legcounsel.house.gov/Comps/Securities%20Exchange%20Act%20Of%201934.pdf for the complete ’33 Act and the ’34 Act respectively.] Not included among any of the required SEC disclosures is the state of a CEO’s health or marriage. The public disclosure of factors affecting CEOs personal lives has been the subject of discussion and debate for some time, and has in the past 10 years or so seen increasing interest in the topic, both from shareholders and boards of directors alike. At present, there does not appear to be anything of significance relating to this type of public disclosure under study by the SEC or Congress. But in light of examples such as Steve Jobs’ cancer saga and the recent Bezos announcement, should the SEC require disclosure?
Discussion
At the outset of this short discussion it is important to bear in mind that irrespective of the materiality of information regarding a CEO, it does not necessarily mean that the information must be disclosed. In other words, materiality of information or facts does not equate with disclosure. If certain information pertaining to the status of a CEO is determined to be material, key areas of potential interest would likely be, inter alia, corporate law and securities law. As a point of reference within the context of these two areas, a fact is defined as material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote their shares or invest their money. Put another way, the term material, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters as to which an average prudent investor ought reasonably to be informed before buying or selling any security of the particular company.
Apple (AAPL): While there is no mandatory rule requiring the disclosure of the health status of the chief executive officer, oftentimes the CEO and/or the board will decide that it is in the best interest of the company to disclose the condition to the shareholders. Steve Jobs’ medical challenges became apparent in 2003 when he was treated for pancreatic cancer. Jobs first announce to Apple that he had serious health issues in August 2004. He took a leave of absence beginning in January 2009 and returned to work in June 2009 during which time he underwent a liver transplant. In January 2011 Jobs again took a leave of absence. Tim Cook was named acting CEO. In August 2011 Jobs informed the company of his 2009 liver transplant. Jobs passed away in October of 2011. Apple’s stock dipped about 2.3% following the 2004 and 2011 announcements, and following the announcement of his death on October 6, 2011 shares of Apple Inc. (AAPL) fell about 0.7 percent to $375.75 at the opening bell but rebounded through the day as many industry observers believed Apple was well-positioned to continue its successes without its legendary founder. By late afternoon the stock was at $377.37, down 0.23 percent. The strength of the company, the relative openness of the CEO during the lengthy ordeal, and the selection of the heir apparent before Jobs’ passing contributed to an overall stable transition period during which investors and the market had ample time and information to price in the inevitable. Might this fact pattern have served as the basis for some sort of legal action by strident Apple shareholders? How long had Apple’s board members known of Jobs’ condition? Did it matter?
Amazon (AMZN): Although there have been many dissolutions of marriages involving CEOs and the division of marital property which included company stock, it is not too far a reach to suggest that the Bezos case is unique. If recent press reports are correct, Jeff Bezos and his wife MacKenzie did not have a prenuptial agreement. Jeff Bezos’ filing with the SEC on August 14, 2018, revealed that the Amazon CEO owned 78.88 million shares Amazon. (Bezos also owns the aerospace manufacturer and spaceflight company Blue Origin as well as the Washington Post newspaper.) On July 27, 2017, Jeff Bezos surpassed Bill Gates as the world's richest man with a net worth of over $124 billion. As of January 2019, his worth is estimated at $142.3 billion.
Andrew R. Jassy is the CEO of Amazon Web Services, a subsidiary of Amazon that offers various cloud computing services across the globe, and is Amazon's second-largest individual shareholder with 91,231 shares of the company according to an August 15, 2018 filing with the SEC. Amazon shareholders are undoubtedly aware of the significant difference between the CEO’s holdings and the next largest individual shareholder. Jefferey Wilke is CEO Worldwide Consumer for Amazon and owns 60,040 shares of Amazon, making him the company's third-largest individual shareholder, according to an SEC filing on September 12, 2018.
The Bezos’ divorce proceedings would likely be governed by the laws of Washington state. Since Washington state is a community property state, there is a very real possibility that Mackenzie might end up with approximately 39.4 million shares of Amazon (among other marital properties). Does the division of the stock between the two Bezos make this information material? What about the disclosing of the Bezos’ divorce and more importantly, the division of approximately 16 percent ownership stake in Amazon’s roughly $800 billion market capitalization? Inquiring shareholders probably want to know. After all, there is potential for MacKenzie (or their 4 children, or some permutation/combination thereof) to become one of Amazon’s largest shareholders, depending upon how the community property is distributed.
Since the state of a CEO’s marriage is not a mandatory disclosure by the SEC, what recourse might shareholders have should they believe that they have been wronged by not knowing of this particular information prior to trading the company’s shares? If a CEO’s marital status truly impacted a corporation, might that fact then be deemed material, and if so, so what? Would the market and shareholders have acted differently vis-a-vis the selling and buying of the company’s stock had the knowledge of the CEO’s marital status been publicly disclosed? The Bezos’ circumstances with respect to Amazon are arguably unique for a number of reasons not the least of which is the number of shares of Amazon stock owned by Bezos, and if shareholders feel determined to pursue action based on Bezos’ divorce announcement, it might possibly take one of two avenues. The first might take the form of a 10b-5 action. (See 17 C.F.R. 240.10b-5.) In this scenario, if the CEO’s potential divorce was deemed material, the CEO regularly and publicly dismissed the possibility of a divorce, or had spoken of a solid marriage and then subsequently decided to divorce the spouse, might that violate Rule 10b-5? What has been the harm to shareholders?
SEC Rule 10b-5 reads “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
The other action might look like a suit for breach of the fiduciary duties of care and/or loyalty. The board of directors manage the company by acting on behalf of shareholders. Part and parcel of that responsibility are the fiduciary duties of care and loyalty. The duty of care simply stands for the principle that as corporate fiduciaries each board member must act in the same manner as a reasonably prudent person in their same position would act, given the same circumstances. The ‘Business Judgement Rule’ would most likely protect the board in the duty of care scenario. [See Smith v. Van Gorkom 488 A.2d 858 (Del. 1985)]. Courts will not normally review the business decisions of boards that act in accordance with their duties, in good faith, and with the care that an ordinary prudent person in like position would exercise under the same or similar circumstances. Normally the plaintiff will bear the burden of proof in a duty of care action, and that is a significant one. So if the board knew of an impending marital issue with the CEO that potentially could have impact on the company, might there be a duty to inform the shareholders? What harm did the shareholders suffer as a result of not knowing?
In the duty of loyalty scenario, it might be alleged that a board member engaged in self dealing if the board member knew of the CEO’s pending divorce, thought it might be impactful to the corporation, and either bought or sold company stock benefitting him/herself based on their knowledge of the information which was received through their being a member of the board of directors. The plaintiff’s burden in this scenario is also a high bar due to the subjectivity involved. And again, what harm to the shareholders?
Summary
While there does not appear to be any discussion or action contemplated by the SEC that would require the disclosure of a corporation’s CEO health, marital, or other personal information, in certain circumstances a CEO’s personal status might be of more than a minor concern to shareholders. The examples discussed above (AAPL and AMZN) are but two of many similar fact patterns. Several observations however make these two interesting, to include the valuations of the corporations, how the business performed subsequent to the revelation of facts by the CEO, and in the case of AMZN, the distribution of marital assets (re: AMZN shares) as between Bezos and his spouse, which remains to be seen. In both of these examples, the strident shareholders might seek to bring action with respect to Rule 10b-5, or breach of a fiduciary duty against the board of directors assuming the board had knowledge of the gravity of the personal issue (health condition or the imminent divorce of the CEO). Regardless, when a CEO’s personal assets vis-a-vis his company are greater than $140 billion and a community property state is involved, the outcome no doubt will be interesting. These examples raise a myriad of questions worth contemplation, and time will tell if the SEC is given to any action regarding disclosure of a CEO’s personal information in the future. And if they do, should that be concerning to shareholders and to current and future CEOs?