The COVID-19 outbreak creates plenty of disclosure issues about its potential impact on a company’s business and financial condition, but there’s another one lurking in the background — what if the CEO becomes ill? Unfortunately, based on what we know about the virus, that doesn’t seem to be an unlikely outcome for at least a few companies, so it probably makes sense to start thinking about that particular issue now.
If you’re inclined to do that, check out the recent blog from UCLA’s Stephen Bainbridge on this topic. The blog acknowledges that it may be prudent for the CEO to disclose this information to the board and shareholders, but says that the existence of a legal obligation to do so is another matter. A lot may depend on what you’ve previously said — for example, have you singled out the potential loss of the CEO as a risk factor in prior disclosure? This excerpt says that in the absence of this or another disclosure trigger, there may not be a legal obligation to disclose the illness:
Even if the CEO’s health is material, a company could only be held liable for disclosing that information if there was a duty to disclose it. This is because, under the securities laws, “[s]ilence, absent a duty to disclose, is not misleading ….” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988). Hence, for example, if the company put out a press release containing misleading information about the CEO’s health, it would have a duty to correct that statement. But simply remaining silent about the CEO’s health should not result in liability, because there is no SEC rule requiring disclosure or any caselaw imposing a duty to disclose such information.
Having said all that, there are some academics who think there should be such a duty, although they recognize that the law has not yet imposed such a duty.
Prof. Bainbridge cites the academic literature supporting the imposition of a duty to disclose a CEO’s significant health problem, but as someone who wasn’t on law review, I take great pleasure in omitting the citations from my blog. After all, it’s been a tough week, and — to quote Kevin Bacon’s character in the movie Diner — “it’s a smile.”
-John Jenkins, TheCorporateCounsel.net March 13, 2020
