As the coronavirus outbreak has spread, the COVID-19 disease has struck millions across the globe. The demographics and geographic distribution of the disease will make for interesting study when the current outbreak has ended, but clearly the disease has struck both the mighty and modest. The high-profile victims include the Prince of Wales and the U.K. Prime Minister. Other victims have included (and likely will continue to include) senior corporate executives. When key execs contract the disease, their companies face the question whether the executives’ illness must be disclosed. As discussed in Judy Greenwald’s April 21, 2020 Business Insurance article (here), there are no bright line answers to this question.
Examples of Company Disclosures
There certainly have been a number of corporate executives hit with the COVID-19 disease. For example, on April 9, 2020, Morgan Stanley disclosed that its CEO, James Gorman, had recovered from the disease. On March 20, 2020, Altria Group announced that it CEO Howard Willard had contracted the coronavirus illness and would be taking a leave of absence. On March 31, 2020, real estate company Vereit announced that its CEO Glenn Rufrano had tested positive for the coronavirus and was being treated at home. On March 26, NBC Universal announced that its CEO had tested positive for the coronavirus. On March 13, 2020, BT plc announced that its CEO had contracted the illness and had chosen to self-isolate.
In each of these examples, and in numerous other cases that have come to light, the companies involved elected to disclose their CEOs illness. But does the company have an obligation to make a disclosure to the investing public if its CEO or other key official contracts the disease?
Considerations Concerning Companies’ Disclosure Obligations
On the one hand, in an April 8, 2020 joint statement about COVID-19 disclosures from SEC Chair Jay Clayton and SEC Division of Corporate Finance Director William Hinman (here), the two SEC officials said “We urge companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning,” and specifically called on reporting companies to provide investors with information on “material risks” to their business operations and results resulting from the coronavirus “to the fullest extent possible.”
On the other hand, company’s specific disclosure obligations with respect to an executive’s illness are unclear. According to D&O maven Dan Bailey, who is quoted in the Business Insurance article to which I linked above, there is “no black and white answer” to this question. As Boris Feldman of the Wilson Sonsini firm is quoted as saying in the same article, “the formal answer is, there’s a great deal of latitude.”
This question about obligations to make disclosures concerning executives’ health brings a lot of competing considerations into play.
First, there is the general principle for reporting companies under U.S. securities laws that companies do not have a an obligation to reveal material non-public information absent a specific obligation to do so, as noted by Tom Gorman of the Dorsey & Whitney law firm in the Business Insurance article. While many companies (such as those identified above) may elect to disclose their executives’ illness, there are no specific requirements that the company disclosure the illness of a corporate executive, particularly where the CEO is still performing his or her duties.
Other countervailing consideration that clearly can come in to play are the privacy rights of the affected individual.
Many readers will undoubtedly recall the controversy that surrounding what turned out to be the final illness of Apple CEO Steve Jobs. In January 2011, the company did disclose that Jobs would be taking his third health-related absence from the company, but questions swirled about the nature of Jobs’s illness, his ability to recover, and his continuing involvement in company affairs. There was a great deal of controversy at the time about the right of the investing public to know more about Jobs’s illness versus the rights of Jobs to keep the details of his medical condition private. These issues were never fully resolved.
Where an affirmative obligation to disclose may arise is when the CEO or other key official is no longer able to perform their duties, particularly if business operations are disrupted as a result. A key examples of this is Century Cobalt Company’s March 16, 2020 disclosure that it was unable to files it annual report on Form 10-K because its CEO was is isolation after having contracting the coronavirus. Similarly, as discussed in a March 25, 2020 Compliance Week article (here), a CEO’s or other key official’s inability to participate in a conference call may well trigger a disclosure.
Another consideration that may affect a company’s disclose an executive’s condition has to do with insider trading. If company insiders were to sell their shares in company securities while aware of non-public information concerning a key executives health, subsequent claimants or even the SEC might contend that the trading represents prohibited insider trading. The disclosure of information concerning the executive’s health would remove this concern (and also permit other insiders to trade their securities).
If a Company Makes a Disclosure, What Must be Disclosed?
Even if the company chooses to disclose, there are the questions about what must be disclosed. Principles of full disclosure and transparency may argue in favor or more fulsome disclosure but that could (as noted above with respect to Apple and Steve Jobs) conflict with the individual’s privacy interests. One commentator quoted in the Compliance Week article to which I linked above suggests that at a minimum the disclosure must identify the person affected, the extent of their ability or inability to perform their functions, and the anticipated impact on company operations.
A key consideration here is that later, after events unfold, prospective claimants will have the benefit of hindsight in scrutinizing the adequacy of prior disclosure. For that reason, it may be critical for the board and other senior officials to memorialize the reasons for their disclosure decisions.
There are other related disclosure issues. For example, what if the issue is not that a senior executive has the illness, but rather that the workforce has been affected? Although there would be seem to be even less compulsion for companies to disclose the illness of company employees below the C-Suite level, some companies have disclosed employee illnesses. For example, on March 18, 2020, the Taiwan Semiconductor Manufacturing Company did disclose that an employee had received a confirmed diagnosis of COVID-19 and was hospitalized. A key consideration about workforce illnesses is the extent to which the illness affects the company’s operations. A more serious outbreak that interfered with company’s ability to continue business operations clearly is more material and could warrant in interim disclosure.
Is There a Duty to Update?
Another related disclosure issue that arises if a company chooses to disclose is whether the company has a duty to update. Here the question is going to be whether subsequent events render the prior disclosure potentially misleading. The example of U.K. Prime Minister Boris Johnson is instructive here. 10 Downing Street initially disclosed that Johnson had tested positive for the illness and was recovering at home. If that initial statement had not been updated when Johnson subsequently was hospitalized and placed in the Intensive Care Unit, the initial statement clearly would have become misleading.
From a company perspective, when considering whether prior disclosures must be updated, it is critical to keep in mind that prospective claimants will have the benefit of hindsight in making allegations that prior disclosures should have been updated. These kinds of considerations militate in favor up subsequent updates (particularly if subsequent developments are negative).
An Example from History: In thinking about these issues, and in particular thinking about the circumstances surrounding Boris Johnson’s illness, I reflected on the example from American History of the U.S. President, Woodrow Wilson, as described in University of Wisconsin history professor John Milton Cooper, Jr’s excellent one-volume biography of Woodrow Wilson.
In October 1919, while traveling the country to try to drum up public support for The League of Nations, Wilson suffered a debilitating stroke. Just a few days later, while recuperating at the White House, he suffered a dangerous prostate infection that, according to Cooper, left Wilson “near death.” Though he emerged from these twin ordeals, Wilson was left weakened, and arguably incapacitated.
Notwithstanding the seriousness of Wilson’s condition, the information disclosed publicly about his condition was carefully measured and consistently “vague” and “upbeat.” Over the ensuing weeks and months, Wilson would struggle to recover, but he never considered resigning. His Vice President, Thomas R. Marshall, fearful of appearing as if he were plotting some kind of a coup, resolutely stayed in the background.
Cooper’s biography overall presents a balanced but unquestionably favorable impression of Wilson. However, with respect to Wilson’s condition in the wake of the medical crises, Cooper’s assessment is harsh.
He noted that “the psychological effects of the stroke were … striking” as Wilson’s “emotions were unbalanced and his judgment was warped.” Though in the past Wilson had been able to “offset his driving determination, combativeness, and overweening self-confidence, with detachment, reflection and self-criticism,” those compensating behaviors were now “largely gone.” Worse, Cooper noted, “his denial of his illness and limitations was starting to border on delusion.”
The most disturbing thing about Wilson’s condition, however, is that the American people were largely kept in the dark, as was most of official Washington. With the benefit of hindsight and the passage of a century’s time, it seems unbelievable how little of Wilson’s incapacity was disclosed.
There are some important lessons from this example.
The first is how harsh the judgment of history is on the decision to withhold information from the American people about Wilson’s condition. Cooper, an unquestionably favorable biographer, can barely restrain his outrage over the insufficiency of the disclosure about Wilson’s condition. Admittedly, part of Cooper’s outrage is due to the fact that the mistaken picture given of Wilson’s health allowed his wife Edith to exercise a complete gatekeeper role over the President, and practically speaking to determine Presidential policy and action. But even allowing for this historically astonishing aspect of Wilson’s situation, the fact remains that the history’s judgment surrounding the disclosure questions are unforgiving.
The second is that the decisions and disclosures surrounding Wilson’s health unquestionably undermined Wilson’s legacy. Cooper’s biography makes a persuasive case that, until his illness, Wilson was an effective President. Cooper also seems to suggest that without the troublesome months after Wilson’s illness, Wilson could well be remembered as a great President. Instead, the turmoil and conflict that followed his illness cast a cloud over Wilson’s entire Presidency. Had he accepted his incapacity and stepped aside when he was no longer able to govern, Wilson’s legacy might have been preserved. But that would have required him to acknowledge – to himself, and more importantly, to the American people – that he was no longer fit for office.
Clause 4 of the 25th Amendment to the Constitution (ratified by a sufficient number of U.S. states in 1967), provides, among other things, that, “Whenever the Vice President and a majority of either the principal officers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office, the Vice President shall immediately assume the powers and duties of the office as Acting President.”
This clause has never been invoked, and one can only imagine what a traumatic event it would be if it ever were to be invoked. However, the example from the events surrounding Woodrow Wilson underscores the fact that in order for this momentous step to even be considered, the Vice President, cabinet officials, and Congress would have to be fully informed about the President’s health condition.
While the questions relating to the health of a U.S. President are far different than those relating to a corporate CEO, consideration of all of the issues in both situations argues in favor of full disclosure.