Jobs' Health and Disney's Proxy Statement

We discussed Steve Jobs’ health and the implications of his disclosure under Rule 10b-5 in prior posts.

Recently, the Financial Times printed an article on Jobs’ failing health and his directorship at Disney.  We discuss in this post whether Job's health issues would potentially be material to Disney.  This post looks at the materiality issue.  It does not look at the other elements of Rule 10b-5 or attempt to assess any exposure on the part of Disney.  It only examines whether, had Disney known of the health problems, the information would have been material to a shareholder of Disney.

Disney’s proxy statement states:

Steven P. Jobs, 53, has served as Chief Executive Officer of Apple Inc., a designer, manufacturer and marketer of personal computers, portable digital music players and mobile communications devices, since February 1997 and is a member of its Board of Directors. Prior to the Company’s acquisition of Pixar, Mr.Jobs also served as Chairman of Pixar from March 1991 and as Chief Executive Officer of Pixar from February 1986. Mr.Jobs has been a Director of the Company since the Company’s acquisition of Pixar in May 2006.

Disney disclosed the information about Jobs mandated by the proxy rules.  The explicit requirements are, however, a minimum. The antifraud provisions, whether Rule 10b-5 or Rule 14a-9 require additional information if necessary to make any public statement accurate and complete.  The misstatement or omission must, however, be material.

In TSC industries, Inc. v. Northway, Inc.426 U.S. 436 (1976), the Supreme Court, laid out the standard for materiality in a proxy setting:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote...there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. 426 U.S. 436, 496.

The Court expressly extended this standard to cases brought under Rule 10b-5 in Basic v. Levinson, 485 U.S. 224, 231 (1988).

As the CEO and face of Apple, Jobs is widely perceived as the impetus of its revival through the development of the iMac, iPod, and iTunes.  His health issues (and, as a result, his continued service as CEO) are likely to be important to a reasonable investors at Apple. The issue at Disney, however, is more complex.  He is only one of eleven directors at Disney, serving on a board that only met six times in 2008.   To the extent interchangeable with the other directors, Jobs continued tenure in office would not have a significant impact on shareholders.  Issues about his health would likely not be material.

Nonetheless, there is also an argument that Jobs is a unique director at Disney and his ability to serve on the board is a significant contribution to Disney.  His general reputation in the high tech area might suggest a unique contribution.  In addition, Jobs’ specific abilities in the film industry might be uniquely important to Disney.  He served as CEO of Pixar before the company was acquired by Disney.  The possible perception of Jobs as a director closely linked to the future success of Disney would mean that a reasonable shareholder would in fact find it important to know about his health issues (at least to the extent they suggest that he might cease serving as a director). 

In short, while health problems of most outside directors would probably not be material in most cases, there may be a class of directors where this is not the case.  Where the market perceived a particular director as critical to the future of the company, health issues that might cause the director to depart could be material.  Jobs may be one such director.

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