Nvidia’s board investigates Huang as shares lose 9.5%

By Sophie Lindqvist

Nvidia shares fell 5.47% Tuesday after a 4% decline Monday, erasing about 9.5% over two sessions despite little concrete news from the company.

CEO Jensen Huang has admitted an extramarital affair with Alice Huang, a former executive at Nvidia customer Megaspeed whom U.S. intelligence agencies believe was spying for China, while reportedly trying to conduct business as usual. The board’s hiring of Wachtell, Lipton, Rosen & Katz is the episode’s most concrete development so far.

What must the board investigation establish?

Ann Lipton of the University of Colorado and Todd Henderson of the University of Chicago say no real precedent exists for a chief executive caught in a suspected honeypot. Lipton knows of affair and sexual-harassment cases, but not cases combining either with a potential national-security breach.

Henderson, whose work covers corporations, securities regulation and law and economics, says the facts remain thin. The most important unknown is what, if anything, Alice Huang obtained from Jensen Huang.

Henderson says secrets about Nvidia’s fabs or chip designs would matter to the Justice Department; ordinary corporate information probably would not. The inquiry by independent directors and their outside counsel is perhaps the most standard part of the episode, Lipton says.

Its thoroughness will reflect exactly what the independent directors want. Henderson notes that Washington law firms conducting internal investigations know who pays their bills. He offered no claim that Nvidia’s outside counsel faces such a conflict.

Lipton sees three lines of inquiry:

• Whether the law was broken.
• Whether Huang violated Nvidia’s internal policies.
• Whether Huang misled the board, including how forthcoming he was and when he learned of the suspicions.

The board said Sunday that it had no reason to believe national security or Nvidia secrets were compromised.

When did Huang learn about the suspicions?

It remains unclear when Huang learned that Alice Huang was a suspected Chinese spy. Wired reported Monday that Huang hired a crisis public-relations firm known for handling sex scandals a full year earlier.

One scenario is an embarrassing affair without knowledge of her suspected role. The other is an affair with a woman he knew U.S. agencies suspected of spying for China.

Henderson said: “I think that’s very different. If I were a board member and the CEO of a company with very sensitive technology was in that situation, I would be furious if they didn’t tell me.” He compared concealing the relationship to withholding a fatal diagnosis. Henderson calls that a potential fireable offense.

Can shareholders sue over the disclosure?

Lipton expects shareholder litigation, although legal theories differ sharply. Securities fraud is the most obvious theory, she says. A proposed class action already alleges that Nvidia and Huang misled investors by describing Nvidia’s Megaspeed dealings as routine.

Lipton said: “You can have as many affairs with Chinese spies as you like. You just can’t lie about it under the federal securities laws.”

A derivative claim under Delaware law, where Nvidia is incorporated, proceeds on the company’s behalf and faces a harder hurdle. Shareholders must first show that the board cannot handle the problem, usually because directors are implicated or too beholden to Huang to act independently.

Courts do not permit a shareholder suit every time employees act recklessly or damage the company. Nvidia’s 10-member board has a track record of loyalty and deference to Huang, according to a New York Times report published Tuesday.

Lipton cites a McDonald’s shareholder suit over alleged mismanagement from several years ago. It followed allegations of harassment against the chief people officer and a relationship between the CEO and a subordinate. The court found no reason the board could not address the misconduct itself.

The proposed class action presents a disclosure test, while a derivative suit asks whether independent directors can credibly investigate their own leader.

Does Huang’s family create succession risk?

Even if Huang retains his job, the episode exposes a succession problem. Nvidia uses a flat structure with more than 60 direct reports to Huang, and the company does not appear to have a succession plan. Lipton calls that a danger for any company.

His son Spencer serves as director of product management; daughter Madison is senior director of product marketing; and son-in-law Nico Caprez works in business development. Some employees believe Huang is grooming successors.

When Bloomberg asked last month whether Madison could lead Nvidia, Huang did not dismiss the possibility and said it was not something he would wish on her. Lipton calls hiring the children poor corporate hygiene, although founders have often done so; she notes that Kimbal Musk sits on Tesla’s board because he is Elon Musk’s brother.

Directors are supposed to act only for stockholders, but founders receive more latitude while their companies thrive. Henderson describes himself as a strong anti-nepotism advocate. His father’s Westinghouse nuclear research lab barred employees from hiring their children, and Henderson considers a founder’s child succeeding him at Nvidia’s scale crazy.

Can the board act without voting control?

Nvidia lacks dual-class shares. Huang reportedly owns about 3.6% of Nvidia and does not control the vote, according to Lipton. She therefore considers him easier to dislodge, even though the company remains deeply integrated around him.

Without dual-class voting control, however, the independent directors retain several practical routes to address the crisis while Huang continues to exercise substantial influence over daily operations. Additional voting control would have left the board with fewer options. Neither professor has taken a position on whether Huang should leave.

The board’s findings on his knowledge and disclosure will shape whether the matter remains an individual-conduct case or becomes a broader failure of oversight. The immediate commercial risk is procedural: unresolved disclosure could expand litigation, weaken investor confidence and disturb management continuity at Nvidia.