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Upcoming Board Diversity Deadlines and Steps to Take to Ensure Compliance

By Dennis Doucette and Kaitlyn Jensen

Public companies in California face increasing requirements to increase diversity on their corporate boards. A California law focused on increasing the number of female directors is ramping up its mandate to include other underrepresented groups, and Nasdaq has separately begun implementing broader diversity mandates for boards of its listed companies. We’ll walk you through the various requirements and their deadlines.

California-headquartered public companies must by the end of 2021 satisfy certain board of director diversity requirements in order to avoid potential fines, unpleasant disclosures and other issues. Enacted in 2018, SB 826 required the boards of California-headquartered public companies (listed on a major US stock exchange) to have at least one female director (regardless of board size) by the end of the 2019 calendar year. We previously wrote about its effect on California public companies.

The step-up requirement of this California law now mandates that by the end of the 2021 calendar year, California companies must have:

  • At least 3 female directors if the size of the board is then 6 or more members.
  • At least 2 female directors if the size of the board then is 5 members.
  • At least 1 female director if the size of the board of directors is then 4 or fewer members.

To further California’s commitment to diversity on public company boards, in 2020 California Governor Gavin Newsom signed AB 979 into law. This law requires that California-headquartered public companies have at least one director on their board that is a member of an underrepresented community by the end of the 2021 calendar year.

To meet this diversity requirement, the board must include an individual who “self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”

The step-up requirement of this law will require that by the end of the 2021 calendar year, California public companies must have at least one director from an underrepresented community on the board. By the end of 2022 the companies must have:

  • At least 3 directors from underrepresented communities if the size of the board is then 9 or more members.
  • At least 2 directors from underrepresented communities if the size of the board is then 5 to 8 members.
  • At least 1 director from an underrepresented community if the size of the board is then 4 or fewer members.

In addition to the California requirements, the U.S. Securities and Exchange Commission (SEC) approved Nasdaq’s board diversity and disclosure requirements on August 6, 2021. Subject to some exceptions for non-operating companies, these diversity objectives will require each Nasdaq listed company to provide statistical information regarding diversity among the members of the company’s board of directors and have, or explain why it does not have, at least two “Diverse” directors on its board.

Under the Nasdaq Rule, Nasdaq companies will be required to have at least one director who self-identifies as female and one director who is either an underrepresented minority or LGBTQ+. If a company does not satisfy the two diverse director requirements, the company must publicly disclose the particular aspects of board diversity it fails to satisfy and provide the reasons why it does not have two diverse directors. Disclosure of failure to satisfy the requirement can be provided in the company’s proxy statement, information statement (or 10-K if the company does not file a proxy), or on the company’s website.

Phases of the Nasdaq board diversity requirement will be enforced beginning August 2022, with listed companies required to have at least one diverse director on the board, or explain why they do not, by August 7, 2023. Companies listed on the Nasdaq Global Market or Nasdaq Global Select Market will have until August 6, 2025 to be in full compliance with the diversity standard, or explain why they are not.

In addition to meeting the board diversity requirement or explaining why it has not, each Nasdaq company must disclose aggregate board diversity data by August 8, 2022 or, if later, the date their next proxy statements are filed. The aggregate board diversity data is required to be disclosed in a specified matrix form that can be found at the Nasdaq Listing Center.

The Nasdaq board diversity requirement provides flexibility for foreign issuers and companies that are classified as “smaller reporting companies.” Such issuers can meet the diversity standard by seating two female directors on the board. Nasdaq companies with five or fewer board members may satisfy the requirement with one diverse director or an explanation as to the absence of at least one diverse director. SPACs, asset-backed issuers and other passive issuers are exempt from the board diversity objectives and disclosure requirements.

Transition periods for companies listed on Nasdaq prior to August 6, 2021:

  • By August 8, 2022, Nasdaq Global Select or Global Markets, Nasdaq Capital Markets, and companies with boards of 5 or fewer directors must submit their initial board matrix.
  • By August 7, 2023, Nasdaq Global Select or Global Markets, Nasdaq Capital Markets, and companies with boards of 5 or fewer directors must seat 1 diverse director or provide explanation for lack of diverse director.
  • Two diverse directors or explanation for lack of two diverse directors required:
    • August 6, 2025* for Nasdaq Global Select or Global Markets
    • August 6, 2026* for Nasdaq Capital Market
    • Never for boards with 5 or fewer directors

If you’re an executive at a public company in California, it is imperative that you comply with state law in terms of board diversity, and the same applies if you are listed on Nasdaq. Consultation with outside counsel can help you stay on the right side of the law.

* A company that files its proxy statement after these dates in each respective calendar year would have to explain why it meets, or does not meet, the objective at the time of its proxy filing (or, if the company does not file a proxy, in its Form 10-K or 20-F).

Dennis Doucette focuses on buyers, sellers and investors in mergers, stock and asset purchases, management buyouts, reorganizations and related transactions. He has extensive experience with formations, corporate stock issuances, recapitalizations and reorganizations, stock restriction agreements, officers and directors advice, equity incentives/compensation, higher education compliance/governance, securities compliance and corporate governance.

Kaitlyn Jensen is a Law Clerk for Procopio's Business and Technology Team. She is in her third year at University of San Diego School of Law pursing a JD with a business and corporate law concentration.