California law requiring female directors on public company boards ruled unconstitutional | Goodwin

Ruling follows similar ruling on directors of underrepresented minorities in April 2022

A California court has ruled that California Senate Bill 826, which required “public” companies that listed a California address for their principal executive offices on the cover page of their Form 10-K reports, must have a specified number of female directors on certain dates. , violates the California constitution and prohibited the use of California taxpayer funds to enforce the 2018 law. California Assembly violated the California Constitution and the issuance of a similar injunction preventing California from using taxpayer funds to implement this law. Assembly Bill 979 was signed into law in 2020 to add a requirement that public companies that were already subject to Senate Bill 826 also have a specified number of directors from “underrepresented minorities” , as defined in the law, on certain dates. If the state does not appeal these decisions and the California Courts of Appeals do not overturn these decisions, it appears that these two legislative initiatives to promote more diverse representation on corporate boards public will have ended.

The status of diversity on US public company boards

California and other state legislative initiatives. Together, the two California decisions represent a visible legal setback to efforts to diversify public company boards. California laws applied to any publicly traded company headquartered in California, depending on whether or not the company listed a California address for its principal executive offices in its Form 10-K report, regardless of i.e. the place where the company was organized or carried out its activities. . The scope of these California statutes has therefore extended far beyond the typical scope of state corporate statutes. However, although very visible, the practical impact of these decisions may not be immediately significant.

There are legislative initiatives to expand the diversity of public company boards in other states. Because California decisions depend on the interpretation of California constitutional provisions and perceived flaws in the legislative process, these decisions may have limited impact on ongoing initiatives in other states.

Nasdaq Gender and Demographic Diversity Rules. The California rulings have no effect on rules adopted by the Nasdaq Stock Exchange and approved by the U.S. Securities and Exchange Commission in August 2021 that require Nasdaq-listed companies (1) to disclose information about gender and the demographic self-identification of their directors and (2) have a specified number of directors who identify as female or as demographically diverse under Nasdaq rules or disclose why they do not, as described in an alert Earlier Goodwin. The Nasdaq has embarked on a lengthy and detailed process to support its regulation, outlined in its 354-page proposal submitted to the SEC for approval. However, the Nasdaq rules are subject to ongoing legal challenges and the outcome of that litigation is difficult to predict. The New York Stock Exchange apparently does not have similar amendments under consideration, which may reflect a reluctance to undertake the lengthy and costly process of proposing similar amendments until the outcome of litigation involving the Nasdaq amendments be clearer.

The diversity of the Board beyond mandates

It would be dishonest not to recognize that the social debate and controversy over the merits of director diversity serving on US public company boards and the means to achieve greater diversity is taking place in a social and legal environment wider. Between the realm of legal and quasi-legal mandates, on the one hand, and the increasingly bitter and sometimes violent conflict over the form of American national social norms, other influences operate on the governance of public enterprises. Of these, institutional investors are by far the most powerful influence.

Institutional investors can wield unprecedented influence on corporate governance issues today and have never been more willing to wield their influence. As of mid-February 2022, five companies – Black Rock, Vanguard, UBS, Fidelity and State Street – had more than $30.5 trillion dollars of assets under management. Each has voting policies that include diverse board composition as an important element, as do many other institutional investors. Proxy advisory services have also become increasingly focused on board diversity, and while they have arguably become followers rather than leaders in this area, their policies are at least indicators of the trajectory of diversity as a key element of the governance of American public companies. While there are voices critical of the power — and liberal policy priorities — of large institutional investors and proxy advisory services, there are currently no serious challenges to their voting power and influence. It is therefore likely that board diversity will continue to grow, albeit unevenly, due to shareholder voting rather than external mandates.

It should be noted that other Western economies have recently announced initiatives to increase the diversity of public company boards. The UK’s Financial Conduct Authority published new listing rules in April 2022 which will require listed companies to include a statement in their annual financial report indicating whether the company has achieved specific board diversity targets and expand current reporting requirements to cover the diversity policies of major boards. committees. In March 2022, EU Member States agreed on a general legislative approach which should result in greater equality between women and men on the boards of listed companies.

Next steps

California has 60 days to appeal decisions on Assembly Bill 979 and Senate Bill 826, so companies that would be subject to these laws should continue to monitor legal developments in these business at least until the time limits for appeal have expired.

Nasdaq-listed companies should also monitor the status of legal challenges to the Nasdaq rules. Since there is no indication at this time that legal action will delay or invalidate the Nasdaq rules, Nasdaq-listed companies should continue to review their compliance plans. Nasdaq rules allow companies that were listed on Nasdaq before August 6, 2021 to defer disclosure of the required director diversity matrix until August 8, 2022 or the date the company files its proxy statement. 2022, whichever is later. Companies listed on the Nasdaq on or after August 6, 2021 have one year from the date of listing to disclose their director diversity matrix. The Nasdaq rules also include requirements that Nasdaq-listed companies specify the number of diverse directors or disclose why they do not, subject to a phased-in schedule. Recruiting and onboarding directors will likely take more time than collecting information about director self-identification. Companies must therefore also consider this part of the Nasdaq rules.

Finally, most public companies will want to consider issues of shareholder engagement and how the company wishes to handle discussions with significant investors about board composition and corporate governance issues. As noted above, even if California laws and Nasdaq rules are overturned, many companies will have important reasons to continue to focus on board composition and diversity.

The Goodwin Public Company consulting practice and Goodwin Allied Practices will continue to monitor developments in this area. At this time, we plan to maintain the Goodwin Year-End Questionnaire for Directors and Executives in its current form at least until the appeal periods for the two California decisions expire, but we have added a note regarding the two decisions. We will monitor developments and make decisions on revisions when the status of Assembly Bill 979 and Senate Bill 826 changes or if there are other developments that would affect portions of the questionnaire on the diversity.

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