On August 6, 2021, the U.S. Securities and Exchange Commission approved new listing rules regarding board diversity and disclosure, described in our prior Client Alert. The new rules will require a Nasdaq-listed company to have at least two diverse directors (including at least one woman and at least one member of an underrepresented community) or the company will have to explain why it has failed to do so. Subject companies will also be required to disclose board diversity on an annual basis in a prescribed tabular format. The SEC also approved the implementation of a board recruiting service portal that will allow certain Nasdaq-listed companies to access a network of diverse candidates.
Nasdaq filed a proposal for the new rules with the SEC on December 1, 2020, and subsequently amended the proposal on February 26, 2021, to, among other things, require companies with five or fewer board members to: have (or explain the absence of) one diverse board member, allow newly listed companies additional time to achieve compliance and provide a grace period to regain compliance for companies that fall out of compliance due to a board vacancy. The final rules as adopted are the same as the amended rules as proposed by Nasdaq.
New Rule 5605(f) generally requires companies listed on Nasdaq’s U.S. exchange to have at least two diverse directors, including:
If a company does not satisfy both of these criteria, the company must:
Such disclosure must be provided in advance of the company’s next annual meeting of shareholders in its proxy or information statement (or Form 10-K or 20-F, if it does not file a proxy) or on its website. If the company chooses to disclose the information on its website, it must also concurrently provide such information in its proxy or information statement and submit the URL link to the disclosure through the Nasdaq Listing Center no later than one business day after such posting.
Companies with five or fewer board members will only need to have one diverse board member (or explain the absence of a diverse director). In addition, issuers outside the U.S. (i.e., foreign issuers) and smaller reporting companies would have additional flexibility in satisfying the board diversity requirement. Foreign issuers and smaller reporting companies would be able to satisfy the board diversity objective by having two women directors.
The following table summarizes the requirements under Rule 5605(f):
Minimum Number of Diverse Directors |
Must Have at Least One Woman Director? |
Must Have |
|
General Objective |
2 |
Yes |
Yes |
Foreign Issuers |
2 |
Yes |
No |
Smaller Reporting Companies |
2 |
Yes |
No |
Boards with 5 or fewer directors |
1 |
No |
No |
For U.S. companies, the rule defines an “underrepresented minority” as someone who self-identifies as African American or Black, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities. Foreign issuers may satisfy the diversity objective if their second director is an underrepresented individual in their home country jurisdiction. Rule 5605(f) also defines “LGBTQ+” as an individual who self-identifies as lesbian, gay, bisexual, transgender or as a member of the queer community. See the Annex below for these definitions.
Effective Dates and Transition Period
The new rule provides for gradual compliance for currently listed companies, whereby they must have at least one diverse director by an earlier date and full compliance at a later date. The period for achieving compliance with the number of diverse directors depends on the company’s tier:
Nasdaq Exchange Tier |
Period to Initially Comply (One Diverse Director) |
Period to Fully Comply (Two Diverse Directors) |
Nasdaq Global Select Market (NGS) or |
Two years following approval of the rule |
Four years following approval of the rule |
Nasdaq Capital Market (NCM) |
Two years following approval of the rule |
Five years following approval of the rule |
Phase-in Period
The rule takes a similar approach in phasing-in compliance for newly-listed companies depending on tier and providing additional compliance time for smaller companies and those with smaller boards:
Newly-listed Company Category |
Period to Initially Comply (One Diverse Director) |
Period to Fully Comply (Two Diverse Directors) |
NGS or NGM tier |
The later of: i) One year from the date of listing or ii) the date of filing its proxy or information statement for its first annual meeting following listing |
The later of: i) Two years from the date of listing or ii) the date of filing its proxy or information statement for its second annual meeting following listing |
NCM tier |
N/A |
The later of: i) two years from the date of listing or ii) the date of filing its proxy or information statement for its second annual meeting following listing |
Companies with boards of five or fewer members are only required to have one diverse director by the later of (i) two years from the date of listing or (ii) the date of filing its proxy or information statement for its second annual meeting following listing, to fully comply with Rule 5605(f). Companies listing before the end of the transition period would generally have the longer of the remaining length of such transition period or two years to comply. This “phase-in” period will apply to companies listing in connection with an initial public offering, a direct listing, a transfer from another exchange or the over-the-counter market or through a business combination with a special purpose acquisition company (SPAC).
Cure and Grace Periods
If a company fails to meet the requirements under Rule 5605(f), it will have until the later of its next annual meeting or 180 days from the event causing the deficiency to achieve compliance. A company that ceases to maintain compliance with the board diversity objective of Rule 5605(f) due to a board vacancy, will have until the later of: i) one year from the date of vacancy; or ii) the date it files its proxy or information statement (or Form 10-K or 20-F if it does not file a proxy) in the calendar year following the year of the vacancy to have the requisite number of diverse directors or explain the deficiency. A company that relies on this grace period should disclose such reliance in advance of its next annual meeting of shareholders in its proxy or information statement or on its website.
New Rule 5606(a) requires listed companies, except those exempted as described below, to publicly disclose statistical information on their boards’ diversity (a board diversity matrix) in substantially the same format shown below.
Board Diversity Matrix (As of [Date]) |
||||
Total Number of Directors |
# |
|||
Female |
Male |
Non-Binary |
Did Not Disclose Gender |
|
Part I: |
||||
Directors |
# |
# |
# |
# |
Part II: |
||||
African American or Black |
# |
# |
# |
# |
Alaskan Native or Native American |
# |
# |
# |
# |
Asian |
# |
# |
# |
# |
Hispanic or Latinx |
# |
# |
# |
# |
Native Hawaiian or Pacific Islander |
# |
# |
# |
# |
White |
# |
# |
# |
# |
Two or More Races or Ethnicities |
# |
# |
# |
# |
| LGBTQ+ | # | # | # | # |
| Did Not Disclose Demographic Background | # | # | # | # |
The rule allows for aggregated information and companies may designate any director who does not wish to disclose a particular gender, race or sexual orientation as “undisclosed” in the above board diversity matrix. Foreign issuers will be able to provide a modified board diversity matrix. A company must provide its board diversity matrix in the same manner and concurrently with the disclosure required under Rule 5605(f) (i.e., in advance of the company’s annual meeting in its proxy or information statement (or Form 10-K or 20-F if the company does not file); or website).
Effective Date
A company has until the later of August 8, 2022, or the date it files its proxy statement or information statement for its annual meeting (or, if the company does not file a proxy or information statement, in its Form 10-K or 20-F) in calendar year 2022 to provide its initial board diversity matrix. After the first year of applicability, the rule will require disclosure for the current year and the immediately preceding year. Newly-listed companies must comply with Rule 5606 within one year of listing.
The new rules exempt SPACs, asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies and issuers of certain specified securities from the board diversity objectives and disclosure requirements under Rules 5605 and 5606.
Based on the demand for greater board diversity and related disclosure, we believe there will be additional rulemaking in this area from federal and state authorities, as well as potential legal challenges. On June 11, 2021, the SEC released its Reg Flex Agenda, which identified board diversity as a likely focus for SEC-rulemaking by October 2021. In addition, on June 21, 2021, the U.S. Appellate Court for the Ninth Circuit reinstated a case challenging SB 826, the California law that requires companies with principal executive offices in California to have a certain number of women directors (see our previous Client Alert), ruling that the plaintiff had standing to bring a claim for violation of the Fourteenth Amendment (see Creighton Meland v. Shirley N. Weber, Secretary of State of California). Even companies that are not subject to the Nasdaq rules may have to address board diversity and their strategy for achieving it.
Companies can take steps now to address their obligations under the new rules, as well as investor expectations and other legal requirements. We recommend that companies do the following:
Annex
Definitions:
• Non-Binary – Refers to genders that are not solely man or woman. Someone who is non-binary may have more than one gender, no gender, or their gender may not be in relation to the gender binary.
• African American or Black (not of Hispanic or Latinx origin) – A person having origins in any of the Black racial groups of Africa.
• Alaskan Native or Native American – A person having origins in any of the original peoples of North and South America (including Central America), and who maintain cultural identification through tribal affiliation or community recognition.
• Asian – A person having origins in any of the original peoples of the Far East, Southeast Asia or the Indian subcontinent, including, for example, Cambodia, China, India, Japan, Korea, Malaysia, Pakistan, the Philippine Islands, Thailand and Vietnam.
• Hispanic or Latinx – A person of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin, regardless of race. The term Latinx applies broadly to all gendered and gender-neutral forms that may be used by individuals of Latin American heritage, including individuals who self-identify as Latino/a/e.
• Native Hawaiian or Pacific Islander – A person having origins in any of the peoples of Hawaii, Guam, Samoa or other Pacific Islands.
• White (not of Hispanic or Latinx origin) – A person having origins in any of the original peoples of Europe, the Middle East or North Africa.
• Two or More Races or Ethnicities – A person who identifies with more than one of the above categories.
• Underrepresented Individual in Home Country Jurisdiction – A person who self-identifies as an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the foreign issuer’s principal executive offices (as reported on the foreign issuer’s Forms F-1, 10-K, 20-F or 40-F).
• LGBTQ+ – A person who identifies as any of the following: lesbian, gay, bisexual, transgender or as a member of the queer community.