October 22, 2019

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California Codifies Gender Diversity Requirements for Public Company Boards

California is the first state to codify boardroom gender diversity requirements. On September 30, 2018, California Governor Jerry Brown signed into law Senate Bill 826, which requires publicly traded companies that were incorporated in California or have principal executive offices located in California to include females on their boards of directors. The new law requires any such publicly traded company to include at least one woman on its board by the end of 2019. For boards that have at least five directors, at least two are required to be women by the end of July 2021, and for boards that have at least six directors, at least three are required to be women by the end of July 2021. The new law permits companies to expand the size of their boards to meet the new requirements. For purposes of the new statute females are defined as individuals who self-identify as a woman, without regard to the individual’s designated sex at birth.

California’s actions are likely driven in part by the increased focus on boardroom diversity from institutional investors. For example, Vanguard has noted that board diversity has been shown to have positive effects on shareholder value and has joined the 30% Club, an advocacy group seeking to achieve the goal of having at least 30% women on all boards of directors. Other prominent voices have expressed similar viewpoints regarding the impact of diversity in the boardroom on shareholder value, including BlackRock, State Street and proxy advisors such as ISS and Glass Lewis. Additionally, the New York City Comptroller, which oversees New York City’s pension funds, has spearheaded other notable campaigns advocating for board diversity, including the “Boardroom Accountability Project” (launched in November 2014) and the “Boardroom Accountability Project 2.0” (launched in September 2017).

If a company subject to the new rules does not comply with the new law, then the California Secretary of State may impose a fine of $100,000 for the first violation and $300,000 for any violation thereafter. The Secretary of State will also publish annual reports of companies that have (and have not) complied with the new law for the preceding calendar year, the number of public companies that moved their principal executive offices into or out of California during the preceding calendar year and the number of companies that were subject to the new law during the preceding calendar year but are no longer publicly traded.

Given that the new law expressly uses gender categories and would therefore likely trigger increased judicial scrutiny, many expect that a constitutional challenge under the equal protection clause will materialize both at the federal and state levels. Additionally, because the new law would affect companies that were not incorporated in California but that have principal executive offices in California, a challenge under the “internal affairs” doctrine—which generally states that only one state has the authority to regulate a corporation’s internal affairs—is also possible. However, regardless of whether the new law survives such challenges, affected companies should start preparing for compliance to avoid the negative financial, reputational and potential business impacts of non-compliance.

© 2019 Foley & Lardner LLP


About this Author

Jessica Lochmann, Corporate Law, Securities, Governance, Foley and Lardner Law Firm

Jessica Lochmann is a partner with Foley & Lardner LLP, and is a member of the firm’s Transactional & Securities Practice. She is also a member of the firm’s Recruiting Committee and is the former hiring partner for the Milwaukee office. Ms. Lochmann practices general corporate and business law, with an emphasis in securities law, corporate governance, and mergers and acquisitions. She regularly advises clients regarding state and federal securities law compliance and corporate governance matters, assists clients with the preparation and review of Securities...

Benjamin F. Rikkers, Foley, venture capital funds lawyer, aviation related matters attorney

Benjamin F. Rikkers is a partner and business lawyer with Foley & Lardner LLP. Mr. Rikkers’ practice covers a broad range of business matters, including mergers and acquisitions, securities law, general corporate business law, investment of private equity and venture capital funds, and aviation-related matters. He is a member of the firm’s Transactional & Securities and Private Equity & Venture Capital Practices.

Mr. Rikkers regularly represents buyers and sellers in public and private mergers, acquisitions, and other strategic alliances. He also represents issuers and investment banks in public and private equity and debt securities offerings. He provides continuing advice to public companies regarding their federal securities law compliance, disclosure, and reporting obligations.

Collin M. Scheuermann, Foley Lardner Law Firm, Milwaukee, Corporate Law Attorney

Collin M. Scheuermann is an associate and business lawyer with Foley & Lardner LLP. Mr. Scheuermann regularly represents public and private companies on general corporate and business law matters. He is a member of the firm’s Transactional & Securities Practice.

Mr. Scheuermann’s work has focused on mergers and acquisitions transactions, corporate reorganizations, debt offerings, SEC disclosure requirements, shareholder proposals, proxy advisory services, activism preparedness planning and general corporate governance matters. He also...