January 21, 2021

Volume XI, Number 21

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NASDAQ Proposes Board Diversity Requirements

On December 1, 2020, the NASDAQ Stock Market LLC filed with the Securities and Exchange Commission a proposal to adopt rules that would require Nasdaq-listed companies, subject to certain exceptions, to (1) have at least two diverse directors, including one director who self-identifies as a female and one director who self-identifies as an underrepresented minority or as LGBTQ+, or to explain why the company does not have at least two directors on its board that self-identify in such a way, and (2) disclose information in a matrix format related to each director’s self-identified gender, race, and self-identification as LGBTQ+.  The proposed rules, which are subject to public comment and must be approved by the SEC, would be subject to phase-in periods.  The New York Stock Exchange has not yet proposed a similar rule.

The full text of the proposal can be found here

Diversity Requirement

Subject to the phase-in described under “Effective Dates” below, the proposed rules would require Nasdaq-listed companies to either (1) have at least two diverse directors, including one director who self-identifies as female and one director who self-identifies as an underrepresented minority or LGBTQ+, or (2) disclose in the proxy statement for its annual meeting of shareholders or on its website that the Nasdaq requirement applies to the company and provide an explanation of why the company does not have the requisite number of diverse directors. 

The proposed rules define “diverse” as including individuals who self-identify as female, as an underrepresented minority or as LGBTQ+. 

“Underrepresented minority” is defined as an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or two or more races or ethnicities.  The proposed rules further define each of these categories.

“LGBTQ+” is defined as an individual who self-identifies as lesbian, gay, bisexual, transgender or as a member of the queer community. 

The proposed rules provide some flexibility for Smaller Reporting Companies and foreign issuers.  Consistent with existing exemptions from certain of Nasdaq’s corporate governance standards related to board composition, the proposed rules exempt certain types of companies, such as asset-backed issuers and other passive issuers, cooperatives, limited partnerships and management investment companies. Where a company chooses to satisfy the requirement by explaining why it does not have two diverse directors, Nasdaq would not consider the substance of a company’s explanation, so long as one is provided. 

Diversity Matrix Disclosure

The proposed rules also would require each listed company to annually disclose in the proxy statement for its annual shareholder meeting or on its website information on each director’s self-identified characteristics using a matrix or grid format that includes columns showing the total number of directors that self-identify as male, female, non-binary or undisclosed gender, with each column divided into rows showing the number of directors in each column that self-identify as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, LGBTQ+ or undisclosed.

Each year following the first year a company publishes the board diversity matrix, the company would be required to publish its data for the current and immediately prior years, providing investors the information necessary to track changes in a board’s diversity.

Effective Dates

Under the proposed rules, a Nasdaq-listed company would be required to have, or explain why it does not have, one diverse director no later than two calendar years after the date of SEC approval of the proposed rules, and two diverse directors no later than (1) four calendar years after the approval date for companies listed on the Nasdaq Global Select (NGS) or Global Market (NGM) tiers, or (2) five calendar years after the approval date for companies listed on the Nasdaq Capital Market (NCM) tier. For example, if the approval date is March 10, 2021, a listed company would be required to have, or explain why it does not have, one diverse director by March 10, 2023 and two diverse directors by March 10, 2025 (for NGS/NGM companies) or March 10, 2026 (for NCM companies).  Newly listed companies not previously subject to a substantially similar requirement and companies that cease to qualify as exempt companies will have at least one year to comply with the requirement. 

Disclosure of the board diversity matrix would be required beginning one year after the date of SEC approval.

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© 2020 Bracewell LLPNational Law Review, Volume X, Number 337
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About this Author

William S. Anderson, Securities Attorney, Bracewell Law Firm
Partner

Will Anderson focuses on capital markets transactions, liability management, SEC compliance and disclosure matters and mergers and acquisitions.  He also regularly advises Boards of Directors and Special Committees on fiduciary duties, corporate governance and other matters.

Will has represented issuers and underwriters in well over 100 securities offerings that have collectively raised more than $30 billion.  His experience includes initial public offerings, follow-on equity offerings and high yield and investment grade debt offerings.  He...

713-221-1122
Troy L. Harder, Bracewell, SEC Representation Lawyer, Finance, Capital Markets Attorney
Partner

Troy Harder advises clients in all aspects of corporate and securities law, with an emphasis on corporate finance transactions. He has experience representing both issuers and investment banks in a wide range of capital markets transactions, including initial public offerings, public and private offerings of debt and equity securities, tender offers, consent solicitations and exchange offers. He also counsels clients in connection with SEC reporting and corporate governance and compliance matters, including insider reporting and compliance with the rules of the New York...

713-221-1456
Jason Jean Finance & Energy Attorney Bracewell
Partner

Jason Jean is experienced in advising public and private businesses, including private equity investors, in the financial services sector, upstream and midstream energy sector, and other sectors with respect to mergers and other business combinations, asset and stock purchases and sales, restructurings and joint ventures. Jason also advises businesses in private capital markets transactions, including Rule 144A private placements and PIPEs, and public capital market transactions listed on the New York Stock Exchange (NYSE), NASDAQ, Amex and London Stock Exchange. His capital markets...

713.221.1328
Kathy Witty Medford, Bracewell, Capital markets, securities matters lawyer, general corporate transactions attorney
Associate

Kathy Witty Medford advises and represents business clients on securities matters, corporate finance and general corporate transactions.  With a primary focus on capital markets, she represents issuers and underwriters in public and private offerings of equity securities, high-yield debt securities and investment-grade debt securities.

Kathy advises clients on SEC reporting and disclosure obligations and other corporate governance and compliance matters.  She also assists public and private clients with mergers, acquisitions and commercial...

713-221-1513
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