California Expands Board Diversity Mandate

Wilson Sonsini Goodrich & Rosati

On September 30, 2020, California Governor Gavin Newsom signed legislation mandating representation of underrepresented communities on the boards of publicly held corporations based in California. This new law, known as Assembly Bill (AB) 979, provides for substantial penalties for noncompliance.

What is AB 979, and what does it do?

Similar to Senate Bill (SB) 826, which mandated gender diversity on the boards of publicly held corporations based in California (and discussed in our prior alert), AB 979 requires each publicly held corporation—regardless of its jurisdiction of incorporation—with its principal executive offices in California, as disclosed in its annual report on Form 10-K, to have at least one director from an underrepresented community no later than December 31, 2021. A "publicly held corporation" is a corporation whose outstanding shares are listed on a major United States stock exchange.

In addition, by December 31, 2022, these corporations must have a minimum of:

  • two directors from underrepresented communities, if they have more than four but less than nine directors; or
  • three directors from underrepresented communities, if they have nine or more directors.

What does "director from an underrepresented community" mean?

AB 979 defines "director from an underrepresented community" as "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."

Are there any reporting obligations?

The California Secretary of State may adopt implementing regulations, but it is expected that subject corporations will be required to report on their compliance with this new diversity mandate, and that this information will be made public. One option for reporting on board gender diversity is by completing and filing the Corporate Disclosure Statement (Form SI-PT) with the California Secretary of State. We expect that a question relating to this new diversity mandate for directors from underrepresented communities will be added to this form going forward.

Currently, the California Secretary of State is required to publish an annual report on March 1 of each year providing certain information on the board gender diversity mandate. No later than March 1, 2022, and annually thereafter, this report must also include the number of:

  • corporations subject to AB 979 that were in compliance with the law during at least one point during the preceding calendar year;
  • publicly held corporations that moved their U.S. headquarters to California from another state or out of California into another state during the preceding calendar year; and
  • publicly held corporations that were subject to this section during the preceding year, but are no longer publicly traded.

Presumably, these latter two categories will reflect similar, if not the same, information as is provided in the report for purposes of the board gender diversity mandate because it would be the same companies required to comply with the requirements of SB 826 and AB 979.

What happens to a corporation that does not comply with AB 979?

Corporations that do not comply with the requirements of AB 979 are subject to fines ranging from $100,000 for a first violation or a failure to timely file the required information with the California Secretary of State, to $300,000 for second or subsequent violations. A "violation" occurs when a director seat required to be held by a director from an underrepresented community is not held by such a director during at least a portion of a calendar year.

What should be done now?

There have been legal challenges to the constitutionality of SB 826, and there may be similar challenges to AB 979. However, as of the date of this alert, the requirements of SB 826 remain in place.

Subject corporations should begin making preparations to comply with AB 979 in order to avoid fines, as has been done with respect to compliance with SB 826. AB 979 does permit companies to increase the number of directors in order to comply, but care should be taken to follow proper corporate formalities in doing so.

Practically, corporations that do not already have diversity data relating to their directors through other means—for example, through their human resources department or search firm questionnaires—may wish to consider adding a question to their annual director and officer questionnaires to solicit this information. Of note, the requirements of AB 979 do not include naming the director or directors who are from underrepresented communities or disclosing which specific underrepresented community the director represents. If corporations are considering that level of disclosure, then appropriate consents from those directors for public disclosure of that information should be obtained prior to disclosure. To be clear, AB 979's requirements apply to directors only, not employees. California companies pursuing diversity and inclusion initiatives applicable to employees must navigate different, and more restrictive, legal requirements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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