On August 6, 2021, the U.S. Securities and Exchange Commission formally approved Nasdaq’s proposed listing rules regarding board diversity and diversity reporting. The rules, which were originally proposed in December 2020 (see our prior blog entry here), and amended in February 2021, require companies listed on Nasdaq’s U.S. exchange to disclose diversity information about their boards of directors using a standardized template, and, subject to certain exceptions, require them to have at least two diverse directors or explain why they have not met that standard.

 Summary of the New Listing Rules

Specifically, the new listing rules require the following:

• Diversity Reporting.  All operating companies listed on Nasdaq’s U.S. exchange will be required to disclose board-level diversity data in a format substantially similar to the diversity matrix prescribed by Nasdaq. Disclosure can be made through a company’s proxy statement, annual report, or website. This requirement will be effective on the later of August 8, 2022, or the date a listed company files its proxy statement for its annual shareholder meeting during 2022 (i.e., in connection with 2023 proxy statements for most calendar-year reporting companies).
• Diversity Objective.  All operating companies listed on Nasdaq’s U.S. exchange will be required to have at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an “underrepresented minority” or “LGBTQ+”, or provide an explanation for not doing so (which explanation could include a description of a different approach). However, the rules contain relaxed requirements for smaller reporting companies, foreign issuers, and companies with five or fewer directors:

• • Smaller Reporting Companies can also meet the diversity objective with two female directors;
  • Foreign Issuers can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the company’s principal executive offices, or LGBTQ+;
  • Companies with five or fewer directors are only required to have one diverse director, and can meet that objective with one director who is female, an underrepresented minority, or LGBTQ+; and
  • SPACs are not required to have any minimum number of diverse directors until their business combination.

• The rules include a phase-in period for the Diversity Objective, depending on listing tier, as follows:

• • Nasdaq Global Select Market or Nasdaq Global Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023, and two diverse directors by August 6, 2025 (i.e., in connection with 2024 and 2026 proxy statements for most calendar-year reporting companies);
  • Nasdaq Capital Market companies are required to have, or explain why they do not have, one diverse director by August 7, 2023 and two diverse directors by August 6, 2026 (i.e., in connection with 2024 and 2027 proxy statements for most calendar-year reporting companies);
  • Companies with boards that have five or fewer directors, regardless of listing tier, are required to have, or explain why they do not have, one diverse director by August 7, 2023 (i.e., in connection with 2024 proxy statement for most calendar-year reporting companies); and
  • Following their business combination, a SPAC must meet, or explain why they do not meet, the applicable diversity objectives by the later of two years from the date of listing or the date the company files its proxy statement for the company’s second annual meeting of shareholders subsequent to the company’s listing.

Takeaways

While the new listing rules have lengthy phase-in periods, and legal challenges appear likely, we suggest that our Nasdaq-listed clients and friends begin to consider these new requirements this fall as they ramp up efforts around their 2022 proxy statement and annual meeting. To that end, below are several helpful links, and we invite you to contact us directly if you have any questions as you review these new listing rules.

• Matrix for disclosure of board-level diversity data
• Full text of the new listing rules (including definitions of “underrepresented minority” and “LGBTQ+”)
• Full text of the SEC’s Approval Order