Public companies having their principal place of business in California (as stated in the company’s most recent Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”), and which are listed on major U.S. stock exchanges), will soon be required to appoint women to their boards of directors. On September 30, 2018, California Governor Jerry Brown signed State Bill-826 (“SB-826”) into to law that makes California the first state in the United States to require companies that are incorporated or based in California, and are listed on major U.S. stock exchanges, to have at least one woman on their boards of directors by the end of 2019, and a representative number of women on their boards of directors by the end of 2021.

Summary of the New Law

Applicability

  • The law applies to publicly held domestic or foreign (non-California incorporated) corporations whose principal executive offices are located in California, as reported on the company’s most recently filed Form 10-K filed with the SEC.
  • A female is an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.
  • A publicly held corporation is a corporation with outstanding shares on a major United States stock exchange. A “major United States stock exchange” is not defined under the law, but an analysis by the California State Senate Rules Committee noted that the vast majority of the approximately 761 public companies traded on NASDAQ, NYSE and NYSE American would be subject to the law.
  • There are no exceptions for “controlled companies” or investment companies under the law, nor does it include phase-in rules for new or small public companies.

Compliance

  • By the end of 2019, each publicly traded corporation must have at least one female director.
  • By the end of 2021, each publicly traded corporation must comply with the following:

• 3 female directors if the total number of directors is 6 or more;

• 2 female directors if the total number of directors is 5; or

• 1 female director if the total number of directors is 4 or fewer.

  • The bill provides that publicly traded corporations may increase the number of directors on its board via amending organizational documents, consent or otherwise to add seats for female directors to avoid displacing any current directors.
  • The California Secretary of State is required to publish various reports regarding publicly traded corporations that (i) comply with the statute, (ii) moved their headquarters into or out of California in the preceding year, and (iii) were previously subject to the statute and are no longer publicly traded. The Secretary of State may also adopt regulations to implement this new law.

Noncompliance and penalties

  • A publicly traded corporation violates the law if a director seat that is required to be held by a female is not held by a female during at least a portion of the applicable calendar year.
  • The bill provides the California Secretary of State with authority and discretion to impose the following penalties:

• First violation: $100,000

• Subsequent violations: $300,000

First state to mandate female directors

Although California and other states, including Illinois, Massachusetts, Pennsylvania, Ohio, and Colorado, have issued nonbinding resolutions encouraging gender diversity on corporate boards, until now, there has been no mandate for female representation on a state or federal level. California is the first state in the United States to mandate gender diversity on corporate boards, following several countries with similar legal mandates for female representation on boards, including, among others, Germany, Norway, and France.

Push towards gender diversity in the boardroom