New California Law Will Require Increased Diversity On Public Boards

Overview

On September 30, 2020, California Governor Gavin Newsom signed Assembly Bill 979 (AB-979) into law, which will require every public company with securities listed on a major U.S. stock exchange and that has its principal executive office in California, as listed on its form 10-K (“covered corporations”), to have at least one director from an underrepresented community on its board of directors by the end of the 2021 calendar year and upwards of three directors from an underrepresented community on its board of directors by the end of the 2022 calendar year.

For purposes of this mandate, a director from an underrepresented community means a director who self-identifies as:

• Black/African American;
• Hispanic/Latinx;
• Asian;
• Pacific Islander;
• Native American/Native Hawaiian/Alaska Native; or
• Gay/Lesbian/Bisexual/Transgender.

Requirements of AB-979

Covered corporations must have at least one director from an underrepresented community on its board of directors by the end of the 2021 calendar year. This requirement will increase where covered corporations with nine (9) or more directors must have at least three (3) directors from underrepresented communities by the end of the 2022 calendar year. If the covered corporation has five (5) to eight (8) directors, at least two (2) must be from an underrepresented community. For covered corporations with four (4) or fewer directors, one (1) such director must be from an underrepresented community. The covered corporation must also timely file board member information with the California Secretary of State (the “reporting requirement”), which is expected to be reported on the California Corporate Disclosure Statement (Form SI-PT) annually, within 150 days following the end of the covered corporation’s fiscal year. 

In addition to the reporting requirement for each applicable year, compliance with AB-979 is satisfied for the applicable calendar year so long as the requisite number of directors from underrepresented communities served for at least a portion of such calendar year. To comply with AB-979, covered corporations may elect to increase the number of directors on its board to include the requisite number of directors from underrepresented communities. Note, however, that an increase to the number of directors to a company’s board may result in an increase to the number of directors from underrepresented communities mandated by AB-979.

Penalties

Covered corporations who fail to comply with AB-979 may be subject to penalties for each violation, with the first violation carrying a maximum $100,000 penalty and second or subsequent violations carrying a $300,000 penalty for each violation. Each director seat required to be filled by an individual from an underrepresented community that is not filled by an individual from an underrepresented community will count as a separate and independent violation. Additionally, failure by a covered corporation to meet the reporting requirement can result in a $100,000 penalty.

Revisiting Senate Bill No. 826

As discussed previously, the mandates of Senate Bill No. 826 (SB-826) require covered corporations to have at least one (1) female director (i.e., an individual who identifies as a female) on its board of directors for each of calendar year 2019 and 2020. Beginning in calendar year 2021, covered corporations with six (6) or more directors must have at least three (3) female directors by the end of the calendar year. If the covered corporation has five (5) directors, at least two (2) must be female directors. For covered corporations with four (4) or fewer directors, one (1) such director must be a female director.

While compliance with the mandates of each of AB-979 and SB-826 are separate laws with compliance and penalties to be evaluated and applied separately, it appears that the California State Assembly’s legislative intent was not only motivated by the disparity in the number of directors from underrepresented communities among the overall composition of public company boards, but also by the number of directors from underrepresented communities among female directors, citing statistics that appear to show a disproportionate percentage of White female directors (77.9%) as opposed to those who would be considered to be from underrepresented communities (3.3% female Latina directors, 5.3% African American female directors and 11.5% Asian female directors). Accordingly, it appears that a female director who also self-identifies with any of the characteristics that would qualify her as being from an underrepresented community will satisfy the requirements of SB-826 as well as AB-979, while a female director who is White or who does not self-identify with any of the characteristics as described for a director from an underrepresented community, will only go towards satisfying the requirements of SB-826. The table below summarizes the requisite number of directors mandated under each of AB-979 and SB-826, effective for each of the corresponding calendar year based on the total number of directors on a covered corporation’s board. 

Calendar Year	Board Composition  (No. of Directors)	Minimum No. of Directors from Underrepresented Communities                (AB-979)	Minimum No. of  Female Directors  (SB-826)
2019	1 or more	N/A	1
2020	1 or more	0	1
2021	4 or fewer	1	1
	5	1	2
	6 or more	1	3
2022 and each calendar year  thereafter	4 or fewer	1	1
	5	2	2
	6	2	3
	7	2	3
	8	2	3
	9 or more	3	3

Legal Challenges Anticipated

As with SB-826, the legality of AB-979 is expected to be subject to challenges on the grounds that the laws violate equal protection and interfere with shareholder rights. While the challenges to the legality of AB-979 and/or SB-826 may ultimately invalidate such laws, covered corporations and companies headquartered in California planning to go public should nevertheless begin anticipating compliance with the new requirements as the outcomes of such challenges are expected to take several years to resolve. Additionally, covered corporations and companies headquartered in California planning to go public are expected to face greater investor and stakeholder scrutiny regarding board diversity including, for companies who have made certain commitments towards diversity, the potential for shareholder derivative lawsuits for alleged failures to uphold such commitments. As such, covered corporations and companies headquartered in California planning to go public should generally anticipate greater demand for increased board diversity. 

AB-979 and SB-826 does not provide exception for “emerging growth companies” or controlled corporations.

Please contact Lynda Galligan, Lisa Haddad, Joe Johnson, Koray Bulut, John Newell or any member of the Goodwin team if you have questions about AB 979 or SB-826 and what it means for you.