In a groundbreaking move to bring gender diversity to the boardroom, on Sept. 30, 2018, Governor Jerry Brown signed California Senate Bill 826 (SB 826), which amends the California Corporations Code to require public companies headquartered in California to have a minimum number of female directors on their board of directors.
SB 826 requires that, by no later than the end of 2019 (calendar year), all publicly held domestic and foreign corporations whose principal executive offices are located in California (based on a company’s most recent annual report on Form 10-K) and whose shares are listed on a major United States stock exchange (Public Companies) must have a minimum of one female director. According to SB 826, “female” means an individual that self-identifies as a woman, without regard to the individual’s designated sex at birth.
By the end of 2021, Public Companies must meet the following additional board requirements (the Board Requirements):
- If a Public Company’s number of directors is six or more, the Public Company must have a minimum of three female directors;
- If a Public Company’s number of directors is five, the Public Company must have a minimum of two female directors; and
- If a Public Company’s number of directors is four or fewer, the Public Company must have a minimum of one female director1.
SB 826 authorizes the California Secretary of State to impose fines for any violation of these requirements. These fines include (i) $100,000 for failing to timely file board information with the Secretary of State relating to compliance with SB 826, (ii) $100,000 for an initial violation of the Board Requirements, and (iii) $300,000 for any second or subsequent violation of the Board Requirements. In addition, the Secretary of State will publish the names of Public Companies that fail to meet SB 826’s requirements, which we anticipate will garner media coverage.
What to do now?
- Public Companies should review the composition of their board of directors to assess whether they currently satisfy the bill’s requirements.
- In addition, Public Companies should closely review their articles of incorporation and bylaws to determine whether their authorized number of directors (including any established range of directors) is sufficient to accommodate the required number of female directors and/or whether an amendment to the articles or bylaws may be required to be submitted to a shareholder vote.
- Finally, Public Companies should also consider the impact of SB 826 in their proxy disclosures regarding how diversity is assessed in choosing their board composition, as currently required by SEC proxy regulations.
In signing SB 826, Governor Brown stated, “I don’t minimize the potential flaws that indeed may prove fatal to [the bill’s] ultimate implementation.” The constitutionality of SB 826 will undoubtedly be challenged by multiple groups and its applicability to corporations incorporated in other states (including Delaware) will be a source of further discussion in the courts, but for now, California is setting a high bar in its efforts to increase the number of women who are board decision makers for Public Companies.