On August 6, the Securities and Exchange Commission (SEC) approved Nasdaq’s proposed “Board Diversity Rule,” noting that this new listing standard “represents a step forward for investors on board diversity.” As discussed in our prior client alert on Nasdaq’s proposed rule changes, the new Board Diversity Rule requires all Nasdaq-listed companies (subject to certain exceptions described below), including smaller reporting companies, to have at least two diverse directors (or explain the reasons why they do not), including one self-identified female and one who self-identifies as an underrepresented minority or LGBTQ+, and to disclose board diversity statistics. The new Board Diversity Rule becomes effective based on a two-stage deferred basis, with transition periods for newly Nasdaq-listed companies and listing transfers and exceptions for certain companies.

Disclosure Requirement. Each Nasdaq-listed company must annually disclose board diversity data on its website or in its proxy or information statement for its annual meeting of shareholders. Initial disclosures of this data must occur by the later of August 8, 2022, or the date on which a company files its proxy or information statement for its annual shareholder meeting during 2022. Each company must disclose the number of directors based on the directors’ self-identified gender, race, and LGBTQ+ status, respectively, using a Nasdaq-standardized diversity matrix. Any director who chooses not to self-identify will be counted in an “Undisclosed” category. After the first year of applicability, the Board Diversity Rule requires disclosure for the current year and the immediately preceding year. Companies that fail to comply with the disclosure requirement could be delisted if they fail to regain compliance within a cure period of up to 180 days.

Diversity Objective. In addition, Nasdaq-listed companies must meet minimum board diversity requirements within specified transition periods based on the company’s listing tier. All Nasdaq-listed companies must have, or explain why they do not have, at least one diverse director within two years of the proposal’s approval. For most calendar year-end Nasdaq-listed companies, this will be not later than the date on which such company files its proxy statement for 2023 annual meetings. Companies listed on the Nasdaq Global Select Market or the Nasdaq Global Market must have, or explain why they do not have, at least two diverse directors (including one self-identified as female and one self-identified as an underrepresented minority or LGBTQ+) within four years of the proposal’s approval (the date on which a calendar year-end company files its proxy statement for its 2025 annual meeting), while companies listed on the Nasdaq Capital Market will have five years to meet this requirement (the date on which a calendar year-end company files its proxy statement for its 2026 annual meeting). A Nasdaq-listed company with a board of five or fewer directors can meet the diversity objective by having one diverse director, instead of two, within one year of the proposal’s approval. Foreign issuers and smaller reporting companies can satisfy this requirement with two female directors. The rules provide a one-year grace period for a listed company that no longer meets the diversity objective due to a vacancy on its board of directors, such as when a diverse director falls ill or resigns. However, a company that cannot meet the diversity requirement will not be subject to delisting if it explains the reasons for not doing so on its website or in its proxy or information statement for its annual meeting of shareholders. If a company fails to provide an explanation, it will have until the later of its next annual shareholder meeting or 180 days from the event that caused the deficiency to cure the deficiency, either by nominating additional diverse directors or by providing the required disclosures.

This disclosure-based framework addresses the current absence of board-level diversity statistics and aims to provide investors with more reliable and comparable information — information investors have been increasingly demanding. Such information should enhance current SEC rules, requiring that companies disclose whether, or how, they consider diversity when nominating new directors. By providing for more standardized diversity data, the SEC seeks to aid investors’ investment and voting decisions.

Approval of the announcement did not come without opposition, as one SEC commissioner voted against the Board Diversity Rule, and another only gave partial support. In its order approving the Board Diversity Rule, the SEC expressly acknowledged that investors and companies differ in their beliefs as to the impact of board diversity on company performance and governance. Nonetheless, the SEC makes clear that the availability of diversity-related data is intended to benefit the investing public.

Our team provides counsel uniquely tailored to the corporate governance and compliance needs of our clients. Our experienced attorneys listen closely to our clients’ goals and expectations and advise on the most effective strategies to avoid, minimize, solve, and prevent problems.

Our corporate governance attorneys represent individual executives, boards of directors, and board committee members with respect to their fiduciary responsibilities. We help clients avoid costly operational disruptions, regulatory and law enforcement investigations, and civil and criminal penalties by working with them to develop and implement an effective compliance plan. In the event of adverse findings, we act quickly to curtail and solve problems.

Our comprehensive, cross-team approach includes attorneys from our corporate, litigation, regulatory, and executive compensation practices. Together, we provide necessary counseling regarding the governance of public companies and the continually developing responsibilities of their directors and senior management. We advise our corporate clients on developing and implementing integrated, customized compliance and ethics programs and establishing policies that address issues arising under the Sarbanes-Oxley Act and related securities laws.

Businesses across a range of industries are also increasingly turning to our team for advice on the myriad of business and legal implications connected with Environmental, Social, and Governance (ESG) initiatives. Our attorneys closely track SEC and Federal Trade Commission regulations and policies relating to ESG to better advise clients on reporting requirements and their implications. We also understand that ESG is not just driven by regulatory requirements, but also by the demands of client’s stakeholders, including shareholders, customers, employees, suppliers, and communities. We understand these drivers and can help develop strategies for enacting policies and programs to implement ESG strategies.

In our corporate governance practice, we counsel clients on a wide range of governance issues, including:

  • Issues involving board composition and structure, including membership qualifications, nominating procedures, committee structures and duties, and similar matters.
  • Advising boards, individual directors, and corporate executives about fiduciary duties, disclosure, and reporting requirements, and other obligations.
  • Providing advice about fiduciary duties arising from insolvency or financial difficulties.
  • Developing and implementing ethics policies and related programs to prevent and detect violations of law.

PHILADELPHIA – P. Thao Le, a partner in Troutman Pepper’s Corporate Practice Group, has been selected to serve on Law360’s Mergers & Acquisitions Editorial Advisory Board, which provides feedback on Law360’s coverage and expert insight on how best to shape future coverage.

Le focuses her practice on mergers and acquisitions, and private equity investment and disposition transactions. She has represented operating companies, private equity and venture funds and portfolio companies in a wide range of industries in leveraged buyouts, mergers and acquisitions, recapitalizations, and other corporate transactions.

“I am excited to serve on Law360’s Mergers and Acquisitions Editorial Advisory Board,” Le said. “The year has been particularly busy in terms of M&A activity with the first quarter seeing the largest value in M&A deals on record. I look forward to helping inform coverage in this active space.”

Additionally, Le has lectured on deal considerations during COVID-19 and authored papers on deal structures for investments by family offices and on compliance matters for private equity fund managers.

Consistently recognized as a top-tier national practice, Troutman Pepper’s corporate attorneys regularly handle multimillion- and multibillion-dollar transactions. Clients include Fortune 500 corporations and middle-market companies, as well as smaller businesses and emerging growth entities. The firm also represents private equity sponsors, venture capital firms, lenders, investment banks and other financial advisors, boards of directors and special committees, senior management, and significant shareholders.