On September 30, 2018, California Governor Jerry Brown signed into law Senate Bill No. 826, which will require all publicly held corporations whose principal executive offices are located in the state to have at least one female director on their boards by the end of the 2019 calendar year and at least one to three female directors, depending on the size of the particular board, by the end of the 2021 calendar year. With the legislation, California has become the first state to require gender diversity on boards of directors.
What the New Law Requires
Under the new law, any publicly held corporation, including corporations incorporated in and outside of California, whose principal executive offices (according to the corporation’s annual report on Form 10-K filed with the Securities and Exchange Commission) are located in California must have on its board:
- By no later than the close of the 2019 calendar year, at least one female director; and
- By no later than the close of the 2021 calendar year, at least
- Three female directors if the board has six or more directors,
- Two female directors if the board has five directors, and
- One female director if the board has four or fewer directors.
A corporation is deemed “publicly held” when it has outstanding shares listed on a major U.S. stock exchange. “Female” means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth. If a female director holds the board seat for at least a portion of the applicable calendar year, she will count towards the applicable threshold for that year’s compliance.
The secretary of state may impose fines in the amount of $100,000 for a first violation and $300,000 for each subsequent violation. The secretary of state may also impose a fine of $100,000 for failure to timely file board member information with the secretary of state (the content and timing of such required filings have not yet been issued but will be established through regulations to be adopted by the secretary of state).
The secretary of state is also required under the new law to publish reports on its website, documenting information about female representation on public company boards, including, among other things, the number of corporations subject to the new law that have at least one female director (to be published by no later than July 1, 2019) and the number of corporations subject to the new law that were in compliance in the preceding calendar year (to be published by no later than March 1, 2020). Such reports may include additional information, such as the names of corporations not in compliance with the law, which may garner negative media attention.
Several commentators have stated their expectations that the new law will be challenged on constitutional and state law grounds, including the internal affairs doctrine and equal protection clauses of the U.S. and California constitutions. Similarly, the California Senate’s analysis acknowledges a significant risk of legal challenge and that the express gender classification as proposed by Senate Bill No. 826 “may be difficult to defend” under an equal protection challenge under both constitutions, and Governor Brown noted the “potential flaws that indeed may prove fatal to [the law’s] ultimate implementation.” Nevertheless, corporations subject to the new law, especially those not currently in compliance with the 2019 requirements, should begin considering and developing plans for compliance. While the new law allows a corporation to increase the size of the board to comply with its requirements, the corporation’s organizational documents or the laws of its state of incorporation may impose additional hurdles to compliance. For example, while a Delaware corporation may, unless provided otherwise in its certificate of incorporation, amend its bylaws by a majority vote of the directors in order to increase the size of the board (if the bylaws require a specified number of directors) or to set a range for the number of directors to be on the board, for a California corporation, a stockholder vote is required in order to increase the size of its board, either by changing the specified or maximum (if the number of directors permitted by the then-existing organizational documents is variable) number of directors or by changing the board size from a fixed number to a variable range, regardless of whether such provisions are in the certificate of incorporation or the bylaws.
The full text of Senate Bill No. 826 is located here.