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Nasdaq is proposing a brand new range rule requiring firms listed on Nasdaq to diversify their boards of administrators or take away danger

Recent events have fueled a social justice movement that has urged companies to commit to inclusion and diversity, particularly in the composition of their boards of directors. * In light of the foregoing, Nasdaq filed a proposal with the US Securities and Exchange Commission (“SEC”) on December 1, 2020, which, if approved by the SEC, impede the continued listing of a company on the Nasdaq US Stock Exchange Diversity and disclosure requirements would make boards dependent. In proposing this rule, Nasdaq conducted its own in-house study of the diversity of Nasdaq-listed companies, including a review of more than two dozen third-party studies on the impact of board diversity. Nasdaq concluded that there is a positive correlation between various board memberships and improved corporate governance and financial performance.

The Nasdaq proposed rule would provide two measures for companies listed on the Nasdaq US stock exchange. First, the proposed rule would require companies listed on Nasdaq to disclose standardized statistical information about the diversity of each company’s board of directors, with each director optionally identifying certain diversity characteristics such as race / ethnicity, gender, and LGBTQ + status.[1] Companies listed on the Nasdaq US Stock Exchange have one year after the SEC approves the proposed rule for compliance with this disclosure requirement. Second, the rule proposed by Nasdaq would require that every company listed on Nasdaq either (i) have at least one director who identifies himself as a woman, regardless of the gender determined by that director at birth, and at least one director who identify themselves as either LGBTQ + or a racial or ethnic minority in accordance with the categories established by the Equal Employment Opportunity Commission, or (ii) explain why the composition of their board does not meet the diversity requirements set out in (i).[2] This declaration should also be available on the company’s website and in its declaration of authorization or information for the annual general meeting. Nasdaq will gradually introduce the application of this part of its proposed rule. Within two calendar years of the SEC’s approval of the proposed rule, Nasdaq-listed companies must have at least one Diverse director (defined in the proposed rule to include those who identify themselves as women, LGBTQ +, or racial or ethnic minority groups ). or explain and disclose why such a company does not have a diverse director); and within four[3] Calendar years after the proposed rule is approved by the SEC, companies must have at least two different directors (or explain and disclose why that company does not have two different directors). In addition, any company newly listed on the Nasdaq US Stock Exchange that was not subject to a similar requirement on any other national exchange has one year from the date of listing (after the transition periods above) to meet these board diversity requirements fulfill.

If a company listed on the Nasdaq US Stock Exchange fails to meet either the statistical disclosure of the Board composition or the requirements of the proposed directors on various directors of the proposed rule, the company will be notified that it will be until the end of its next general meeting or 180 days Has time from the point at which the deficiency occurred to come up with a plan to restore compliance with the proposed rule or possibly remove Nasdaq. The rule proposed by Nasdaq would generally apply to all companies listed on the Nasdaq US stock exchange. However, certain companies and certain companies, including foreign issuers, are exempt from the proposed rule[4] and smaller reporting firms[5] As defined in the Securities Exchange Act of 1934, certain changes to the proposed rule apply to them. To help companies comply with the Nasdaq Diversity Rule, Nasdaq offers companies free access to a network of diverse candidates who are ready for the board, a tool to help assess and update the board, and a designated email address for companies and their advisors to ask Nasdaq questions regarding the application of the rule.

In Nasdaq’s press release announcing its intention to submit the proposed rule, Nasdaq identified a key target for “Provid[ing] Stakeholders with a better understanding of the current composition and improvement of the company’s board of directors[ing] Investors trust all listed companies [on Nasdaq’s U.S. exchange] consider diversity in the selection of directors. “[6] Proxy consulting firms such as Glass Lewis or Institutional Shareholder Services (“ISS”) are among those stakeholders who will oversee the diversity of corporate boards. In particular, these companies have already begun to include certain diversity benchmarks in the recommendation of shareholders to vote in the election of directors. For example, with effect for shareholder meetings after January 1, 2022, Glass Lewis will generally recommend against the chairman of the nomination committee of a board of directors with fewer than two female directors and, starting in 2021, will evaluate corporate diversity statements.[7] Currently, the ISS will generally recommend against the chairman of the nomination committee or other relevant directors for boards that do not include a woman. Starting with general meetings held after February 1, 2022, the ISS generally recommends against the chairman of the nomination committee or other relevant directors for boards that do not include at least one ethnically or racially diverse member.[8]

Nasdaq’s proposal follows at least 12 lawmakers who have passed or are considering passing laws in addition to US Congress to address board diversity.[9] The state’s board diversity requirements that have received the most attention are those enacted in California in September 2018.[10] focusing on gender diversity, and September 2020,[11] that focus on racial diversity and LGBTQ + inclusion. These requirements apply to companies headquartered in California. The diversity requirements of California’s board of directors are broadly similar to Nasdaq’s proposal that both affected companies effectively (i) disclose certain information about the diversity of their boards of directors and (ii) have at least one director who is themselves as a woman in addition to at least one director who identifies himself as an underrepresented minority (using the Nasdaq proposed rule and California Statute, including racial / ethnic minorities and those who identify as LGBTQ +[12]). However, the California Bylaws provide an appropriate structure for the minimum number of directors required, which requires an increased minimum number of directors who identify as women and an increased minimum number of directors who identify as an underrepresented minority, based on the size of the board of directors the company.[13] Additionally, California law is stricter than the Nasdaq proposed rule in that it mandates compliance with board diversity requirements (and penalties for non-compliance with mandates), while Nasdaq’s proposed rule is called “Compliance or Explain” – Rule is structured. Nasdaq acknowledged that a mandatory regime was being considered, but ultimately decided that the “compliance or explain” model would encourage companies to act and give them sufficient flexibility to maintain decision-making authority over the composition of their board of directors. However, companies that do not comply with the Nasdaq “Compliance or Explain” rule must be delisted from the Nasdaq US stock exchange.

Given the Nasdaq proposed rule and related legislative initiatives, as well as the trend towards diversity and inclusion in corporate boardrooms and the study of the impact of diversity on corporate governance, companies and their boards of directors should continue to evaluate the diversity of their current boards of directors.

See Nasdaq’s proposed rule on diversity requirements here.

* John Mark Zeberkiewicz is a director and Ryan A. Salem is an associate at Richards, Layton & Finger, PA in Wilmington, Delaware. The opinions expressed in this article are those of the authors and not necessarily those of Richards, Layton & Finger, PA or its clients.

[1] See Nasdaq Proposed Rule 5606 (Disclosure of Board Diversity).

[2] See Nasdaq Proposed Rule 5605 (f) (2) (Board Diversity Representation).

[3] Companies listed on the Nasdaq Capital Market will receive five calendar years after the SEC approves the proposed rule of having two different directors.

[4] 17 CFR § 240.3b-4.

[5] 17 CFR § 240.12b-2.

[6] Press Release, Nasdaq, Nasdaq Promoting Diversity Through New Proposed Listing Requirements, https://www.nasdaq.com/press-release/nasdaq-to-advance-diversity-through-new-proposed-listing-requirements-2020-12 – 01.

[7] An overview of the Glass Lewis approach to proxy consulting, Glass Lewis, https://www.glasslewis.com/wp-content/uploads/2020/11/US-Voting-Guidelines-GL.pdf?hsCtaTracking=7c712e31- 24fb- 4a3a-b396-9e8568fa0685% 7C86255695-f1f4-47cb-8dc0-e919a9a5cf5b.

[8] Proxy voting guidelines Recommendations for benchmark guidelines, institutional s’holder services. (November 19, 2020), https://www.issgovernance.com/file/policy/latest/americas/US-Voting-Guidelines.pdf.

[9] Michael Hatcher & Weldon Latham, States Lead Corporate Board Responsibility: Diversify !, Harvard Law Sch. Corporate Governance Forum (May 12, 2020), https://corpgov.law.harvard.edu/2020/05/12/states-are-leading-the-charge-to-corporate-boards-diversify/#: ~: text = In% 20September% 202018% 2C% 20California% 20Governor, Executive% 20office% E2% 80% 9D% 20in% 20the% 20state.

[10] Cal. Corp. Code § 301.3.

[11] Cal. Corp. Code § 301.4.

[12] The rule proposed by Nasdaq goes a little further in its definition of LGBTQ + by expanding it to include those belonging to the queer community, while California law is limited to those who identify as gay, lesbian, bisexual, or transgender.

[13] If the company has at least five directors, the board must consist of at least two women and two underrepresented minorities. The board must consist of an additional director who identifies himself as a woman if the board consists of six or more directors, and the board must consist of an additional director who identifies himself as an under-represented minority if the board has nine or more directors consists.

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