In early August the US Securities and Exchange Commission (SEC) approved new listing rules set for Nasdaq-listed companies. Nasdaq’s diversity rule establishes a disclosure-based framework intended to make consistent and comparable statistics widely available to investors regarding the number of diverse directors serving on a company’s board. The diversity rule is established in Nasdaq Rules 5605(f) and 5606 and will require the following:
- Nasdaq-listed companies with six or more directors to have at least two diverse directors or explain why they don’t. At least one director must self-identify as female, and at least one director must self-identify as an underrepresented minority and/or LGBTQ+. Nasdaq-listed companies with five or fewer directors must have at least one diverse director.
- Public disclosure on an annual basis of specified diversity statistics regarding their board of directors. This must be provided in the company’s proxy statement or information statement for its annual meeting of stockholders, or if the company does not file such statements, in its annual report on Form 10-K or 20F.
- Foreign Issuers must also follow Nasdaq’s diversity framework of at least two members on their board who are diverse, including at least one member who self-identifies as Female and for the second director, who self-identifies as one or more of the following: Female, LGBTQ+, or an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the company’s principal executive offices.
- The only Nasdaq-listed companies exempt from the new diversity rule are SPACs, asset-backed issuers and other passive issuers, limited partnerships, management investment companies, issuers of non-voting preferred securities, debt securities, and certain derivative securities that do not have equity securities listed on Nasdaq, and certain issuers of certain securities other than common or preferred stock and warrants.
All Nasdaq-listed companies will be required to disclose board diversity statistics by the later of August 8, 2022, or the date the company files its next proxy statement for its annual meeting. Newly listed companies on Nasdaq must satisfy the disclosure requirements within one year of listing.
In the event a company is unable to meet the minimum diversity rules within the required timeframes, they will not be subject to delisting if they provide a public disclosure explaining why they were not able to meet the minimum diversity objectives. Nasdaq did indicate that it does not intend to scrutinize the substance of this disclosure
If a company fails to meet the new requirements within the specified timeline, it will be notified of its non-compliance by Nasdaq and will be allowed 45 days to submit a plan to regain compliance. After that period Nasdaq may provide the company with up to 180 days to regain compliance. If the company does not submit a plan or regain compliance, Nasdaq will issue a Staff Delisting Determination.
However you look at it, this is welcome news amplifying the continued focus on diversity and inclusion issues for public companies as proxy advisors, institutional investors, customers, and other stakeholders call for change. But Nasdaq’s diversity rule is sure to face legal challenges as evidenced by the Fifth Circuit Petition for Review filed by Alliance for Fair Board Recruitment (“AFBR”) and the current Ninth Circuit challenge to California’s law, SB 826, which requires companies with principal executive offices in California to have a certain number of women directors on their Board.
If you are a Nasdaq-listed company or are planning an IPO, we recommend reviewing the steps you can take now to meet the obligations under the new listing rules. If you need help or have any questions, please contact Allan Rooney, Tim Davis, Elannie Damianos, or Abbey Docherty or call us on +1 212 545 8022.
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