California to
Impose Gender Requirements
on Boards of Publicly Held Companies
The California legislature has
passed, and there has been sent to the governor for either approval or a veto,
a new law governing gender composition of certain boards of directors. The new
law (assuming it is enacted) is applicable to publicly traded securities that are
either (a) incorporated or organized in California or (b) are a foreign entity
with its principal place of business in California. For those companies, by not
later than December 31, 2019, the company must have at minimum one female
director. Then, for that same class of companies, not later than December 31,
2021, the company must have a number of female directors set by sliding scale:
(i) if the company has four or fewer directors, one female director; (ii) if
the company has five directors, it must have a minimum of two female directors;
and, (iii) if the company has six or more directors, it must have a minimum of
three female directors.
Companies are required to
submit a report to the California Secretary of State with respect to their
compliance with these new requirements. The law imposes significant penalties
for any “failure to timely file board member information.” Those fines are
$100,000 for the first violation and $300,000 for each subsequent violation.
The penalty provision here is
somewhat curious. The fines are imposed for failure to file the report, rather
than the failure to comply with the board composition requirements. As written,
it would appear that a company could be out of compliance with the board
composition requirements, file an accurate report indicating it is out of
compliance, and not be subject to the fine. Put another way, it is not clear
that the statute includes an enforcement mechanism as to the minimum female
board member composition obligation.
It bears noting that this
obligation is applicable to publicly traded companies with her principal place
of business in California. At least some of those companies are going to be
organized outside of California, often in Delaware. California holds the view that
it may impose substantive corporate law requirements on companies doing
business in California irrespective of where organized. I would not be
surprised if litigation ensues over California’s efforts to impose its
substantive corporate law on companies organized in other jurisdictions.
HERE IS A LINK to the statute.
