California to Impose Gender Requirements on Boards of Publicly Held Companies

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 is obvious what was intended, I'm just not sure that is what was written.

      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.