On February 26, 2021, Nasdaq announced an amendment to its Proposal to Adopt Listing Rules Related to Board Diversity, published by the U.S. Securities Exchange Commission (the “SEC”) on December 10, 2020 (the “Initial Proposal”). The amendment is in response to more than 200 comment letters submitted on the Initial Proposal. Below we examine key aspects of the amendment. Details of the Initial Proposal can be found in our Client Alert published in December 2020 and we recommend reading that Client Alert before reading this update.
Key aspects of the amendment include the following:
I. More Flexibility for Companies with Small Boards of Directors
The amendment would allow companies with boards of five or fewer members to achieve Nasdaq’s diversity objectives by having one diverse director, as opposed to two. However, once a company’s board of directors crosses over the five-member threshold, it will be required to have, or disclose why it does not have, at least two diverse directors.
II. Vacancy Grace Period
For a company that no longer meets Nasdaq’s diversity objectives due to a vacancy on its board of directors, the amendment provides that the company will have until the later of (i) one year from the date of vacancy or (ii) the date the company files its proxy statement or its information statement in the calendar year following the year of the date of vacancy, to meet, or explain why it does not meet, Nasdaq’s diversity objectives. In the next SEC filing in which the company is required to make diversity disclosures, the company must state that it is relying on Nasdaq’s grace period with regards to diversity compliance.
III. Updated Phase-In Periods for Newly Listed Issuers
The amendment also proposes extended phase-in periods for newly listed companies that were not previously subject to substantially similar diversity requirements of another national securities exchange. While the Initial Proposal contemplated a one-year phase-in for all newly listed companies, the amendment alters the phase-in period as follows:
- Newly listed Nasdaq Global Select Market or Nasdaq Global Market companies with five or more directors will have one year from the date of listing to comply with the requirement to have one diverse director and two years from the date of listing to comply with the requirement to have at least two diverse directors;
- Newly listed Nasdaq Capital Market companies with five or more directors will have two years from the date of listing to comply with the requirement to have at least two diverse directors; and
- Companies with boards of five directors or less, regardless of what Nasdaq tier they are listed on, will have at least two years from the date of listing to comply with the requirement to have at least one diverse director.
IV. Disclosure Alignment with Annual Meetings
The amendment also provides that for companies required to explain why they do not meet Nasdaq’s board diversity objectives, such disclosure must be provided in advance of the company’s next annual meeting of shareholders: (1) in any proxy statement or any information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F); or (2) on the company’s website. If the company provides such disclosure on its website, then it must add the disclosure to the website concurrently with the filing made pursuant to (1) and submit a URL link to the disclosure through the Nasdaq Listing Center within one business day after such posting.
V. Clarification of Disclosure or Mandate
The amendment also makes it clear that Nasdaq’s diversity proposals are disclosure-based as opposed to mandate-based. Nasdaq reiterates that its diversity objectives would not require boards to have a specified number of diverse candidates (they are not quotas), but rather are meant to encourage disclosure about why boards do not meet certain diversity objectives.
On March 10, 2021, the SEC published a notice and order to solicit comments on the amendment. This allows interested members of the public to submit comments on the amendment until April 6, 2021.
Blake Leger, Halle Vakani, and Holly Wagner are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.