On Sept. 30, California Gov. Jerry Brown (D) signed SB 826, a pioneering law mandating each publicly held company headquartered in California to have at least one woman on its board of directors. It’s the first law of its kind in the United States and it means companies must act quickly in 2019 to find and secure shareholder approvals for qualified women by the end of the year or face penalties.
Some companies would need to have at least two or three female directors, depending on their board’s size, beginning in 2021.
Currently, women are significantly underrepresented on corporate boards of directors. According to Pew Research Center, 47 percent of the workforce is female but only 16 percent of board seats are held by women. Yet, according to a global study conducted by Credit Suisse, business performance generally improves when women are on a corporation’s board.
That report found the following: companies with women on their board significantly outperformed others in the 2008 recession and tend to be less leveraged; there is a positive correlation between stock performance and women on boards; and net income growth for companies with women on their boards is higher.
Which Companies Need to Comply?
SB 826 has a couple of threshold requirements for applicability, and only applies if both of the following are true:
1. The corporation is “publicly held.” As defined in SB 826, “publicly held” means the corporation has outstanding shares listed on a major U.S. stock exchange.
2. The corporation has its principal executive offices in California. The location of the principal executive offices will be that which was reported by the corporation on its most recent Securities and Exchange Commission Form 10-K.
Notably, SB 826 applies to both domestic (meaning incorporated within California) and foreign (meaning incorporated in any state or country other than California) corporations.
Compliance Requirements, Deadlines
Compliance will be measured each calendar year, beginning at the end of 2019. A corporation is in compliance with the law for a particular calendar year if at any point in that year the requisite number of women simultaneously served on the board of directors. SB 826 requires that:
• By Dec. 31, 2019, covered corporations have at least one woman on the board.
• By Dec. 31, 2021, covered corporations comply with the following:
- If a corporation has six or more directors on its board, then a minimum of three must be women.
- If a corporation has five directors on its board, then a minimum of two must be women.
- If a corporation has four or fewer directors on its board, then a minimum of one must be a woman.
Whether a director is female is determined by how the individual self-identifies and is not based on sex assigned at birth.
The California Secretary of State will track and report compliance statistics annually. The first compliance report will be published by July 1, 2019.
Practical Considerations for Compliance
• Dec. 31, 2019, Deadline: Locating, vetting, nominating and securing shareholder approval for a qualified individual to serve on a corporation’s board of directors can be a lengthy process. Significant time is required to identify candidates with suitable industry knowledge, independence and availability whom also comply with all restrictions on directors imposed by a corporation’s governing documents (and competition for quality female candidates will no doubt increase in California under SB 826).
As the 2019 proxy season is quickly approaching, covered public companies that currently lack female directors should start searching for qualified female directors immediately to avoid non-compliance.
• Dec. 31, 2021, Deadline: According to a study by Equilar, approximately 80 percent of covered corporations with annual revenue of $5 million or greater currently fail to satisfy the requirements of SB 826 for 2021. As discussed above, the process of appointing a new director often requires significant time, so corporations with larger boards may want to start looking to 2021 compliance sooner rather than later with that in mind.
• Initial Public Offerings (IPOs): SB 826 does not include a temporary exception or transition period for companies that make an initial public offering. Thus, corporations headquartered in California that are thinking of pursuing an IPO should include SB 826 compliance in their planning.
Repercussions for Non-Compliance
SB 826 explicitly authorizes the California Secretary of State to adopt regulations implementing the law and impose fines for a “violation” of the law. A violation occurs each time a director seat required to be held by a woman is not so held during at least some portion of the relevant calendar year.
SB 826 permits the following fines:
1. $100,000 for failure to timely file board member information with the Secretary of State pursuant to a regulation adopted pursuant to SB 826
2. $100,000 for a first violation
3. $300,000 for a second or subsequent violation
To avoid fine concerns, covered corporations should immediately begin taking steps to ensure compliance.
Tana Ryan, a partner in Kirkland & Ellis LLP’s Los Angeles office, concentrates her practice on representing private equity funds and private companies in a variety of matters, including mergers and acquisitions, leveraged buyouts, going private transactions, distressed acquisitions, and in-court and out-of-court restructurings, as well as general advice on corporate governance, executive compensation, and equity incentive arrangements.
Aura Gilham, an associate in Kirkland & Ellis LLP’s Los Angeles office, concentrates her developing practice on all aspects of corporate transactions.