Nasdaq Amends Board Diversity Proposal—SEC Extends Deadline and Solicits Additional Comments

On February 26, 2021, in response to more than 200 comment letters received from Nasdaq-listed issuers, institutional investors, asset managers, legislators, advocacy organizations, law firms, individual board members and other citizens, Nasdaq filed Amendment No. 1 to its initial proposed rule change regarding board diversity disclosures (Original Proposal).

Nearly 85% of substantive comment letters received were in favor of the Original Proposal. The Amendment is intended to strengthen the Original Proposal and provides additional flexibility, grace periods and longer phase-in periods for newly listed companies to comply with its diversity objectives. Nasdaq's response letter to the SEC outlining the Amendment also addresses "common misperceptions" about the Original Proposal, including clarifying that it does not impose quotas (failing to meet objectives triggers a disclosure requirement, not a penalty) and that companies do not risk delisting if they do not meet the Amendment's diversity objectives.

In light of the Amendment, in a release issued on March 10, 2021, the SEC extended the previous March 11, 2021 deadline to act on the proposal, to allow for additional comment. Comments must be submitted within twenty-one (21) days of the publication of the release in the Federal Register, and rebuttals to those comments must be filed within thirty-five (35) days of the publication of the release in the Federal Register. The SEC has not set a new deadline for it to act on the proposal. Investors, board members and governance experts will be watching closely to see what the SEC ultimately decides. While the approval of the Amendment is not predetermined (the SEC has not reached any conclusions with respect to the issues involved), the Biden-Harris Administration has been generally supportive of diversity and disclosure, as has the acting SEC Chair, Allison Herren Lee.

Original Proposal

The Original Proposal, which is described in detail in our December 10, 2020 Advisory, would obligate Nasdaq-listed companies (subject to specified exceptions) to either have, or explain why they do not have, at least two "Diverse" directors (including at least one director who self-identifies as Female and one director who self-identifies as an Underrepresented Minority or as LGBTQ+) ¹, and also to disclose the diversity of their boards in a Board Diversity Matrix. The Amendment modifies the Original Proposal most significantly as follows:

Proposed Rule 5605(f)—Diverse Board Representation

Companies with Small Boards. Companies with five or fewer directors must have, or explain why they do not have, at least one Diverse director (instead of two). In addition, if a company has five directors before becoming subject to the proposed rule and adds one director to satisfy the diversity objective, its diversity objective would remain at one Diverse director (even though it would have a six member board). However, if the company subsequently expanded its board, the Nasdaq rule would require the company to have at least two Diverse directors (or disclose why it does not).

Grace Period for Vacancies. The Amendment provides a one-year grace period for a listed company that no longer meets the diversity objectives as a result of a board vacancy. In such case, the company would have until the later of: (i) one year from the date of vacancy, or (ii) the date the company files its proxy statement or information statement, or, if the company does not file a proxy, in its Form 10-K or 20-F in the calendar year following the date of vacancy, to meet, or explain why it does not meet, the applicable diversity objectives.

Disclosure Alignment with Annual Meetings. For companies required to explain why they do not meet applicable 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.

Phase-in Periods for Newly-Listed Companies.

• Any company newly listing on the Nasdaq Global Select Market (NGS) or the Nasdaq Global Market (NGM) that was not previously subject to a substantially similar requirement of another national securities exchange will be permitted to satisfy the requirement to have, or explain why it does not have: (i) at least one Diverse director by the later of: (a) one year from the date of listing; or (b) the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company's first annual meeting of shareholders subsequent to the company's listing; and (ii) at least two Diverse directors by the later of: (a) two years from the date of listing; or (b) the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company's second annual meeting of shareholders subsequent to the company's listing.
• Any company newly listing on the Nasdaq Capital Market (NCM) that was not previously subject to a substantially similar requirement of another national securities exchange will be permitted to satisfy the requirement to have, or explain why it does not have at least two Diverse directors by the later of: (a) two years from the date of listing; or (b) the date the company files its proxy statement or its information statement (or, if the Company does not file a proxy, in its Form 10-K or 20-F) for the company's second annual meeting of shareholders subsequent to the company's listing.
• Any company newly listing on the NGS, NGM or NCM that has five or fewer directors and was not previously subject to a substantially similar requirement of another national securities exchange will be permitted to satisfy the requirement to have, or explain why it does not have at least one Diverse director by the later of: (a) two years from the date of listing; or (b) the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the Company's second annual meeting of shareholders subsequent to the company's listing.

Foreign Private Issuers. For foreign private issuers, the definition of "underrepresented individual" within the definition of Diverse has been amended to be based on identity in the country of the company's principal executive offices, as reported in the company's Form F-1, 10-K, 20-F, or 40-F (instead of the Company's home country jurisdiction). In addition, the Amendment clarifies that for Foreign Issuers with a two-tier board system, the board of directors means the company's supervisory or non-management board.

Exempt Companies. The Amendment clarifies that with respect to issuers of non-voting preferred securities, debt securities and Derivative Securities, only those that do not have equity securities listed on Nasdaq are exempt.

Operative Dates. The Approval Date is the date that the SEC approves proposed Rule 5605(f).

• Each listed company on the NGS, NGM and NCM must have, or explain why it does not have, one Diverse director by the later of: (i) two calendar years after the Approval Date (First Effective Date); or (ii) the date the company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company's annual shareholders meeting during the calendar year of the First Effective Date.
• Each company listed on the NGS or the NGM with a board of more than five members must have, or explain why it does not have, at least two Diverse directors by the later of: (i) four calendar years after the Approval Date (Second NGS/NGM Effective Date); or (ii) the date the Company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company's annual shareholders meeting during the calendar year of the Second NGS/NGM Effective Date.
• Each company listed on the NCM with a board of more than five members must have, or explain why it does not have, at least two Diverse directors by the later of: (i) five calendar years after the Approval Date (Second NCM Effective Date); or (ii) the date the Company files its proxy statement or its information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company's annual shareholders meeting during the calendar year of the Second NCM Effective Date.
• Notwithstanding the foregoing, a newly listed company will not be required to comply with the requirements of proposed Rule 5605(f) prior to the end of the phase-in periods described above, and a company listing after the Approval Date, but prior to the end of the periods set forth in this "Operative Dates" section, must fully satisfy the requirements of 5605(f) by the later of the periods set forth in this section or the two-year phase-in period described above.

Proposed Rule 5606—Board Diversity Disclosure

Board Diversity Matrix. The Amendment clarifies that a company may include supplemental data in addition to the information required by the Board Diversity Matrix, and must disclose the information in a searchable format. Nasdaq also amended the Original Proposal to allow companies to provide the disclosures in a Form 10-K or 20- F.²

Operative Dates. The Amendment would require a company to provide statistical information regarding its board's diversity by the later of (1) one calendar year from the Approval Date (Matrix Effective Date); or (2) the date the company files its proxy statement or its information statement for its annual meeting of shareholders (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) during the calendar year of the Matrix Effective Date.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.