On September 30, Governor Gavin Newsom signed into law Assembly Bill ("AB") 979, requiring the boards of California public corporations to include at least one "director from an underrepresented community" by the end of 2021, with heightened minimum requirements in future years. "Director from an underrepresented community" is defined as "an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender."
This is California's latest endeavor in regulating boardroom heterogeneity. AB 979 is modeled after Senate Bill 826, which was signed into law on September 30, 2018 and required the boards of public corporations headquartered in California to include a minimum number of female directors by the end of 2019.
Despite the inevitable risk of AB 979 being challenged on constitutional and other grounds, companies should begin planning for the December 31, 2021 compliance deadline. The requirements are added to the California Corporations Code under a new Section 301.4.
Does Section 301.4 apply to your company? If it does, how do you comply, and what happens if you don't? Let's break it down.
Companies Subject to Section 301.4
A company is subject to Section 301.4 if all of the following are true:
- it is a corporation;
- it has outstanding shares listed on a major U.S. stock exchange; and
- its principal executive office is located in California (according to its last SEC 10-K filing).
Note that Section 301.4 applies regardless of the company's jurisdiction of incorporation. According to 2019 SEC 10-K filings, 625 companies meet this test.
Requirements and Timing to Comply with Section 301.4
By December 31, 2021, any company subject to Section 301.4 must include one director from an underrepresented community on its board (regardless of board size). A company may increase the size of its board to achieve compliance.
By the end of 2022, boards with four to nine directors must include two directors from underrepresented communities, and boards with more than nine directors must have at least three directors from underrepresented communities.
In addition to maintaining the applicable minimum number of directors from underrepresented communities, all companies subject to Section 301.4 must timely file required information about their boards with the Secretary of State. (The regulations which will establish the content and timing of required filings have not been issued.)
Penalties for Noncompliance with Section 301.4
The California Secretary of State may impose fines for procedural or substantive noncompliance:
- Companies may be fined $100,000.00 for failure to timely file required information about their directors with the Secretary of State.
- Companies that fail to have the requisite number of directors from underrepresented communities may be fined $100,000.00 for the first violation and $300,000.00 for subsequent violations.
Beginning to Prepare for Compliance
Though companies have until December 31, 2021 to comply with Section 301.4, preparation for compliance should begin in the meantime. Companies who plan to increase their board sizes to comply should review their organizational documents now to understand the requirements to add and fill board seats, and all companies subject to Section 301.4 may want to evaluate whether their current recruiting processes will identify candidates who will enable compliance.