As we previously discussed, on September 30, 2018, former California Governor Jerry Brown signed legislation intended to ensure that public companies headquartered in California have at least one female director. This law, known as SB 826, went into effect on January 1, 2019 and requires companies subject to this law to have at least one female director by December 31, 2019. Accordingly, we have updated our previous FAQs on SB 826 below.

What is SB 826 and what does it do?

SB 826 created a new Section 301.3 of the California Corporations Code, which provides that no later than December 31, 2019, each publicly held corporation—regardless of its jurisdiction of incorporation—with its principal executive offices in California (as disclosed in its Form 10-K) must have at least one female director serve during a portion of the calendar year or be subject to a fine. A "publicly held corporation" is one whose outstanding shares are listed on a major United States stock exchange, interpreted by the California secretary of state's office as the New York Stock Exchange (NYSE), the Nasdaq Stock Market (Nasdaq), and the NYSE American.

By December 31, 2021, these corporations must have a minimum of:

• three female directors, if they have six or more directors;
• two female directors, if they have five directors; or
• one female director, if they have four or fewer directors.

Are there any reporting obligations for companies under SB 826?

Yes and no. Because the California secretary of state has not yet adopted implementing regulations under SB 826, there is currently no official regulatory mechanism for reporting that would result in a fine (see list in next section). However, the secretary of state has modified the current annual Corporate Disclosure Statement for publicly traded companies to include questions regarding the number of female directors currently serving on a company's board (see question 5 in the statement). Based on our conversations with an individual handling SB 826 matters at the secretary of state's office, during calendar 2019 and as of the date of this Alert, responding to those questions on the Corporate Disclosure Statement is the only current way a company can inform the secretary of state's office regarding compliance with SB 826. We do not expect the secretary of state's office to review a company's annual report on Form 10-K, proxy statement, website, or any other documentation to determine whether a company had a female director serving during a portion of calendar 2019.

What happens to a company that does not comply with SB 826?

Companies that do not comply with SB 826 are subject to two types of fines:

• Reporting fines of $100,000 for failure to timely file board member information with the California secretary of state pursuant to a regulation adopted pursuant to this law, and
• Fines for failure to have a female director serve during at least a portion of a calendar year, ranging from $100,000 for a first violation to $300,000 for subsequent violations.

The secretary of state's office has not yet proposed, much less adopted, regulations pursuant to SB 826. Thus, there is currently no regulatory mechanism for a company to receive the first type of fine for failure to report.

In addition, based on our conversations with an individual handling SB 826 matters at the secretary of state's office, we believe it would be highly unlikely for the state to impose a fine on companies for failure to have a female director serve during at least a portion of the 2019 calendar year without regulations pursuant to SB 826 having previously been adopted.

The secretary of state's office could not comment on the timing of proposed regulations but confirmed that it typically takes three to four months following publication of proposed regulations, including a public comment period, for final regulations to be adopted. We will continue to monitor developments around state regulations under SB 826 during calendar 2020.

If there are currently no official reporting obligations, why should my company report on the Corporate Disclosure Statement?

SB 826 requires the California secretary of state to publish on its website a report documenting the number of companies whose principal executive offices are located in California and who have at least one female director. An initial report was published in July 2019, and with no official reporting mechanism there were a number of anomalies reported.

No later than March 1, 2020, and then on an annual basis, the secretary of state must publish a more detailed report on its website regarding the number of:

• companies subject to SB 826 that were in compliance with the law during at least one point during the preceding calendar year;
• publicly held corporations that moved their U.S. headquarters to California from another state or out of California into another state during the preceding calendar year; and
• publicly held corporations that were subject to SB 826 during the preceding year, but are no longer publicly traded.

Based on our conversations with an individual handling SB 826 matters at the California secretary of state's office, the March 2020 report is currently being prepared based on responses received during 2019 from the Corporate Disclosure Statement. If companies want to be named on the secretary of state's annual report as being compliant because a female director has served on their board for at least a portion of the calendar year, they will need to inform the secretary of state's office through the Corporate Disclosure Statement.

A female director served on our company's board of directors for a portion of 2019 but we had no female director serving on December 31, 2019—did our company violate SB 826?

No. SB 826 specifically provides that "a female director having held a seat for at least a portion of the [calendar] year shall not be a violation," so your company did not violate SB 826.¹ Conversely, SB 826 provides "each director seat required by this section to be held by a female, which is not held by a female during at least a portion of a calendar year, shall count as a violation." Therefore, if your company did not have a female director at any time during calendar 2019, it was in violation of SB 826 as of January 1, 2020.

My company filed a Corporate Disclosure Statement during 2019 and indicated that a female director was serving on our board—is there anything else we need to do now to report compliance?

No. Under those circumstances we expect that your company will be named in the March 2020 report as compliant, but you should check the March 2020 report once it is made available to make sure your information was recorded properly.

My company filed a Corporate Disclosure Statement during 2019 indicating that a female director was not serving on our board at the time. We later appointed a female director, but have not filed a new Corporate Disclosure Statement indicating that a female director had served on our board during a portion of the calendar year—what can we do now?

We suggest that you to file a new Corporate Disclosure Statement as soon as possible reporting that information. The Corporate Disclosure Statement requires you to report on the current board as of the date of filing, but companies have the ability to include additional information to explain their responses. You should indicate supplementally the name of the female director(s) who served during calendar 2019 and the dates of service.

Note that the California secretary of state's office still may not list your company as being compliant in the March 2020 report since the information was not filed during calendar 2019, but your Corporate Disclosure Statement noting the service of a female director during calendar 2019 will be available for public viewing on the secretary of state's website. In addition, in the event that your company receives media coverage for being listed as non-compliant in the March 2020 report, you will be able to point out that you were indeed compliant but that the secretary of state's office did not include your information.

Note that it is possible to file multiple Corporate Disclosure Statements in a calendar year, so if at any point during a calendar year your company is in compliance with SB 826, you should report it.

My company had a female director serve for at least a portion of calendar 2019 but we did not file a Corporate Disclosure Statement at all during 2019—what can we do now?

We suggest that you follow the same procedure noted in the previous question.

My company did not have a female director serve for at least a portion of calendar 2019—what can we do now?

Under those circumstances we expect that your company will be named in the March 2020 report as not being in compliance with SB 826. You may wish to be prepared to address negative media accounts of your company's noncompliance at that time and explain any mitigating circumstances, including your company's efforts to recruit female directors.

Is anyone challenging SB 826 in court? Do I still need to comply if the validity of the law is in question?

Two lawsuits have been filed challenging SB 826 on separate grounds. One suit is a taxpayer suit challenging the expenditure of state funds to enforce the law, and another suit is a constitutional challenge to the law based on the equal protection clause of the U.S. Constitution and related federal statutes. Some commentators have also expressed concerns about the law based on the "internal affairs doctrine" under the commerce clause and full faith and credit clause of the U.S. Constitution, but no suit challenging the law on that basis has yet been brought. Because the law is currently in force and these suits are still in their early stages, companies should carefully consider and consult counsel with respect to compliance with SB 826.

The principal executive offices of our company (as disclosed in our Form 10-K) are not located in California—do we need to comply with SB 826?

No. You should keep in mind, however, that other states, including Illinois and Maryland, have adopted laws requiring disclosure of gender and other types of board diversity. The Illinois law, for example, applies to publicly held companies with principal executive offices in Illinois (regardless of jurisdiction of incorporation). You should ensure compliance with other board diversity laws that may apply to your company.

What other board diversity rules should we know about?

Proxy advisory firms and institutional stockholders are making board diversity a matter of their proxy voting policies. For example, for annual meetings on or after February 1, 2020, Institutional Shareholder Services (ISS) will generally recommend a vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies listed on the Russell 3000 or S&P 1500 indices when there are no women on the company's board, subject to certain mitigating factors. Glass Lewis has a similar voting guideline, as do major institutional stockholders themselves.

What else should we do now?

• Review the California secretary of state's March 2020 report when it is released to ensure that your company's compliance for calendar 2019 is reported correctly. Based on your company's circumstances, you may wish to be prepared to address negative media accounts of your company's actual or misreported noncompliance at that time.
• Ensure that your company's compliance with SB 826 is properly reported with the secretary of state's office in calendar 2020. At this point, applicable companies must have at least one female director serve for at least a portion of calendar 2020.
• Continue to prepare for the December 31, 2021 compliance date by adding the requisite number of additional female directors before calendar 2021 ends.
• Review the secretary of state's implementing regulations once available. There are still many questions regarding SB 826 that implementing regulations may or may not answer—for example, what is the definition of "portion" and the other undefined terms in SB 826? Is there a transition period for newly public companies, and how does that affect IPO planning in future years? What about companies whose directorship offers to female candidates are rejected, or whose female nominees in a proxy fight are not voted into office? How will fines be assessed and appeals from alleged violations be addressed? Your company may wish to comment on these and other matters during the public comment period once the implementing regulations are released.

For more information, please contact any member of the public company representation or securities and governance litigation practice at Wilson Sonsini Goodrich & Rosati.

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[1] SB 826 does not define “portion,” and no implementing regulations under SB 826 have been proposed or adopted that defines “portion.” The definition of portion is a part of a whole; an amount, share, section, or piece. Without a definition in the statute and with no implementing regulations we think it would be difficult for a court or regulator to find that service on at least one day was not a portion, although the court or regulator would likely look to the totality of the circumstances in making its determination.