On August 6, 2021, the U.S. Securities and Exchange Commission (SEC) approved the proposed rule change submitted by The Nasdaq Stock Market LLC (Nasdaq) to adopt new listing rules establishing a disclosure-based framework relating to board diversity. Under these new listing rules, Nasdaq-listed companies will be required, subject to certain exceptions, to have (or explain why they do not have) the applicable number of diverse directors, and disclose certain board-level diversity statistics on an annual basis.

The new listing rules were first proposed in December 2020 (and discussed in our previous alert) and amended by Nasdaq in February 2021. The SEC approved the amended version of the proposed rule change, together with Nasdaq’s companion proposal offering certain listed companies access to a complimentary board recruiting service to assist companies in identifying and evaluating diverse board candidates. Following SEC approval, Nasdaq published guidance to assist companies that may have questions on these new listing rules.

Board Diversity Objective: Comply or Explain Requirement

Generally, following applicable transition and phase-in periods (discussed below), new Rule 5605(f) will require Nasdaq-listed companies, subject to certain exceptions, to have (or explain why they do not have) at least two diverse directors, including one director who self-identifies as female and one director who self-identifies as LGBTQ+ or as an underrepresented minority.¹ The rules provide flexibility for companies that have boards with five or fewer members, as well as for foreign issuers (including foreign private issuers) and smaller reporting companies, which are discussed below.

Any Nasdaq-listed company that opts to satisfy the new rules by explaining why it does not have the applicable number of diverse directors will be required to specify the applicable provisions of the new listing rules to which it is subject and explain the reasons why it does not have one or two diverse directors, as applicable. This disclosure will need to be made either in the company’s proxy or information statement (or, if the company does not file a proxy statement, in its Form 10-K or Form 20-F), or on its website. If the company elects to disclose this information on its website, then it will be required to publish this disclosure concurrently with the filing of its proxy or information statement (or Form 10-K or 20-F, where applicable) and submit a URL link through the Nasdaq Listing Center within one business day after posting.

Companies with five or fewer board members. Under the new listing rules, Nasdaq-listed companies with five or fewer board members will be required to have, or explain why they do not have, at least one diverse director (versus two diverse directors for companies with larger boards). Of note, a Nasdaq-listed company that has a five-member board before becoming subject to this new listing rule, and that adds a diverse director to satisfy the new listing rules (thereby resulting in a six-member board), would not become subject to the requirement to have, or explain why it does not have, at least two diverse directors by virtue of that one additional board member.

Foreign issuers. Under the new listing rules, foreign issuers that have boards with more than five members may satisfy the new listing rules by either:

• having two directors who each self-identify as female, or
• having one director who self-identifies as female and one director who self-identifies as LGBTQ+ or as an “underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the Company’s principal executive offices” (which differs from Nasdaq’s definition of “underrepresented minority” used for purposes of U.S.-based companies), or
• explaining why they do not meet the foregoing diversity objectives.

Smaller reporting companies. Under the new listing rules, smaller reporting companies (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) that have boards with more than five members may satisfy the new listing rules by either:

• having two directors who each self-identify as female, or
• having one director who self-identifies as female and one director who self-identifies as LGBTQ+ or as an underrepresented minority, or
• explaining why they do not meet the foregoing diversity objectives.

Effective dates, transition periods, and phase-in periods. Nasdaq-listed companies must comply with these new requirements, as follows:

 

EFFECTIVE DATES AND TRANSITION PERIODS
	Nasdaq Global Select Market and Nasdaq Global Market	Nasdaq Capital Market
Comply or Explain – One Director	later of August 7, 2023, or the date that the company files its proxy statement for its annual shareholder meeting during 2023	Same
Comply or Explain – Two Directors (for companies with more than five directors)	later of August 6, 2025, or the date that the company files its proxy statement for its annual shareholder meeting during 2025	later of August 6, 2026, or the date that the company files its proxy statement for its annual shareholder meeting during 2026

Newly listed companies with more than five directors will be required to comply with these new requirements, as follows:

 

PHASE-IN PERIODS
	Nasdaq Global Select Market and Nasdaq Global Market	Nasdaq Capital Market
Comply or Explain – One Director	later of one year from the listing date, or the date that the company files its proxy statement for its first annual shareholder meeting after listing	See below
Comply or Explain – Two Directors	later of two years from the listing date, or the date that the company files its proxy statement for its second annual shareholder meeting after listing	later of two years from the listing date, or the date that the company files its proxy statement for its second annual shareholder meeting after listing

If a newly listed company has five or fewer directors, then it will have the later of two years from the listing date or the date that the company files its proxy statement for its second annual shareholder meeting after listing within which to comply.

Newly listed companies are not required to comply with these new listing requirements prior to the end of the phase-in periods discussed above. In addition, any company listing after August 6, 2021, but prior to the end of the transition periods discussed above, will have until the later of the expiration of the applicable transition periods or phase-in periods to fully satisfy these new listing requirements.

Board Diversity Disclosure Requirement

New Rule 5606(a) will require Nasdaq-listed companies, subject to certain exceptions, to disclose annually, to the extent permitted by applicable law, board-level diversity data using the board diversity matrix provided by Nasdaq or a format substantially similar to this matrix. Among other things, this board-level diversity data will assist Nasdaq in assessing whether Nasdaq-listed companies satisfy the board diversity objectives discussed above. The matrix must include:

• the number of directors based on gender identity (female, male, or non-binary);
• the number of directors based on race and ethnicity (which categories are consistent with the categories used in EEO-1 reports);
• the number of directors who self-identify as LGBTQ+;
• the number of directors who choose not to disclose gender; and
• the number of directors who choose not to identify as any race and ethnicity or as LGBTQ+.

A separate matrix is available for foreign issuers to allow for differences in the categories used for race and ethnicity, as well as the potential inability of some foreign issuers (due to legal restrictions or prohibitions in their home countries) to request diversity data from their directors.

This matrix will need to be disclosed either in the company’s proxy or information statement (or, if the company does not file a proxy statement, in its Form 10-K or Form 20-F), or on its website. If the company elects to disclose this information on its website, then it will be required to publish this disclosure concurrently with the filing of its proxy or information statement (or Form 10-K or 20-F, where applicable) and submit a URL link through the Nasdaq Listing Center within one business day after posting. After the first year of disclosure, companies will be required to include disclosure for the current year and the immediately preceding year.

Effective date. This board-level diversity disclosure is first required by the later of August 8, 2022, or the date that the company files its proxy statement for its annual shareholder meeting during 2022. Newly listed companies will be required to satisfy this disclosure requirement within one year of listing on Nasdaq.

Exempt Companies

Certain companies are exempt from both the board diversity objective requirement and the board diversity disclosure requirement. These companies include special purpose acquisition companies (prior to any business combination or de-SPAC merger); asset-backed issuers and other passive issuers; cooperatives; limited partnerships; management investment companies; issuers of non-voting preferred securities, debt securities, and derivative securities; and issuers of securities listed under the Nasdaq Rule 5700 Series.

Cure Period and Grace Period

Any Nasdaq-listed company that does not meet the applicable requirements in new Rule 5605(f) will be notified by Nasdaq that the company is not in compliance with this rule, and will have until the later of its next annual shareholders meeting or 180 days from the event causing the deficiency to cure the deficiency. If the company does not regain compliance within the cure period, then Nasdaq would issue a Staff Delisting Determination Letter. If a company falls out of compliance with new Rule 5605(f) due to a vacancy on the board, then it will have until the later of one year from the date of vacancy or the date that the company files its proxy or information statement (or, if the company does not file a proxy statement, its Form 10-K or 20-F) in the calendar year following the year of the date of vacancy. A company that relies on this grace period may disclose this reliance in place of explaining why it does not have the applicable number of diverse directors and specifying the applicable provisions of the new listing rules to which it is subject.

Any Nasdaq-listed company that does not comply with the disclosure requirements in new Rule 5606(a) will be notified by Nasdaq that the company is not in compliance with this rule, and will be given 45 calendar days to submit a plan to regain compliance. Based on that plan, Nasdaq may provide up to 180 days for the company to regain compliance prior to issuing a Staff Delisting Determination Letter.

What to Do Now?

Nasdaq-listed companies and companies seeking to list on Nasdaq should plan for the new listing rules now, including holding discussions at the board and management level regarding how it plans to handle these new diversity objectives and disclosure requirements. Included in these discussions will be a wide variety of considerations and questions, which may include, among others:

• whether the company plans to solicit voluntary self-disclosures of gender, race and ethnicity, and LGBTQ+ information from its directors;
• assuming that the company will solicit this information from its directors, how will the information-gathering process be managed—for example, will these questions be asked as part of the company’s annual director and officer questionnaire process or in some other manner, and what additional document control policies or privacy protections will be implemented to assure director privacy;
• if the company will not have one or two diverse directors on its board, as applicable, what will the company disclose in its proxy statement, and how will management and the investor relations team respond to any questions related to the foregoing;
• is the company subject to other board diversity objectives or requirements, such as California’s board diversity laws (for which Nasdaq provided a side-by-side comparison to its own listing requirements), and how will the company satisfy (or not) all of the varying requirements;
• do any of the company’s major institutional investors (for example, BlackRock or State Street) have voting guidelines relating to, or have they engaged or might they engage with the company on, board diversity matters, and how will management and the investor relations team manage those discussions and expectations; and
• whether and how the company will manage board diversity disclosures, including discussions relating thereto, whether at the aggregated board level or individual level, with other constituencies such as the media, investors, or its employees.

For more information on Nasdaq’s new board diversity listing rules or any related matter, please contact any member of Wilson Sonsini’s public company representation or capital markets practices.

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[1] The new listing rules include, among others, the following definitions:

“Diverse” means an individual who self-identifies in one or more of the following categories: Female, Underrepresented Minority, or LGBTQ+.

“Female” means an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.

“Underrepresented Minority” means an individual who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities.

“LGBTQ+” means an individual who self-identifies as any of the following: lesbian, gay, bisexual, transgender, or as a member of the queer community.