As required by SB 826, California’s board gender diversity law, the California Secretary of State has posted its March 2020 report on the status of compliance with the new law. The report combines information gathered in the July 2019 report (see this PubCo post) with data for the additional six-month period of July 1, 2019 through December 31, 2019. The report counts 625 publicly held corporations that identified principal executive offices in California in their 2019 10-Ks, but indicates that only 330 of these “impacted corporations” had filed a 2019 California Publicly Traded Corporate Disclosure Statement, which would reflect their compliance with the board gender diversity requirement. Of the 330 companies that had filed, 282 reported that they were in compliance with the board gender diversity mandate.
As you may recall, California’s board gender diversity legislation requires that publicly held companies (defined as corporations listed on major U.S. stock exchanges) with principal executive offices located in California, no matter where they are incorporated, include minimum numbers of women on their boards of directors. Under the new law, each of these publicly held companies was required to have a minimum of one woman on its board of directors by the close of 2019. That minimum increases to two by December 31, 2021, if the corporation has five directors, and to three women directors if the corporation has six or more directors. Notably, the statute provides that a “female director having held a seat for at least a portion of the year shall not be a violation.” (See this PubCo post.)
Section 301.3(c) and (d) of the California Corporations Code required the Secretary’s office to publish on its website by July 1, 2019, a report “documenting the number of domestic and foreign corporations whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California and who have at least one female director,” with an updated report posted by March 1, 2020 and annually thereafter. The report is also required to provide the number of publicly held corporations that moved their U.S. headquarters to or from California during the last year and the number of publicly held corporations that were subject to the requirements during the preceding year, but were no longer publicly traded. The legislation also authorizes the imposition of fines for violations of the new law in the amounts of $100,000 for the first violation, and $300,000 for each subsequent violation. The Secretary may also adopt regs imposing a penalty for failure to timely file board member information with the Secretary of State with a fine of $100,000. We have been advised, however, that no fines would be imposed until the Secretary adopts appropriate regulations.
The report was created by searching manually through publicly available information provided in annual California Statements and 10-Ks filed by corporations with the SEC, as well as information provided by the NYSE, Nasdaq and NYSEAMER and other online sources, including company websites. The dates searched were January 1, 2019 through December 31, 2019. The report notes that, because the law did not go into effect until January 1, 2019, the Secretary of State’s office had not previously collected data on publicly held corporations that would enable the office to report on a corporation’s movement of headquarters or delisting of shares from a particular market or exchange. However, the office is currently collecting this data, and those metrics will be included in the 2021 report.
It’s worth noting that there are timing issues in connection with these annual reports and statements, resulting in some gaps in available data in the March 2020 Report. Forms 10-K are due, generally depending on the size of the company’s public float, 60, 75 or 90 days after the end of the company’s fiscal year, and the deadline for filing the California Statement is 150 days after the end of the company’s fiscal year. (Corporations Code sections 1502.1 (domestic) and 2117.1 (foreign).) And it appears from the report that a significant number of companies either did not file their California Statements in time to be reflected in the report or, in some cases, may not have been able to include in their Statements the most current information regarding compliance for 2019. For example, companies with calendar-year FYEs will have filed their California Statements in the first half of 2019, but if they did not add a female director and become compliant until, say, the fourth quarter of 2019, they will not have reported that compliance on their California Statements in time for the March 1, 2020 update (unless they were to amend).
Also, the report may not show that particular companies are in compliance even though their proxy statements may show that they are. That’s because the language in the statute defines “female” as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.” As a result, the Secretary is not reviewing 10-Ks or proxy statements to determine whether a company is compliant with the new board composition requirement, but is instead determining compliance based only on the California Statement, which includes a specific inquiry regarding the number of “female” directors.