On August 9, 2021, the Alliance for Fair Board Recruitment, a non-profit membership organization (the “AFFBR”), filed a Petition for Review under Section 25(a) of the Securities Exchange Act of 1934 (“Exchange Act”) in the Fifth Circuit Court of Appeals for review of the U.S. Securities and Exchange Commission’s (the “SEC”) final order (the “Final Order”) approving a December 1, 2020 proposal, as subsequently amended, submitted by The Nasdaq Stock Market LLC (“Nasdaq”) to adopt listing rules related to enhancing corporate board diversity (the “Board Diversity Listing Rule”). Please see our prior Client Update available here for additional background on Nasdaq’s Board Diversity Listing Rule and the SEC’s Final Order.

As we previously discussed, the Board Diversity Listing Rule requires the boards of directors of most Nasdaq-listed companies, subject to certain exceptions, to have at least two “diverse” candidates, consisting of at least one director who self-identifies as female and at least one director who self-identifies as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian, Pacific Islander, two or more races or LGBTQ+.

In its petition, the AFFBR relied on Section 25(a) of the Exchange Act to assert its claim as a “person aggrieved by a final order” of the SEC to obtain review in the U.S. Court of Appeals for the circuit in which such person has its principal place of business. The AFFBR claims that the Board Diversity Listing Rule is unconstitutional because it will compel companies to illegally discriminate on the basis of gender, race and sexual orientation when selecting directors. In its press release, the AFFBR claims that the “Nasdaq's discriminate-or-explain rule also exceeds its role and the authority granted by federal securities law and also violates core Bill of Rights guarantees against compelled speech and discrimination based on sex and race by stereotyping all people of the same skin color or sex as being alike and interchangeable. Further, the rule will not deliver the promised benefits. As Harvard law professor Jesse Fried has explained, numerous studies have shown ‘that stock returns suffer when firms are pressured to hire new directors for diversity reasons.’” The AFFBR also claims that it has members who, because of their race, sex, and sexual orientation are forced to compete on an uneven playing field because of the Board Diversity Listing Rule.

Notably, the AFFBR also recently filed suit challenging California SB 826 and AB 979, which set certain gender and racial-diversity requirements for corporate board diversity for all publicly traded companies headquartered in California (regardless of their jurisdiction of formation).

The Nasdaq Board Diversity Listing Rule provides for several transition periods during which listed companies may gain compliance, with the first deadline on August 8, 2022. We will be closely following the outcome of legal challenges, such as AFFBR’s, to the recently approved rules and any impact such challenges may have on the ultimate implementation of corporate board diversity initiatives.

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