Client Alert: Fifth Circuit Court of Appeals Tosses Nasdaq Diversity Disclosure Requirements
December 12, 2024
Affected companies can now re-examine commitment to diversity on boards and in disclosures.
On December 11, 2024, the Fifth Circuit Court of Appeals (in a close 9-7 ruling), held that the Nasdaq Marketplace Rules for listed companies requiring disclosure of the racial, gender and sexual characteristics of their directors exceeded the authority of the U.S. Securities and Exchange Commission (“SEC”) to approve under the Securities Exchange Act of 1934, as amended. This ruling, effective immediately, removes the requirement that listed companies provide information in their proxy and information statements as to the above characteristics.
In an interesting development, the SEC has subsequently said it would not appeal the ruling despite the close vote of the Fifth Circuit.
This ruling, which was not unexpected, is part of a developing backlash against the politicalization of many DEI and other ESG initiatives as investors and other constituents have begun to push back against their implementation and maintenance. It seems likely that this trend will continue and there will be additional pushback on other similar rules and laws.
What Should Affected Companies Do Now?
To the extent that companies have complied with the rules solely because they were required to, they may going forward delete the disclosures and the required “Diversity Matrix” that have been included in their proxy and information statements. To the extent companies wish to continue to publicly promote diversity in their boards, they are now free to craft the narrative and disclosures as they see fit (subject, of course, to applicable Nasdaq Marketplace Rules). This ruling will provide companies in the second category additional flexibility to communicate with shareholders and other constituencies in telling their diversity story.
What about NYSE-Listed Companies?
No change. In contrast to Nasdaq, the New York Stock Exchange (“NYSE”) never adopted similar rules. Rather, in 2019, the NYSE adopted a market-based approach to diversity in creating its Board Advisory Council (“BAC”). The BAC uses its members’ deep networks and experience to identify and recommend talented and diverse candidates to listed companies.
Conclusion
We believe this may be just the beginning of more litigation and concerted, organized efforts by investors and other stakeholders as they begin to question the validity of ESG measures. For example, it is noteworthy that several companies (including Tractor Supply, Walmart, Shell, Croc, Google, Coca Cola and Nestle) have all recently either eliminated or scaled back ESG commitments which may signal additional momentum for this trend.
We will continue to keep you apprised of developments as they occur.
For further information, consult your Croke Fairchild lawyer or:
Geoffrey Morgan, Partner
Alex Stern, Associate