On December 11, 2024, the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”), in an en banc rehearing of Alliance for Fair Board Recruitment v. Securities and Exchange Commission (“SEC”)[1], held that the SEC did not have the authority to approve Nasdaq’s Board Diversity Rules (as defined below). As a result, Nasdaq-listed companies[2] will no longer be required to comply with Nasdaq’s Board Diversity Rules. The SEC has not yet indicated whether it plans to appeal.
Nasdaq’s Board Diversity Rules, approved by the SEC in August 2021, established, among other things, (1) a mandate that Nasdaq-listed companies have at least one female director and at least one director who is a member of an underrepresented minority or the LGBTQ+ community, or if a company did not, it must disclose why it did not meet these standards and (2) a requirement of Nasdaq-listed companies to annually disclose statistical information on the directors’ self-identified gender, race, and sexual orientation (collectively, the “Board Diversity Rules”).
Following SEC approval of the Board Diversity Rules, the Alliance for Fair Board Recruitment and the National Center for Public Policy Research (the “Petitioners”) sought to have the Fifth Circuit invalidate the Board Diversity Rules. The Petitioners argued that the Board Diversity Rules violated federal securities laws and the First and Fourteenth Amendments of the U.S. Constitution’s prohibition of discriminatory laws and restraints on free speech, as they unconstitutionally conferred preferential status on minorities, women, and members of the LGBTQ+ community. In October 2023, a three-judge panel upheld the Board Diversity Rules. The Petitioners then requested a rehearing by the full Fifth Circuit.
The Fifth Circuit’s final ruling found Nasdaq’s Board Diversity Rules "far removed" from the purposes of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), holding that “no part of the Exchange Act even hints at the SEC’s purported power to remake corporate boards using diversity factors.”[3]
Takeaway
Nasdaq-listed issuers will no longer be required to comply with the Board Diversity Rules. This will allow Nasdaq-listed issuers more flexibility in determining director membership and related disclosure. However, issuers should continue to evaluate internal corporate policies, voting guidelines of proxy advisory firms, institutional investor voting guidelines, and the results of stakeholder engagement.
ESGone? ESG and a Second Trump Administration
The Fifth Circuit’s ruling comes after several setbacks to ESG mandates, including, as discussed in our March blog post, the Fifth Circuit’s recent decision to stay the SEC’s rules on climate-related disclosures. We expect the second Trump administration, and a Republican-controlled Congress will push to rollback additional ESG initiatives, including environmental and climate initiatives. For example, incoming President Trump’s nominee to chair the SEC, Paul Atkins, has criticized the SEC’s stayed climate-related disclosures rule.
As we enter a second Trump administration, we expect there will be further tensions with some U.S. states as well as the UK, Europe, and other G20 economies that may press forward with implementing ESG mandates and climate commitments. Issuers will need to be aware of navigating what may be conflicting priorities to avoid being caught in political crosscurrents in the United States and globally.
[1] Alliance for Fair Board Recruitment v. SEC, No. 21-60626 (5th Cir. 2024).
[2] The Nasdaq Board Diversity Rules also applied to foreign private issuers.
[3] Alliance for Fair Board Recruitment, slip op. at 31.
