The Norwegian Parliament has passed new rules on gender representation in corporate boards

This article is also available in Norwegian HERE. 

The new legislation represents an expansion of the existing Norwegian gender representation requirements applicable to, among other, public limited liability companies, private limited liability companies owned 100% by the Norwegian state, as well as state-owned enterprises and intermunicipal companies.

The number of corporate entities comprised by the legislation is expanded gradually over the next few years based on thresholds linked to annual revenue and number of employees, and it is expected to apply to approx. 20,000 entities by 2028. According to the legislative proposal, only 20% of the board directors in Norwegian private limited liability companies are female, and thus the new legislation entails that a significant number of Norwegian entities will have to change their board composition over the next years.

The purpose of the legislative change is to increase the proportion of female board directors in Norwegian boards, given a very modest increase in the percentage of female board directors over the past decades. The Government's assessment is that equality and diversity in the business sector will foster more innovation, improve working environments, enhance decision-making, and increase value creation. Further, the new legislation is intended to positively impact gender balance among C-suites and top management (where the percentage of women represented is even lower than in the boardroom), as it has become clear that the current legislation applicable to public companies from 2006 have shown little or no effect in this regard.

Several types of corporate entities are comprised by the new legislation, including private limited liability companies, partnerships, limited partnerships, various types of foundations, house building cooperatives, cooperative enterprises, as well as financial enterprises not organised as private or public limited liability companies.

As the new legislation interferes with private autonomy and the right for shareholders to manage the company according to their own preferences, the new gender representation requirements are limited to enterprises of a certain size. Limitation in size is further meant to ensure that the new legislation targets companies where it has greatest effect, i.e. entities of a certain power, position and network, being able to attract and compensate candidates and the ability to influence society with a ripple effect on smaller entities.

To be covered by the gender balance requirements, the corporate entity must either have total operating and financial income exceeding NOK 50 million, or have more than 30 employees. The rules will be implemented gradually over the next few years, comprising an increasing number of entities each year according to size (in terms of income/employees), see below.

The calculation of revenue/employees is done individually for each enterprise based on its annual accounts, regardless of group affiliation. Consequently, consolidations are disregarded, and the ultimate parent company is also measured based on its own annual accounts only.

The new gender representation requirements are implemented gradually, expanding annually to comprise an increased number of corporate entities until 2028. Phase one applies to entities with more than NOK 100 million in operating revenues (including financial income), assumed to comprise approx. 8,000 entities.

Formally, each year's balance sheet date is the applicable cut-off date, with thresholds computed based on the year prior to said balance sheet date. Since the new legislation entered into force on 1 January 2024, the first possible balance sheet date is 31 December 2024. According to the general rule of the legislation, when an enterprise triggers applicable thresholds for the first time and thereby becomes required to fulfil the new gender representation requirements, the company has until one month after the first following ordinary general meeting to comply. However, according to the transition rules which apply until 1 July 2028, a special provision states that private limited liability companies with more than NOK100 million in total revenues must have a compliant board composition in place on 31 December 2024 by the latest.

The second and third phase of implementation comprise entities with more than respectively 50 and 30 employees. The fourth and fifth phase comprise entities with more than respectively NOK 70 and 50 million in total revenues, i.e. regardless of number of employees. Special transition rules states that comprised companies must have a compliant board composition in place no later than 30 June of the respective year, i.e. 30 June 2025 for companies enrolled in the second phase, 30 June 2026 for companies enrolled in the third phase, and 30 June 2027 for companies enrolled in the fourth phase.

An important limitation beyond described thresholds in turnover and employees, is that the gender representation requirements apply only to boards with three or more directors. This means that entities which are comprised by the new rules in terms of turnover or employees, are not subject to gender representation requirements if the board has only one or two directors. Time will tell whether shareholders of Norwegian entities will choose to downsize their board to avoid the new requirements.

The requirements for gender balance are as follows:

• Boards with 3-4 directors: maximum 2 of the same gender

• Boards with 5-6 directors: maximum 3 of the same gender

• Boards with 7 directors: maximum 4 of the same gender

• Boards with 8 directors: maximum 5 of the same gender

• Boards with 9 or more directors: maximum 60% of the same gender

To accommodate individuals with a third legal gender, the rule is defined as maximum gender representation from one gender rather than minimum representation of men and females respectively.

The gender balance is calculated separately for shareholder-elected board directors and their deputy directors. Further, gender balance is calculated separately for shareholder-elected and employee-elected representatives, with separate calculation for employee-elected board directors and deputy directors respectively, see below.

Gender balance requirements apply to both employee representatives and their deputies. Gender balance is calculated separately for employee-elected board directors and their deputies. This means that employee-elected board directors alone, i.e. excluding shareholder-elected directors, must fulfil the requirements for gender balance. The same applies to the deputies of the employee representatives.

Although employee representatives are subject to gender balance requirements, two practically important exceptions apply: 

• For companies with 200 or fewer employees, the requirement only applies in case of election of three or more employee-elected board directors, and the applicable requirement is that all of them are not of the same gender.
• Also, gender balance requirements do not apply to companies with 200 or fewer employees if the company has an imbalanced workforce (meaning that more than 80% of employees at the time of election are of the same gender)

The Norwegian Ministry of Trade, Industry and Fisheries (the "Ministry") has issued a practically important clarification related to election periods for employee representatives, which must be elected every second year. The clarification emphasises that the transitional rules (applicable in relation to the implementation of the gender balance requirements in Norway) are not intended to interfere with existing election periods. Thus fortunately, according to the Ministry’s clarification, enterprises required to have a gender-balanced board in place by 31 December 2024 pursuant to the transitional rules (as formulated), does not have to urgently elect employee representatives within said date if the next ordinary employee election is not to be held until next year according to the relevant enterprise’s election period.

If a board director resigns, the Ministry has determined that an enterprise may wait to elect a new board director until the next annual general meeting pursuant to the rules on supplementary elections, without violating gender balance requirements. Thus if a board director resigns, the board is not automatically invalid even if the remaining board directors does not fulfil the gender balance requirements. The prerequisite is that the board represents a quorum and that the board fulfilled the applicable gender balance requirement prior to resignation.

Failure to comply with the requirements may have serious consequences:

Potentially invalid board decisions

A board of directors not composed in accordance with requirements of the law is in principle not a validly elected board. A non-valid board of directors does not have the authority to represent the company externally nor take legal action on behalf of the company, and does not have the authority to bind the company to agreements and obligations. Thus, board of directors not composed in accordance with requirements of the law (taking into account rules on supplementary elections) should not make any decision on behalf of the enterprise until a new board of directors with a compliant composition is elected.

Breach of the gender requirements may have serious consequences for third parties having entered into agreements with the company which have been decided at board level of the company, as such agreements are, as a main rule, not validly entered into by the company. Whether lack of authority entails a lack of contractual obligation on the company, is a question of so-called legitimisation effect. The rule is that agreements and transactions made by company representatives who have exceeded their authority are not binding on the company if (i) the company proves that the counterparty realised or should have realised that authority was exceeded, and (ii) it would be contrary to honesty to enforce the transaction.

Failing to register in the Norwegian Register of Business Enterprises

Applications for registration in the Norwegian Register of Business Enterprises will be refused if they are not legal. Thus, an enterprise will not be able to file for registration an elected board of directors that does not fulfil the gender balance requirements.

Compulsory dissolution

Finally, an enterprise that does not comply with the requirements face serious consequences: it will be compulsorily liquidated by ruling of the court. There are no exceptions to the compulsory dissolution rule, nor is it possible for enterprises to apply for exemption from the new gender balance requirements. Enterprises therefore have no other choice than to fulfil the requirements.

Given that the gender balance requirements only apply to boards with three or more directors, we do not expect to see many cases of compulsory dissolution. Rather, we assume that enterprises who for various reasons are unable or unwilling to fulfil the requirements will merely reduce the number of board directors rather than risking compulsory dissolution.

Calculations suggest that 13,000 board directors must be recruited by 2028 for Norwegian entities to comply with the new legislation. From next year on, thousands of entities have to recruit female board directors. To secure the top female talents, companies comprised by phase one of the legislation ought to initiate their recruitment process now.