California Board Diversity Laws Challenged, But Not Overturned

Posted: September 9, 2021 | News

California currently has two corporate board diversity statutes in place that require publicly traded companies with executive offices in California, to appoint women and “under-representative communities” to their boards of directors. The first statute SB 826, was passed in 2018 and was signed into law by then-Governor Jerry Brown. This statute requires the appointment of a minimum number of female directors to the boards of publicly traded companies headquartered in California. AB 979, which was enacted last year, requires publicly traded companies based in California to meet minimum quotas for directors from “underrepresented communities.” These communities are defined as “an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.”  

Each of these statutes requires two members of the underrepresented community (including women) for each five-person board and three members for each six-person board. There are substantial fines for companies found in violation of these statutes.

Over the past two years while they phase into effect, both laws have faced increasing legal challenges as deadlines for the stipulated mandates approach. In 2019, a single shareholder of an affected company filed a lawsuit opposing SB 826, alleging the statute had violated the Equal Protection Clause of the Fourteenth Amendment, requiring “shareholders to discriminate on the basis of sex when exercising their corporate voting rights.” While a district court initially dismissed the case for lack of sufficient standing, the 9th Circuit Court of Appeals recently overturned the ruling in a unanimous decision, remanding the case to be retried in the lower court. The decision was made solely based on the rights of the plaintiff to sue, not the merits of the case or the constitutionality of the law.

Just last month, a Texas non-profit membership organization, Alliance for Fair Board Recruitment, brought a case against the California Secretary of State citing the violation of the Equal Protection Clause of the Fourteenth Amendment. In that case, the plaintiffs are challenging both SB 826 and AB 979 as being unconstitutional and trampling “on the sovereign rights of other states to regulate corporate governance for entities incorporated under their laws.”

Despite the legal challenges, both SB 826 and AB 979 currently stand, and enforcement has not been blocked. This means that California’s publicly held corporations will be required to seat at least one underrepresented board member by December 2021, and at least two or three women, by the same deadline to avoid a hefty fine. While these statutes may be overturned in court, it would be prudent for companies covered by them to consider the practical and legal implications for their own organization.

At North & Nash, A Professional Law Corporation, our attorneys are experienced in complex legal matters. We provide guidance on a wide variety of issues including new and existing diversity laws that can dramatically impact your business. Please reach out to us at 949-752-2200 for more information.

Author: Partners at North & Nash, A Professional Law Corporation

Sources:

Appeals Court Revives Challenge to California Board Diversity Law

Bill Text - SB-826 Corporations: boards of directors.

AB 979 Requires California-Based Publicly Held Corporations to Diversify Their Boards of Directors

Blog: Petition filed for review of SEC approval of Nasdaq board diversity rule

9th Circuit Revives Lawsuit Challenging One of the Board of Directors Diversity Statutes

Lawsuit Filed Challenging State of California's Sex and Racial Quotas for Corporate Board Membership