California Court Determines Board Gender Diversity Statute Violates California Constitution

Published date18 May 2022
Subject MatterCorporate/Commercial Law, Employment and HR, Corporate and Company Law, Directors and Officers, Corporate Governance, Discrimination, Disability & Sexual Harassment, Diversity, Equity & Inclusion
Law FirmCooley LLP
AuthorMs Cydney Posner

You might remember that the first legal challenge to SB 826, California's board gender diversity statute, Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a "taxpayer suit," the litigation sought a judgment declaring the expenditure of taxpayer funds to enforce or implement SB 826 to be illegal and an injunction preventing the California Secretary of State from expending taxpayer funds and taxpayer-financed resources for those purposes, alleging that the law's mandate is an unconstitutional gender-based quota and violates the California constitution. A bench trial began in December in Los Angeles County Superior Court that was supposed to last six or seven days, but closing arguments didn't conclude until March. (See this PubCo post.) The verdict from that Court has just come down. The Court determined that SB 826 violates the Equal Protection Provisions of the California Constitution and enjoined implementation and enforcement of the statute. This verdict follows summary judgment in favor of the same plaintiffs in their case against AB 979, California's board diversity statute regarding "underrepresented communities," which was patterned after the board gender diversity statute. (See this PubCo post.) The Secretary of State has not yet indicated whether there will be an appeal. In light of pressures from institutional investors and others for board gender diversity, together with the Nasdaq "comply or explain" board diversity rule (see the SideBar below), what impact the decision will have on board composition remains to be seen.

Background. SB 826 required that, by December 31, 2021, all public companies listed on a major exchange and headquartered in California, no matter where they are incorporated, include at least two women on their boards if the corporation had five directors, and three women directors if the corporation had six or more directors. A minimum of one woman director was required if the board had four or fewer directors. The statute also required that the office of the California Secretary of State post on its website reports on the status of compliance with the law. Under the statute, the Secretary could impose fines for violations, ranging from $100,000 to $300,000 per violation. To date, the Secretary has neither proposed nor adopted regulations regarding fines or imposed fines for violations.

In the litigation, the plaintiffs claimed standing as "taxpayers," under "California's common law taxpayer standing doctrine and Code of Civil Procedure Section 526a, which grants California taxpayers the right to sue government officials to prevent unlawful expenditures of taxpayer funds and taxpayer-financed resources." They contended that, in so-called "taxpayer suits," it is "immaterial that the amount of the expenditure is small or that enjoining the illegal expenditure will permit a savings of tax funds." Further, they alleged, the Assembly Appropriations Committee indicated...

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