California Court Strikes Down Board Gender Diversity Statute

On May 13, 2022, the Superior Court of California in Los Angeles County held that SB 826, the law requiring companies with headquarters in California to have a prescribed number of women on their boards of directors, is unconstitutional under California’s constitution and enjoined it.

This follows a separate Superior Court decision on April 1, which struck down a similar California law, AB 979, requiring companies headquartered in California to have a minimum number of ethnically and racially diverse or LGBT members on their boards of directors (see our prior alert). Accordingly, both of California’s board diversity statutes are no longer in force, pending the results of any decisions to appeal these rulings.

SB 826, which was signed into law on September 30, 2018, as described in our previous alert, requires all companies to have at least one woman director, companies with five board members to have at least two women directors and companies with six or more directors to have at least three women directors. California-based companies that did not comply would be subject to fines of $100,000 for an initial violation and $300,000 for each subsequent violation. SB 826 served as the model on which AB 979 was based, so the court’s recent decision against AB 979 portended SB 826’s similar demise.

On August 6, 2019, the three plaintiffs who were a party to the lawsuit that successfully challenged AB 979 filed a lawsuit seeking to enjoin the California Secretary of State from expending taxpayer funds and taxpayer-financed resources to enforce SB 826. In the case, Robin Crest, et al. v. Alex Padilla (19STCV27561) (Crest v. Padilla), the plaintiffs argued that SB 826’s requirements employed a suspect classification that required the State of California to establish a compelling government interest. The court agreed with the plaintiff’s contention that California failed to show a compelling government interest to justify what they argued amounted to an illegal quota that violated the equal protection clause of California’s Constitution. In particular, the court found that the State of California did not satisfy its burden because it did not show that the statute met a compelling state interest, was necessary and was narrowly tailored. The court found the state’s arguments and supporting data did not adequately establish a causal connection between women on corporate boards and corporate governance or support claims of gender discrimination that needed remediation. The State of California has not announced whether it intends to appeal the rulings in either of the board diversity cases.

Despite these setbacks to California’s board diversity statutes, the demand for board diversity remains strong. As we have previously noted, Nasdaq-listed companies are still subject to its board diversity rules. In addition, many institutional investors have adopted board diversity policies and may vote against the election of directors at companies that fail to demonstrate gender or ethnic/racial diversity. The major proxy voting advisory firms have similar policies for their voting recommendations.

We expect that the benchmarks established in AB 979 and SB 826 will continue to be influential in the expectations of stakeholders, even if they are ultimately struck down after any final appeals. As many companies have already met the California or similar board diversity requirements, the impact of these rulings may be limited as investor expectations, corporate governance norms and peer comparisons will continue to drive the demand for board diversity. Companies should continue to consider the stated preferences and voting policies of their key stakeholders and other regulatory requirements in determining how to address board diversity.