23 May 2022

Second California Law Mandating Specific Number of Underrepresented Board Members Struck Down as Unconstitutional

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For the second time, there has been a successful challenge to the constitutionality of California law requiring increased diversity on boards of directors.

On May 13, 2022, Judge Maureen Duffy-Lewis of Los Angeles Superior Court struck down California’s first board diversification law on the heels of an April 1, 2022, ruling by Judge Terry A. Green, also at Los Angeles Superior Court, each holding the respective board diversification law before them (one addressing gender discrimination and the other addressing racial, ethnic, and sexual orientation discrimination, respectively) to be unlawful. While these rulings are unlikely to be the last word on the viability of such statutes, they are the first to address their constitutionality head-on through lengthy, detailed rulings. As such, their reasoning may resonate with judges facing similar challenges in federal court and at the appellate level as well as in jurisdictions outside of California.

Corporations Code Section 301.3, signed into law by Democratic Gov. Jerry Brown in 2018 as SB 826 along with other #MeToo statutes, requires public corporations whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California to have had a minimum of one woman on its board of directors by the close of 2019 and, by the close of 2021, to have had at least two women if the corporation has five directors or at least three female directors if the corporation has six or more directors. The law also requires the Secretary of State to publish compliance with these requirements and impose fines of at least $100,000 for violations.

Judge Duffy-Lewis, following a three-month bench trial, found that the state failed to meet its burden to show that the proffered interests of improving the economy, corporate performance and governance, and opportunities for women in the workplace were sufficiently compelling to justify the statute’s use of a suspect, gender-based classification as required by the Constitution’s Equal Protection Clause. She found that the state failed to show that corporations had discriminated against women in selecting board members, and the studies cited in the proposed legislation “do not sufficiently address discrimination and or causality nor utilize the most sophisticated, econometric methodologies and current statistical analysis available and thus were in this court’s view, unreliable.” The court dismissed the state’s argument that having more women on boards is beneficial because women are “consensus builders” and will promote “less risky behavior in investments” as an “offer of stereotypes” that did not justify the law. Moreover, the statute also failed to pass constitutional muster because its solution was not narrowly tailored, as no evidence was presented to show that the legislature considered a gender-neutral means to meet the proffered goals.

Judge Terry A. Green’s April ruling similarly struck down as unconstitutional Corporations Code Section 301.4, signed into law by Democratic Gov. Gavin Newsom in 2020 as AB 979. Section 301.4 includes a step-up mandate similar to that required by Section 301.3 with respect to directors from underrepresented communities, defined as individuals who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual, or transgender. The law requires at least one such director by the close of 2022 for corporations with four or fewer directors, two such directors for corporations with more than four but fewer than nine directors, and three such directors for corporations with nine or more directors. Please see our blog post for a more detailed discussion of Judge Green’s ruling.

As challenges continue to California’s board diversification statutes, other states are enacting their own versions of these laws. For example, while the California board diversification statutes include a “flexible floor” for public companies to meet, Washington’s gender board diversification law defines a “gender diverse board” as one where 25% of the directors serving self-identify as women. Other states, including Maryland, Illinois, and New York, have sought to increase diversity by requiring companies to disclose board demographics. Moreover, in 2021, the Securities and Exchange Commission approved the Nasdaq’s proposed board diversity rule.

It remains to be seen what weight, if any, these rulings will have in California and beyond. Meanwhile, companies subject to the California board diversification laws must continue to follow the judicial trajectory of these rulings when deciding whether and to what extent to comply with these significant legal requirements.