Written by Jeremy Mittman and Nimish Patel

California’s groundbreaking laws mandating corporate board diversity are under fire as two California courts recently ruled them unconstitutional. The courts struck down two California statutes – SB 826 and AB 979 – which required corporations doing business in the Golden State to have a certain number of sitting directors who were female or who were identified as members of an “underrepresented community.”

Background

In 2018, former California Governor Jerry Brown signed SB 826, which mandated that public companies whose principal offices are located in California must have a minimum of one female director on its board or face penalties. Two years later, in 2020, Governor Gavin Newsom signed AB 979, which mandated that public companies whose principal offices are located in California must have a minimum of one member of an “underrepresented community” on its board or face penalties. According to AB 979, the condition could be satisfied if the director “self-identifie[d] as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifie[d] as gay, lesbian, bisexual, or transgender.” 

A trio of California taxpayers filed lawsuits challenging both SB 826 and AB 979, claiming that they were unconstitutional.

Court Decisions

On April 1, 2022, Los Angeles Superior Court Judge Terry Green struck down AB 979, concluding that it violates the Equal Protection Clause of the California Constitution. Judge Green wrote, “The statute treats similarly situated individuals – qualified potential corporate board members – differently based on their membership (or lack thereof) in certain listed racial, sexual orientation, and gender identity groups.” Similarly, on May 13, 2022, Los Angeles Superior Court Judge Maureen Duffy-Lewis struck down SB 826 for violating the Equal Protection Clause of the California Constitution. In both cases, the court ruled that the laws were not narrowly tailored to address discrimination against women or underrepresented communities in board selection and that the state failed to show evidence of past discrimination.

Shortly after the May 13 decision, the California Secretary of State indicated that she planned to file an appeal. We will continue to monitor both cases for updates as we may not have heard the final word on the validity of SB 826 and AB 979.

Takeaway

Despite these two decisions, board diversity remains an issue that public companies in California and elsewhere should pay close attention to. For example, last August, the U.S. Securities and Exchange Commission (SEC) formally approved Nasdaq’s proposed board diversity listing rules, which we reported on here. Given that board diversity remains a nationwide focus, companies should continue to evaluate their diversity and inclusion strategies for their board of directors.