There’s now another legal challenge to SB 826, California’s board gender diversity statute, filed today in the federal district court in the Eastern District of California. In Creighton Meland v. Alex Padilla, Secretary of State of Californiaa shareholder of a publicly traded company that is incorporated in Delaware and headquartered in California filed a complaint seeking a declaratory judgment that the statute is unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute.  A representative of a legal organization contended that the statute “puts equal numbers above equal treatment….This law is built on the condescending belief that women aren’t capable of getting into the boardroom unless the government opens the door for them. Women are capable of earning a spot on corporate boards without the government coercing businesses to hire them.”  This case appears to be the second complaint filed to challenge the new law, the first being, Crest v. Alex Padilla.  (And here is the amended complaint.) As you may recall, Crest, filed in California State Court, was framed as a “taxpayer suit” that sought to enjoin Padilla from expending taxpayer funds and taxpayer-financed resources to enforce or implement the statute, claiming violations of the equal protection provisions of the California constitution.  (See this PubCo post.) 

The legislation requires that public companies (defined as corporations listed on major U.S. stock exchanges) that have principal executive offices located in California, no matter where they are incorporated, include, as then-Governor Jerry Brown phrased it, a “representative number” of women on their boards of directors. Under the new law, each public company will be required to have a minimum of one woman on its board of directors by the close of 2019. That minimum increases to two by December 31, 2021, if the corporation has five directors, and to three women directors if the corporation has six or more directors. As required by new Section 301.3(c) of the California Corporations Code, the Secretary’s office published on its website, by July 1, 2019, a report “documenting the number of domestic and foreign corporations whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California and who have at least one female director.”

As the complaint notes in part, on signing the bill into law on September 30, 2018, former Governor Brown issued a letter acknowledging that there

“have been numerous objections to this bill and serious legal concerns have been raised. I don’t minimize the potential flaws that indeed may prove fatal to its ultimate implementation. Nevertheless, recent events in Washington, D.C. — and beyond — make it crystal clear that many are not getting the message. As far back as 1886, and  before women were even allowed to vote, corporations have been considered persons within the meaning of the Fourteenth Amendment….. Given all the special privileges that corporations have enjoyed for so long, it’s high time corporate boards include the people who constitute more than half the ‘persons’ in America.”

(See this PubCo post.)  The complaint also states that “the California State Assembly Judiciary Committee recognized that ‘SB 826 would likely be challenged on equal protection grounds and the means that the bill uses, which is essentially a quota, could be difficult to defend.’ The Assembly floor analysis included the same language.”

The complaint alleges that the company reincorporated in Delaware from California in 2010 to “enhance shareholder control over our company’s Bylaws.”  The company currently has an all-male board and would be required under the statute “to add a female member by the end of 2019 and two more female board members by the end of 2021 or face fines for failing to comply with the Woman Quota.” (Note, however, that no regulations have yet been adopted to impose fines under the statute, and our current understanding, based on conversations with the office of the Secretary, is that no fines will be imposed until regulations have been adopted.)

In addition, the complaint alleges that the plaintiff is injured as a shareholder, separate from any injury to the corporation, as he will be prohibited from voting as he desires. (That is, he is not suing derivatively on behalf of the company but rather claims standing on the basis of his individual injury as a shareholder.) According to the complaint, “to achieve its goal, the law must impact the behavior of shareholders like Mr. Meland, who are responsible for voting for the members of the board of directors at annual meetings….The Woman Quota imposes a sex-based quota directly on shareholders, and seeks to force shareholders to perpetuate sex-based discrimination….The Woman Quota injures Plaintiff’s right to vote for the candidate of his choice, free from the threat that the corporation will be fined if he votes without regard to sex.” (Given that California challenged standing in the first case, it seems likely the State would challenge it here as well.)

The plaintiff claims that the statute is a sex-based classification that violates the equal protection provisions of the 14th Amendment (not, as in the first case, the equal protection provisions of the California constitution). More specifically, the complaint contends that the statute “facially discriminates on the basis of sex” and “serves no important government interest” because “[s]ex-based balancing is not an important government interest that can sustain a sex-based classification under the Equal Protection Clause.”  In addition, the complaint contends that the statute “relies on a variety of improper gender stereotypes, such as the belief that women board members bring a particular ‘working style’ which will impact corporate governance. Reliance on stereotypes about the capabilities or worldviews of women is illegitimate and does not further an important government interest.”  And even if it did, the complaint argues, the mechanism it employs is “a rigid and arbitrary quota—… not closely tailored to that interest.”

Presumably, California will file an answer or other response contesting these claims. But unless and until a court issues the requested injunction, the law remains in effect.  However, it remains to be seen whether, in the face of this litigation, the Secretary of State will continue to take action to enforce and implement the law.

Posted by Cydney Posner