In Meland v. Padilla, a shareholder of a publicly traded company filed suit in federal district court  seeking a declaratory judgment that SB 826, California’s board gender diversity statute, was unconstitutional under the equal protection provisions of the 14th Amendment.  A federal judge has just dismissed that legal challenge on the basis of lack of standing. (Update: This case has been appealed to the 9th Circuit.)

As you may recall, 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 law, each public company was 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. The statute also requires, under Sections 301.3(c) and (d) of the California Corporations Code, that the Secretary’s office post on its website reports on the status of compliance with the law.

Even proponents of the California law recognized the possibility of “equal protection” claims and other legal challenges—when Governor Jerry Brown signed the bill into law, he acknowledged that “serious legal concerns” had been raised. (See this PubCo post.) And many expected a flood of legal challenges to frustrate efforts to implement the bill. Nevertheless, California’s businesses appear to have accepted the requirements of the legal mandate—perhaps also feeling the pressure from large asset managers such as BlackRock and State Street—and have not filed suit.

However, two complaints were filed. The first, Crest v. Alex Padilla (as amended), filed in California State Court, was framed as a “taxpayer suit” that sought to enjoin Padilla, the California Secretary of State, 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.)

In the second case, Meland v. Padilla, the plaintiff, a shareholder of  a publicly held corporation that is incorporated in Delaware and headquartered in California, filed a complaint in the U.S. District Court for the Eastern District of California seeking a declaratory judgment that the statute was unconstitutional under the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute.  At the time the complaint was filed, the company had an all-male board and, the plaintiff asserted in the complaint, was 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.”

The complaint alleged that the plaintiff was injured as a shareholder, separate from any injury to the corporation, as he would be prohibited from voting as he desired. 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.” 

The plaintiff also claimed that the statute is a sex-based classification that violates the equal protection provisions of the 14th Amendment. More specifically, the complaint contended 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 contended 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 argued, the mechanism it employs is “a rigid and arbitrary quota—… not closely tailored to that interest.”

In support of his motion to dismiss, the Secretary of State argued, among other things, that the plaintiff lacked standing:

“Because SB 826 does not govern Plaintiff’s rights as a voting shareholder, Plaintiff cannot allege any direct injury to himself from the law, as distinct from injury to the corporation. He also does not meet prudential requirements for shareholder standing because, under principles of constitutional and corporate law, a shareholder lacks authority to sue for injury to the corporation. And even if he could properly allege injury derivative of the corporation, Plaintiff’s claims would fail because he cannot allege a cognizable ‘injury in fact’ to the corporation. Any harm incurred if the corporation failed to comply with the law, and if the corporation incurred a fine for such failure, is both too attenuated and too speculative to satisfy Article III standing requirements.”

The Secretary also argued that even if the plaintiff had standing, the case would fail as unripe, and may be moot; the plaintiff could not show that the company failed to comply with the statute or suffered a fine because, in fact, the company was in compliance. Without standing or a ripe claim, the Secretary contended, there was no federal jurisdiction.

The Court appears to have been persuaded by the Secretary’s argument. In its opinion, the Court first took judicial notice of information, including the company’s Form 8-K, showing that, on December 12, 2019 (after the filing of the complaint but before the end of 2019), the company’s shareholders elected a woman to the board of directors.  In that regard, the Court observed that whether the company will be fined for not having a woman on its board does affect the issue of standing.

Next, the Court took on the issue of the plaintiff’s standing. According to the Court, standing consists of both the constitutional requirements of Article III as well as a nonconstitutional prudential consideration.”  To establish standing under Article III, a plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” To show that he suffered an injury in fact, the plaintiff must demonstrate that he suffered a “concrete and particularized” injury that affected him “in a personal and individual way.” The injury must also be actual, not hypothetical.  From a prudential perspective, “the plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.”  In particular, the Court noted, “for a shareholder to redress an injury to a corporation, the shareholder must have ‘been injured directly and independently from the corporation.’”

The Court found that none of the provisions of SB 826 affected the plaintiff’s 14th amendment rights to an extent sufficient to establish standing under Article III. The plaintiff had argued that the statute was compelling him, as a shareholder, to vote in a way that perpetuated sex-based discrimination and, therefore, that he had standing to challenge the requirement. However, the Court contended, the plaintiff’s argument “misse[d] the mark” and “ignored and/or distorted the plain language of SB 826.”  Rather, SB 826 “places a requirement and a possible penalty on publicly held corporations, but Plaintiff is not a publicly held corporation. He is a shareholder. And that is a distinction with a difference.”  Under SB 826, neither the requirement nor the penalty is imposed on the plaintiff, the Court maintained.

In addition, the Court reasoned, the plaintiff is not being forced to vote for any particular director: “notwithstanding SB 826, Plaintiff, as a shareholder, can vote in shareholder elections as he pleases. If, at future shareholder meetings, Plaintiff prefers a male board member nominee, there is nothing in SB 826 preventing him from casting a vote in favor of that nominee.” The plaintiff was not affected in any “personal or individual way.” Nor was the injury more than hypothetical.  The plaintiff had alleged that the company would be fined because it did not have a woman on its board; now, however, the company did have a woman on the board and would not be fined, at least for the foreseeable future.  As a result, even if there were an injury to the plaintiff, it was only a hypothetical one.

For the same reasons, the Court held that the plaintiff did not have prudential standing. Only the company faced fines under SB 826; the impact on the plaintiff was “merely incidental.”  Shareholders can have standing if their voting rights have “legitimately been impaired,” for example, when they have been denied the right to vote on certain matters altogether, but, as discussed above, the Court did not find that to be the case here. Because the Court held that the plaintiff lacked standing, the Court did not address whether the plaintiff had otherwise adequately stated a claim. 

Accordingly, the Court dismissed the complaint without prejudice.  Have we heard the end of this case?  Only time will tell.

Posted by Cydney Posner