You might remember that the first legal challenge to California’s board gender diversity statute,  Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a “taxpayer suit,” the litigation sought to enjoin Alex Padilla, the then-California Secretary of State (now U.S. Senator), from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, SB 826, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. The court in that case has just denied each side’s motion for summary judgment after concluding that there were triable issues of material fact. The case will now be going to trial, which is currently set for October 25. Stay tuned.

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.

SB 826 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 specified numbers of women on their boards of directors. 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—not too far away—if the corporation has five directors, and to three women directors if the corporation has six or more directors. The statute also requires that the office of the California Secretary of State post on its website reports on the status of compliance with the law. Under the statute, the Secretary may impose fines for violations, ranging from $100,000 to $300,000 per violation.  To date, the Secretary has neither proposed nor adopted regulations regarding fines or imposed fines for violations.

In the litigation, the plaintiffs claim standing as “taxpayers,” under “California’s common law taxpayer standing doctrine and Code of Civil Procedure Section 526a, which grants California taxpayers the right to sue government officials to prevent unlawful expenditures of taxpayer funds and taxpayer-financed resources.” They contend that, in so-called “taxpayer suits,” it is “immaterial that the amount of the expenditure is small or that enjoining the illegal expenditure will permit a savings of tax funds.” Further, they allege, the Assembly Appropriations Committee indicated that SB 826 would require  “ongoing General Fund costs of approximately $500,000 each year for the Secretary of State to develop regulations, investigate claims, and enforce violations of the statute’s provisions and unknown additional costs to produce a required annual report.”

In the complaint, the plaintiffs contend that the law’s requirement for female representation on corporate boards “employs express gender classifications. As a result, SB 826 is immediately suspect and presumptively invalid” under the equal protection provisions of the California Constitution and subject to “strict scrutiny” in the California courts. The complaint requests entry of a judgment declaring any expenditures of taxpayer funds to implement or enforce SB 826 to be illegal and issuance of an injunction permanently prohibiting the Secretary from expending taxpayer funds to enforce or implement the provisions of the legislation.

There are, of course several other ongoing legal challenges to SB 826, as well as to its companion legislation, AB 979, which requires boards of public companies, including foreign corporations with principal executive offices located in California, to include specified numbers of directors from “underrepresented communities.” The same three plaintiffs in the present case have also filed a similar lawsuit challenging AB 979 on essentially the same basis. Like Crest v. Padilla I, the case is framed as a “taxpayer suit” and seeks to enjoin the California Secretary of State from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional  quota and violates the California constitution. (See this PubCo post.)

In Creighton Meland v. Alex Padilla, Secretary of State of California, filed in the federal district court in the Eastern District of California, a 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 was unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute. The plaintiff claims that the statute is a sex-based classification that violates the equal protection provisions of the 14th Amendment by imposing a sex-based quota directly on shareholders and by seeking to force shareholders to perpetuate sex-based discrimination. 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 April 2020, a federal judge dismissed that legal challenge on the basis of lack of standing. In June 2021, a three-judge panel of the 9th Circuit reversed that decision, allowing the case, now called Meland v. Weber, to go forward.  The court held that, because the plaintiff “plausibly alleged that SB 826 requires or encourages him to discriminate on the basis of sex, he has adequately alleged that he has standing to challenge SB 826’s constitutionality.” There is a hearing in the district court currently scheduled in this case for October 19 on the plaintiff’s motion for a preliminary injunction. (See this PubCo post and this PubCo post)

In another case, Alliance for Fair Board Recruitment v. Weber, the plaintiff sought declaratory relief that both of California’s board diversity statutes violate the Equal Protection Clause of the 14th Amendment and the internal affairs doctrine. The case was filed in a California federal district court against the California Secretary of State, Dr. Shirley Weber, and seeks to enjoin Weber from enforcing those statutes. The plaintiff is described as “a Texas non-profit membership association,” with members that include “persons who are seeking employment as corporate directors as well as shareholders of publicly traded companies headquartered in California and therefore subject to SB 826 and AB 979.” According to the complaint, these statutes require all publicly traded corporations headquartered in California to discriminate based on sex and race in selecting their board members. The complaint alleges that “[t]hese laws are unconstitutional and patronizing social engineering. The legal regime they institute relies on and perpetuates invidious racial categories and sex stereotypes that the American legal system has rightly discarded.” In addition, the plaintiff contends that both statutes “trample on the sovereign rights of other states to regulate corporate governance for entities incorporated under their laws. SB 826 and AB 979 apply to all corporations headquartered in California, even if the corporation in question is incorporated under the laws of a different state. This policy is illegal because California lacks jurisdiction to regulate the internal affairs of entities incorporated under the laws of other states.” (See this PubCo post.)  Notably, this same group has filed a slim petition under the Exchange Act in the Fifth Circuit Court of Appeals for review of the SEC’s final order approving the Nasdaq board diversity rule. (See this PubCo post.)

Posted by Cydney Posner