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On October 19, a federal district court judge held a hearing on a motion for a preliminary injunction in Meland v. Weber, a case challenging SB 826, California’s board gender diversity statute, on the basis that it is unconstitutional under the equal protection provisions of the 14th Amendment. The judge had previously dismissed the case on the basis of lack of standing, but was reversed by the 9th Circuit.  What did the hearing reveal?

SideBar

As you may recall, 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 minimum numbers 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 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. So far, the Secretary has neither adopted regulations regarding fines or imposed fines for violations.

Even proponents of the California law recognized the possibility of “equal protection” claims and other legal challenges—when then-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.

Case history. In Meland v. Padilla, a shareholder of a publicly traded company that is incorporated in Delaware and headquartered in California filed a complaint seeking a declaratory judgment that SB 826 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 district court dismissed that legal challenge on the basis of lack of standing, finding 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. While the plaintiff had argued that he had standing because the statute was compelling him, as a shareholder, to vote in a way that perpetuated sex-based discrimination, the district court concluded that 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.” In addition, the district 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, the district court also concluded, was not affected in any “personal or individual way.”

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.” The panel observed, “we have long held that ‘[a] person required by the government to discriminate by ethnicity or sex against others has standing to challenge the validity of the requirement, even though the government does not discriminate against him.’” Accordingly, the court concluded, if the plaintiff has plausibly alleged that SB 826 “requires or encourages” him to discriminate on the basis of sex, “then he has suffered a concrete personal injury sufficient to confer Article III standing.” (For a more detailed rundown of the history of this case, see this PubCo post and this PubCo post.) 

Shortly after the 9th Circuit decision, Meland moved for a preliminary injunction to prevent the California Secretary of State from enforcing the statute while the case is pending. On October 19, there was a hearing in the district court  on the plaintiff’s motion.

At the hearing. Reuters is reporting that, during the hearing, the federal district court judge indicated that he is unlikely to grant the preliminary injunction. According to the article, while the judge made clear that he is still considering “Meland’s argument that the 2018 law is unconstitutional because it pressures shareholders to vote for women directors,” he said “that Meland has not shown the lawsuit is likely to succeed, meaning he will likely not block the California Secretary of State from enforcing the statute while the case is pending.” In addition, the judge asked why it was “in the public interest to allow an out-of-state shareholder who holds 65 shares in an 18-million-share company to stop a law that no corporation objects to, that no corporation is challenging, and is working?” Counsel for Meland reportedly responded that “while the law may have increased representation, it has led to the patronization of female board candidates.”

SideBar

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 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 was originally set for trial on October 25. However, on the court’s own motion, the jury trial estimated to last between six and seven days previously scheduled for October 25 was “trailed” to December 1. (See this PubCo post.)

The same three plaintiffs in that case 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 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

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