On May 13, 2022, the Superior Court of the State of California for the County of Los Angeles held in Crest v. Padilla, Case No. 19STCV27561, that California Senate Bill (SB) 826, requiring publicly held corporations with principal executive offices located in California to have a minimum number of women on their boards, violates the Equal Protection Clause of the California Constitution. SB 826 required that covered corporations have a minimum of three female directors for a board with six or more directors, two female directors for a board with five or more directors and one female director for a board with four or fewer directors. The statute provided that the California Secretary of State would have the power to impose substantial fines for its violation.

This decision follows shortly after the decision of the Los Angeles Superior Court in Crest v. Padilla, Case No. 20 STCV 37513, striking down California Corporations Code Section 301.4 which required publicly held companies with principal executive offices in California to have a minimum number of directors from an underrepresented community (defined as individuals self-identifying as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native or gay, lesbian, bisexual or transgender), also citing violation of the Equal Protection Clause of the California Constitution. That law required California corporations with nine or more directors to have a minimum of three directors from underrepresented communities, with five to eight directors to have a minimum of two directors from underrepresented communities and with four or fewer directors to have a minimum of one director from an underrepresented community. That law, too, allowed for the imposition of fines on corporations that failed to comply with the law.¹

In striking down California Corporations Code 301.4, Judge Terry A. Green of the Los Angeles Superior Court held that the law violated the Equal Protection Clause of the California Constitution on its face because it “treated 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” and required “that a certain specific number of board seats be reserved for members of the group on the list,” thereby excluding members of other groups from those seats. Judge Green found that the Secretary of State of California had not identified a compelling interest in the case to justify this classification; that the broader public benefits that would be achieved by the statute were insufficient; and that the statute was not narrowly tailored to serve the interests offered. The court concluded that: “Only in very particular cases should discrimination be remedied by more discrimination … which should only happen after obvious alternative measures have been tried. Sometimes the direct approach should be the last resort, not the first.” In its language, the court was not criticizing the goal of the California legislature in enacting the statute but the specific means it had taken to serve the state’s commitment to equal treatment and opportunity.  

Now, in striking down SB 826, Judge Maureen Duffy-Lewis of the California Superior Court for the County of Los Angeles found that the State of California had not met its burden of proof. Judge Duffy-Lewis found that the law created a quota that “affects two or more ‘similarly situated’ groups in an unequal manner,” thereby shifting the burden to the State to prove that the statute “satisfies strict scrutiny.”  Applying the strict scrutiny test, the court held that the State had in the case at hand failed to show that the legislation was “narrowly tailored” to meet “a compelling state interest.” The court found that the legislature failed to show that it “considered gender-neutral alternatives to remedy… discrimination against women by private-sector corporations in the selection of board members or that gender-neutral alternatives were not available” and “did not consider amending existing anti-discrimination laws or enacting a new anti-discrimination law by focusing on the board selection process before enacting S.B.826…”.  The court found a lack of proof that SB 826’s use of a gender-based classification was actually remedial and “designed as nearly as possible to restore the victims of specific purposeful or intentional, unlawful discrimination to the positions the victims would have occupied in the absence of discrimination.” The court’s language and reasoning signaled that, if asked to rule on a different statute more consistent with the nature of other existing legislation intended to prevent and remedy discrimination, the result might have been different.     

Shortly after the decision enjoining SB 826, the California Secretary of State announced that she had directed the filing of an appeal of the decision. 

Notwithstanding the specific results in these two California cases, public corporations headquartered in California and elsewhere should stay informed of further developments and be aware that the move to diversify corporate boards is at an early stage and will continue. In addition to monitoring legislative developments in California and other states, requirements of regulatory agencies like the Securities and Exchange Commission come into play.

Nasdaq has its own board diversity rule for its listed companies, which the SEC approved last August. However, that rule also is currently facing legal challenges. The Nasdaq requirement, effective in 2023, however, is different from SB826 (and California Corporations Code Section 301.4). Nasdaq adopted a “comply or explain” diversity rule and established a framework for disclosure. Companies listed on Nasdaq (with limited exceptions) have to add certain specified diverse members to their boards or explain why they do not satisfy such diversity objectives. However, if they elect to explain why they do not satisfy the requirement, the rule does not actually mandate that they add diverse board members. Consequently, there is reason to believe that the outcome of challenges to this rule may be different.

While these legal challenges may be a setback to the State of California and other efforts to diversify corporate boards, the interest of the public in diverse boards, investor pressure and proxy advisory firm guidelines calling for increased board diversity mean that this is and will continue to be a developing area of the law.

1. Dentons client alert, “An April Fools Day Surprise: California Court Strikes Down Corporate Board Diversity Law,” April 14, 2022 ↩