On April 1, 2022, the California Superior Court for Los Angeles County issued an order striking down California law requiring public corporations with primary offices in the state to have a minimum number of directors from underrepresented communities. on their boards. The Court found that the law violated the Equal Protection Clause of the California Constitution.
The move follows actions in other parts of the country that restrict diversity efforts, such as Florida’s “Stop Woke Act.”
Governor Gavin Newsom signed Assembly Bill 979 into law on September 30, 2020, creating Section 301.4 of the California Corporations Code. As a reminder, the law required that:
- By the end of 2021, domestic or foreign public companies with primary executive offices in California have at least one director from an underrepresented community on their board.
- By the end of 2022, those companies with nine or more directors have at least three directors from underrepresented communities; five to eight directors have at least two directors from underrepresented communities; four or fewer directors have at least one director from an underrepresented community.
The act also gave the California Secretary of State the power to impose fines on non-compliant companies as well as collect data for reporting on compliance with the law.
This law came two years after (and is modeled after) Senate Bill 826 (enacting California Corporations Code Section 301.3), requiring boards of directors of public corporations headquartered in California to have a minimum number of female directors on the board. This law has also been challenged in court.
The same day Governor Newsom signed the bill into law, three people filed a lawsuit, seeking declaratory relief and an injunction asking that the law be found to be apparently unconstitutional. The lawsuit named the California Secretary of State as a defendant. The individuals filed a lawsuit claiming to be taxpayers on the grounds that the secretary spent taxpayers’ money to collect and disseminate data required under the law.
In its April 1 decision, the court ruled that the law violated the Equal Protection Clause of the California Constitution. The Court distinguished between the “group conditions” the law was intended to affect, versus the “right of individuals to equal treatment” protected by the California Constitution. Specifically, the Court held that “[b]Before the legislature can require members of a group to obtain certain seats on the board of directors, it must first try to create neutral conditions in which persons qualified as any group can succeed. The Court did not specify in its order what “neutral terms” may entail, or whether those terms are different from the current, unregulated status quo.
Part of the secretary’s argument was that people from underrepresented groups weren’t in the same situation as others. The Court again held that the rights guaranteed by the equal protection clause were based on individual rights rather than collective rights. The secretary also argued that the state has a compelling public interest in addressing past discrimination and providing corporations with more diverse boards. The Court did not consider them sufficient, holding that it was not enough for the state to offer a general intention to combat general discrimination, but to identify a specific area in which the discrimination occurred and that “the general interest for a sound business” does not mean constitute a compelling interest for the State.
Although no notice of appeal has yet been filed, the Court’s entry of the order on the motion makes the matter ready for appeal. The Secretary of State has sixty days from the entry of the order to file a notice of appeal. There is no certainty, but this litigation could continue. In the meantime, California corporations should monitor this litigation closely, as rules regarding board composition remain in flux.