On May 13, the Superior Court of California, County of Los Angeles, issued a verdict following a bench trial that effectively struck down SB 826, a California statute requiring the boards of public corporations based in the state to include a minimum number of female directors (as previously discussed here and here). See Crest v. Padilla, No. 19STCV27561 (Cal. Sup. Ct., May 13, 2022). The court determined that the statute violated the equal protection clause of the California Constitution. The ruling comes on the heels of the April 1 ruling by a different Los Angeles County Superior Court judge in a case brought by the same plaintiffs, in which the court found AB 979 unconstitutional (as previously discussed here). AB 979 imposed similar minimum board requirements for directors from underrepresented communities.
Other legal challenges are still pending in state and federal court, and appeals of these Superior Court decisions may follow. But regardless of the ultimate outcomes of these cases, board diversity will remain a high priority for many companies and stakeholders.
The Court’s Decision
As a threshold matter, the court found that “plaintiffs are taxpayers and have standing [under California law] for purposes of challenging a statutory scheme enacted by Legislature for application throughout the state.” The court also held that the action was ripe for adjudication, although there had been no effort yet by the state to enforce it.
The court then analyzed plaintiffs’ claim that SB 826 violates the equal protection clause of the California Constitution. The court first held that by enacting SB 826, “the state has adopted a classification that affects two or more ‘similarly situated’ groups in an unequal manner,” giving rise to a strict scrutiny analysis. Under the strict scrutiny rubric, the burden shifts to the governmental defendant to show (1) a compelling state interest, (2) that the challenged law is necessary to further that interest and (3) that the law is narrowly tailored. The court held that defendant had failed to make an adequate showing with respect to any of these elements.
With respect to a compelling state interest, the court rejected defendant’s argument that SB 826 furthered the compelling state interests of (1) eliminating and remedying discrimination in the director selection process, (2) boosting California’s economy, (3) improving opportunities for women in the workplace, and (4) protecting California’s taxpayers, public employees, pensions and retirees. The court determined that the legislature’s true goal in enacting SB 826 “was to achieve gender equity or parity,” as opposed to remedying specific instances of discrimination.
The court further held that even if the purpose of SB 826 was to further a compelling state interest, defendant had failed to meet its burden that SB 826 was necessary to further such an interest or that SB 826 was narrowly tailored. The court ruled that defendant had not presented sufficient evidence showing that SB 826 was expected to have a meaningful positive impact on California’s economy, or that it was necessary to improve opportunities for women in the workplace or to protect California’s taxpayers. Moreover, the court ruled that defendant failed to show that the law was narrowly tailored, because “[d]efendant failed to show the Legislature considered gender-neutral alternatives to remedy specific purposeful or intentional, unlawful discrimination against women” arising from the selection of board members by California companies.
As we have repeatedly noted, notwithstanding the present decision and the prior Superior Court decision invalidating AB 979, public companies, believing in the benefits of board diversity and cognizant of various stakeholder interests, continue to have ample incentives to pursue board diversity as an essential governance goal.