Judicial Watch, a conservative activist group, has filed the first lawsuit challenging the constitutionality of Senate Bill 826 (SB 826), California’s mandatory board diversity law requiring women on public company boards of directors. The lawsuit was filed against the California Secretary of State on behalf of three California taxpayers on August 6, 2019, in the Los Angeles Superior Court and seeks a judgment that any expenditure of taxpayer funds and taxpayer-financed resources to enforce or carry out the provisions of SB 826 is illegal.
Plaintiffs argue that the gender classifications used in SB 826 can only be justified by a compelling government interest, which the Secretary of State has failed to establish. The lawsuit cites then-Governor Jerry Brown’s words in his signing message acknowledging that SB 826 has “potential flaws that indeed may prove fatal to its ultimate implementation” and that “serious legal concerns have been raised” to the legislation. The complaint is available here.
SB 826 was signed into law on September 30, 2018, by then-Governor Brown and added Section 301.3 to the California Corporations Code, requiring each publicly held corporation (whether domestic or foreign) having its principal executive offices in the state of California to have at least one female director on its board of directors by December 31, 2019. The law’s requirements become more stringent on December 31, 2021, when each California-headquartered publicly held corporation must have at least (i) three female directors on its board of directors (if it has six or more directors), (ii) two female directors on its board of directors (if it has five directors), and (iii) one female director on its board of directors (if its board size is less than five directors). A corporation that does not comply by the specified compliance date will be subject to a $100,000 fine for the first violation and a $300,000 fine for a violation in any subsequent year.
As highlighted in our previous alert on SB 826, it was expected that SB 826 would face potential challenges. Even before it was passed, opponents of SB 826 argued that it violates the equal protection clause of both the US Constitution and the California Constitution by creating a quota mandate based on an express gender classification. Opponents also argued that SB 826 violates the internal affairs doctrine and is unconstitutional under the Commerce Clause of the US Constitution by applying the law to corporations headquartered in California even if incorporated in another state. Now that this first legal challenge to SB 826 has been filed, other lawsuits may soon follow.
Despite the controversial nature of SB 826, some states have followed California’s lead with similar mandates for public companies to include women on their boards. Proposed bills mandating a certain number of women representatives on corporate boards are currently being considered by state legislatures in Michigan, New Jersey, and Washington, while other states, including Illinois, Maryland, and New York, have adopted or proposed amendments to state filing requirements that will collect more data on gender diversity on corporate boards. This is in addition to non-binding resolutions encouraging board diversity that have been passed by certain other states, including Colorado, Massachusetts, and Pennsylvania.
In response to these legislative measures, along with the continuing focus on board diversity from institutional shareholders, proxy advisors, and other governance activists, as of July 2019, all S&P 500 companies have at least one female director on their board of directors and, according to data from Equilar, the number of Russell 3000 companies with all-male boards has decreased from more than 500 at the time of adoption of SB 826 to 376 companies as of the first quarter of 2019. We expect that private-ordering efforts seeking to enhance corporate board diversity will continue regardless of the ultimate outcome of the lawsuit against SB 826. As a result, companies will continue to see increased demand and competition for qualified female directors, and it would be prudent for public companies headquartered in California to continue with their inclusive board refreshment efforts.