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California court holds that board diversity law violates equal protection

4/13/22

By: John Rubiner

On September 30, 2020, California Governor Gavin Newsom signed into a law a bill (SB 979) that required publicly held companies headquartered in California to include board members from underrepresented communities. The law further required that, by the end of 2021, California-headquartered public companies have at least one director on their boards who is from an underrepresented community, defined as “an individual who selfidentifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who selfidentifies as gay, lesbian, bisexual, or transgender.”  Cal. Corp. Code § 301.4.  In addition to that initial 2021 requirement, the law mandates that the number of directors from underrepresented communities be increased by the end of calendar year 2022, depending on the size of the board. 

On the same day, the governor signed SB 979 into law, three taxpayers, supported by the advocacy group Judicial Watch, filed an action seeking to enjoin the California Secretary of State from using taxpayer funds for the purpose of carrying out the statute. (Crest v. Padilla, LA Super. Ct. Case No. 20STCV37513). In seeking summary judgment, plaintiffs argued that Section 301.4 used suspect classifications based on race, ethnicity, sexual preference and transgender status and violated the equal protection clause of the California Constitution. In addition, the plaintiffs argued the law violated Article I, Section 31(a) of the California Constitution, which prohibits the State of California from discriminating against, or granting preferential treatment to, individuals or groups based on race, color, ethnicity, or national origin in the operation of public contracting. 

In ruling on cross-motions for summary judgment, on April 1, 2022, Los Angeles County Superior Court Judge Terry Green found that the statute violates the equal protection clause of the California Constitution. While Judge Green did not set forth all his reasoning, he noted that the groups identified in the legislation seemed arbitrary and did not include, for example, religious minorities (while including other categories such as race, sexual preference and transgender status). 

There still is a pending action against the Secretary of State seeking to invalidate another statute (SB 826, Corp. Code § 301.3) which requires inclusion of women on corporate boards. See Crest v. Padilla, LA Super. Ct. Case No. 19STCV27561.) 

While California’s legislatively imposed diversity requirement has now been deemed unconstitutional, it should be noted that shareholder groups and institutional investors continue to push diversity on corporate boards. Similarly, the SEC recently approved a Nasdaq rule requiring listed companies to disclose the ethnic and gender composition of their board and to include at least two “diverse” directors or, alternatively, explain why it does not have that level of diversity. As a result, companies should continue to expect to see different avenues utilized to put pressure on companies to diversify their board of directors.  

For more information, please contact John K. Rubiner, jrubiner@fmglaw.com, or your FMG attorney.