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By: Rebecca Smith
Nearly one-quarter of California-headquartered publicly held domestic or foreign corporations have no female directors. No later than the close of the 2019 calendar year, those companies will need to add at least one. Senate Bill 826 (SB 826) signed by Governor Brown on September 30, 2018 has mandated this change. And, if the board of directors of a corporation is larger than four board members, the required number of women on the board increases. If the number of directors is six or more, the corporation must have a minimum of three directors, if the number of directors is five, the corporation shall have a minimum of two directors. Corporations will be allowed until the close of the 2021 calendar year to add the additional female directors beyond one.
There is a strong likelihood that this new law will be challenged in the courts. The first argument being made is that the law will displace an existing member of the board of directors solely on the basis of gender. The new law has attempted to address this by indicating: “A corporation may increase the number of directors on its board to comply with this section.” The argument being made is that the law focuses too narrowly on gender instead of other aspects of diversity, including race and sexual orientation. The government may have to prove not only that there is disparity in board representation among men and women, but also that such a divide is a sufficient reason to create a special law for women.
The other issue in the forefront is to which companies the law will apply. While the statute provides that the companies will be determined by the location of the principal executive offices according to the corporation’s SEC 10-K form, challenges are being made that the law should not apply to businesses headquartered in California, but incorporated elsewhere. The new Section 2115.5 of the Corporations Code has attempted to address this issue by indicating that the new requirements shall apply to a foreign corporation that is a publicly held corporation to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated. That being said, the “internal affairs doctrine” may provide a basis for the challenge. The internal affairs doctrine, a choice of law rule in corporation law, provides that the internal affairs of a corporation will be governed by the corporate statutes and case law of the state in which the corporation is incorporated.
So what happens if a company does not comply: A fine of $100,000 for a first violation, and a fine of $300,000 for a second or subsequent violation. For purposes of imposing the fine, each director seat required by the section to be held by a female, which is not held by a female during at least a portion of the calendar year is considered a violation. For the time being, California companies with their principal executive offices in California should start to think about how to comply with the law by the end of 2019 and stay tuned for any changes.
If you have any questions or would like more information, please contact Rebecca Smith at [email protected].