On June 21, 2021, a three-judge panel of the Ninth Circuit Court of Appeal, in Creighton Meland v. Shirley N. Weber, Secretary of State of California (No. 20-15762), reversed the district court’s dismissal for lack of standing of a lawsuit brought by a shareholder challenging the constitutionality of California’s gender quota law found in Section 301.3 of the California Corporations Code.
Section 301.3 went into effect on January 1, 2019, requiring publicly-held corporations–those with outstanding shares listed on a major United States stock exchange–that are incorporated in California or that have their principal executive offices here, to have at least one female director on their board by December 31, 2019. No later than December 31, 2021, these corporations must have at least one female director if their number of directors is four or fewer, at least two female directors if their number of directors is five, and at least three female directors if their number of directors is six or more.
Starting January 1, 2019, publicly traded corporations and publicly traded foreign corporations (defined in Sections 1502.1 & 2117.1, respectively, of the California Corporations Code) have been required to disclose on the Corporate Disclosure Statement (Form SI-PT) filed with the Secretary of State whether the corporation’s Form 10-K lists a California principal executive address, and, if so, whether it has at least one female director on its current board of directors.
The failure to timely file board member information with the Secretary of State will result in a fine of $100,000. In addition, a first violation in failing to meet the quotas established by the law will result in a fine of $100,000; each violation thereafter will result in a fine of $300,000.
On November 13, 2019, plaintiff, an Illinois citizen who was a shareholder of OSI Systems, Inc., a public company incorporated in Delaware and headquartered in California that had no female directors, brought suit in the United States District Court in the Eastern District challenging the law and seeking (i) a declaratory judgment that the law violates the Equal Protection Clause of the 14th amendment to the U.S. Constitution, and (ii) a permanent injunction to halt California’s Secretary of State from enforcing or taking further action to enforce the law.
The plaintiff alleged that the statute violates the Equal Protection Clause by imposing a sex-based classification/“rigid and arbitrary quota” that is not closely tailored to any important government interest and that impairs the plaintiff’s right to vote for directors of his choice “free from the threat that the corporation will be fined if he votes without regard to sex.” Further, the plaintiff asserts that shareholders will be forced to perpetuate sex-based discrimination by relying on “improper gender stereotypes, such as the belief that women board members bring a particular ‘working style’ which will impact corporate governance. Reliance on stereotypes about the capabilities or worldviews of women is illegitimate and does not further an important government interest.”
At its December 2019 annual meeting of shareholders, OSI shareholders elected a female director; thereafter, the State of California moved to dismiss the case for lack of standing. The district court granted the motion, finding that (i) the law’s reporting requirements and penalties fell on corporations, not its shareholders, and thus plaintiff had not suffered an injury in fact; (ii) the law did not prevent Meland from voting for a male director; and (iii) even if he had established an individualized injury, his injury was neither actual nor imminent because OSI had complied with the law.
In reversing the district court, the court of appeal held that the plaintiff had “plausibly alleged” that because the gender quota law “requires or encourages him to discriminate based on sex, Meland has adequately alleged an injury in fact…and thus has Article III standing to challenge [the gender quota law]. Meland’s alleged injury is also distinct from any injury to OSI, and he can bring his own Fourteenth Amendment challenge… Finally, Meland’s injury is ongoing and neither speculative or hypothetical, and the district court can grant meaningful relief. This case is therefore ripe and not moot.” In finding that the law requires or encourages plaintiff to discriminate based on sex, the court noted that shareholders elect directors and thus, considering the purpose of the law and its’ practical effect, shareholders have been sufficiently injured by the law to confer standing.
The Meland case is not the only lawsuit challenging the law. Another suit, brought in August 2019 in the Superior Court of Los Angeles County, Robin Crest, et al. v. Alex Padilla (LASC Case No. 19STCV27561),noted that the State Assembly Appropriations Committee indicated that there will be ongoing annual General Fund costs of approximately $500,000 for the Secretary of State to adopt regulations, investigate claims and enforce violations of the law’s provisions. The plaintiffs allege that the expenditure of taxpayer funds or taxpayer-financed resources on the statute violates the California Constitution, in that SB 826 is a quota system for female representation that uses express gender classifications, and is thus immediately suspect, presumptively invalid and triggers strict scrutiny judicial review, which, the plaintiffs assert, the legislation won’t survive because the Secretary of State can’t make the difficult showings that it is justified by a compelling governmental interest and has been narrowly tailored to serve that interest.
The Secretary of State filed a demurrer to the suit, asserting that the plaintiffs do not have standing and that the action is not ripe in that “it is ‘sheer guesswork’ to conclude that the Secretary of State will undertake regulations to enforce SB 826, that the Secretary of State will impose fines pursuant to SB 826, or that any corporation would even fail to be in compliance with the statute.” The judge rejected the demurrer and found that the plaintiffs had standing. A trial is scheduled for later this year.
This e-Bulletin was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP. Mr. Ross is a member and past co-chair of the Corporations Committee of the Business Law Section of the California Lawyers Association.