Business Law

Spotlight on Diversity: Corporations Committee Issues eBulletin: Another Challenge To SB 826 – California’s Gender Quota Law for Boards of Directors

On November 13, 2019, another lawsuit was brought in California (in this case in the United States District Court in the Eastern District) challenging California’s gender quota law for boards of directors (SB 826). This lawsuit seeks (i) a declaratory judgment that SB 826 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 (Alex Padilla) from enforcing or taking further action to enforce the law. SB 826 is a California law that 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.

The new law requires the Secretary of State to publish an initial report no later than July 1, 2019 (which it has done here), and thereafter to publish annual reports documenting the number of corporations whose principal executive offices are located in California and who have at least one female director.

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 SB 826 will result in a fine of $100,000; each violation thereafter will result in a fine of $300,000.

The lawsuit, Creighton Meland, Jr. v. Alex Padilla, was brought on behalf of an Illinois citizen who is a shareholder of OSI Systems, Inc., a public company incorporated in Delaware and headquartered in California that currently has no female directors. The plaintiff alleges that the statute violates the Equal Protection Clause of the 14th amendment to the U.S. Constitution 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.”

The complaint notes that when Governor Brown signed SB 826 last year, he indicated that there have been “numerous objections to this bill and serious legal concerns that have been raised” and that he didn’t “minimize the potential flaws that indeed may prove fatal to its ultimate implementation.” The complaint also points out that before SB 826 was signed the Judiciary Committee of the California State Assembly wrote that the law “would likely be challenged on equal protection grounds and the means that the bill uses, which is essentially a quota, could be difficult to defend.”

The lawsuit was brought on behalf of the plaintiff by the Pacific Legal Foundation, described on its website as “a nonprofit legal organization that defends Americans’ liberties when threatened by government overreach and abuse.”
An earlier lawsuit, brought in August 2019 in the Superior Court of Los Angeles County, Robin Crest, et al. v. Alex Padilla (LASC Case No. 19STCV27561), notes 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.

Last month, 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.”

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.

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