California Superior Court Strikes Down Director Diversity Mandate
M&A and Corporate Governance Litigation
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  • California Superior Court Strikes Down Director Diversity Mandate

    On May 13, 2022, Judge Maureen Duffy Lewis of the Superior Court of the State of California for Los Angeles County entered judgement in favor of three taxpayers bringing state constitutional challenges to S.B. 826, a bill for a California law that required the boards of California corporations to include women.  Crest v. Padilla, Case No. 19 STCV 27561 (Cal. Super. Ct. L.A. Cnty. May 13, 2022).  The law mandated that, by December 31, 2021, publicly held companies incorporated in California must appoint at least one woman on boards of four or fewer directors, two women on boards of five directors, and three women on boards of six or more directors.  The Court agreed with plaintiffs that the law violated the California constitution’s Equal Protection Clause.

    The Court first determined that plaintiffs had standing to challenge the law because the expenditure of taxpayer funds was necessary to enforce its provisions, and plaintiffs were California taxpayers.  The Court next concluded that the law constituted a gender-based quota and the State failed to prove that the law served compelling state interests by (1) eliminating or remedying discrimination in the director selection process; (2) benefiting the economy through increased gender diversity on boards; or (3) benefiting and protecting taxpayers, public employees, and retirees through improved gender diversity among directors.

    The Court concluded that although there could be a correlation between gender diversity on boards and economic performance, the empirical studies and expert testimony presented was unreliable.  And while the Court acknowledged statistics cited by the legislature showing disparities between the number of women and men in director positions, it found that the State was unable to show evidence of actual, unlawful discrimination against specific women by any corporation subject to S.B. 826.  The Court furthermore found that the State’s witnesses attributed differences in the representation of men and women on boards not to actual discrimination but other reasons such as, “the lack of open board seats, women’s networking issues, board propensity to select persons that they already know, and boards’ preference for choosing CEOs to fill open board positions.”  Finally, the Court concluded that the State did not prove that the law was narrowly tailored in light of available gender-neutral alternatives, such as amending existing anti-discrimination laws or enacting a new anti-discrimination law focusing on the board selection process.

    The decision in this case follows the grant of summary judgment by Judge Terry A. Green of the Superior Court of California for Los Angeles County in April 2022 for the same plaintiffs in another case challenging the constitutionality of A.B. 979, which required California corporations to meet certain minimum threshold numbers for directors from “underrepresented communities.”  Crest v. Padilla, Case No. 20 STCV 37513 (Cal. Super. Ct. L.A. Cnty. Apr. 1, 2022).

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