Assembly Bill 979 (the Bill), signed into law by Gov. Newsom on September 30, 2020, required all public companies with a principal executive office in California to have at least one director from an underrepresented community on their board of directors by December 31, 2021, and, depending on the total number of directors on the company’s board, up to three directors from underrepresented communities by the end of 2022.
The Bill defined “director from an underrepresented community” as a director who self-identifies as Black, African American, Asian, Hispanic or Latino, Pacific Islander, Native American, Alaskan Native, Native Hawaiian, gay, lesbian, transgender, or bisexual.
Failure to comply with the Bill subjected companies to up to $100,000 for the first violation and $300,000 for subsequent violations.
The lawsuit, filed by Judicial Watch, a conservative legal advocacy group (Robin Crest, et al. v. Alex Padilla, in his official capacity as Secretary of State of the State of California (No. 20ST-CV-37513)), claimed the California Secretary of State violated California’s constitutional equal protection clause by expending taxpayers’ money and public officials’ time and resources to engage in discrimination based on classifications of race, ethnicity, sexual preference and other status.
The California Constitution requires equal treatment and application of laws to all persons who are similarly situated. If a law discriminates based on race, ethnicity, sexual preference or other classifications, the law is subject to a showing by the government that the law is necessary for a compelling governmental interest and that the class distinctions are necessary to accomplish the law’s purpose. Although the Bill was aimed at promoting diversity and opportunity, by specifying certain classifications of persons to be appointed to board seats, the law necessarily required discrimination based on these classes. The court found the Bill failed to be narrowly tailored to a compelling governmental interest and the class distinction violated California’s constitution. The court granted an injunction striking down the Bill.
Implications: Public companies with principal offices in California are no longer required to appoint directors from underrepresented communities to comply with the Bill. Whether the state will appeal the ruling is yet to be known. Regardless of the court’s decision, public companies may still be subject to Nasdaq’s board diversity rules and similar appointment of directors or disclosure requirements promulgated by the Securities and Exchange Commission.