Court Surprisingly Strikes Down California’s Corporate Diversity Statute

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Diversity programs are commonly implemented in many aspects of our lives these days. So, it is surprising when a court—no less one based in California—strikes down such a program as unconstitutional. But that is exactly what one court recently did when it struck down A.B. 979, a law requiring publicly traded companies based in California to include members from underrepresented communities on their board.

Overview of A.B., 979

A.B. 979 (codified in California Corporations Code § 301.4) was controversial from the outset. A.B. 979 requires publicly traded companies (e.g., those listed on NYSE) that have their principal executive office in California to have at least one member of an underrepresented community on their board no later than the close of the 2022 calendar year (“underrepresented communities” means persons who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, or LGBTQ). The actual number of underrepresented directors varies by board size but is specified in the law.

To ensure compliance with the law, A.B. 979 authorizes the California Secretary of State to impose (draconian) fines of $100,000.00 who fail to timely comply with the law’s requirements. These penalties are elevated to $300,000.00 for second or subsequent offenses.

A.B. 979 Struck Down

Unsurprisingly, A.B. 979 was challenged in Los Angeles Superior Court (the “Court”) by a coalition of parties alleging that A.B. 979 violated the Equal Protection Clause of the California constitution.

More surprising, the Court agreed with the challenger’s arguments, ruling that the law (among other things) engaged in suspect classifications based on a board member’s race, sexual orientation, or gender identity. As such, the Court enjoined (i.e., struck down) A.B. 979 as unconstitutional.

Next Steps

Without question, we expect that the State of California will appeal the Court’s ruling. Diversity legislation of A.B. 979’s sort is just too important for the State to sit idly by. Meanwhile, the enforcement of A.B. 979 will continue to be stayed pending an appellate court’s intervention.

While A.B. 979’s ultimate fate may be in limbo, the federal government (namely, the SEC) may enact diversity requirements of its own—particularly in light of the socio-political climate prevailing these days.  In the meantime, we advise companies—both public and private—to consider the potential benefits (legal and otherwise) of having an inclusive board, regardless of any legal mandate. Diversity of people often leads to diverse perspectives, and everyone benefits from a new perspective.

Contact us for more information about how this can affect your business by e-mailing us at info@mnklawyers.com.

This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.

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