California Corporations: Diversity on Boards of Directors of Publicly-Held Corporations

California Corporations:  Diversity on Boards of Directors of Publicly-Held Corporations

The California Secretary of State just lost in its effort to enforce California’s law requiring public corporations with principal executive offices in California to include someone from ‘an underrepresented community’ (“Underrepresented community” would be someone that self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, gay, lesbian, bisexual or transgender ) on their board of directors in the case of Crest et al. v. Padilla (Crest II), C.A. No. 20STCV37513 Cal. Super. Ct..  The new law effective January 1, 2021 – Section 301.4 of the California Corporations Code – requires publicly held corporations, to have at least one director (or more, if there are more than 4 directors total) from an underrepresented community on the board by December 31, 2021.  A public company’s failure to timely file board member information with the Secretary of State could result in a fine of $100,000 and subsequent fines of $300,000 for each violation thereafter.

In this state court ruling, the judge agreed that the public interest entities that brought the lawsuit could challenge the law and that their argument that the law violates the equal protection clause of the California Constitution had merit.  The law “treats similarly-situated individuals differently based on race, sexual orientation, and gender identity, because that use of suspect categories is not justified by any compelling interest, and because the statute is not narrowly tailored to serve the interests offered…”  While the judge acknowledged that boards without diversity could be a problem, he concluded that the Legislature could not just require diversity on boards without first trying to create neutral conditions under which qualified individuals from any group may succeed.

But public companies are not out of the woods yet.  The California Secretary of State has not yet announced whether this state court ruling will be appealed.  Further, Nasdaq, the SEC, proxy advisory firms, shareholders, customers, employees and even the general public expect and may have requirements for board diversity in public companies or companies that do business with public entities.

We will keep you updated.  Please contact Dawn at: dcoulson@eppscoulson.com if you have questions.

Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.  It is likely considered advertising.  Epps & Coulson, LLP encourages you to call to discuss these matters as they apply to you or your business.

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