Monday, June 21, 2021: Appeals Court Holds Shareholders Have Standing to Challenge California Law Requiring Women on Public Company Boards of Directors
In a 3-0 decision, the Ninth Circuit Court of Appeals held in Meland v. Weber, Case No. 2:19-cv-02288-JAM-AC, that individual shareholders of a public company have standing under Article III of the U.S. Constitution to pursue claims challenging California SB826, California’s law requiring female representation in corporate boardrooms.
The Court determined that because individual shareholders vote on selection of individuals to serve on the company’s Board of Directors, shareholders could plausibly allege that SB826 requires or encourages shareholders to discriminate based on sex, and such allegations would establish an adequate pleading of an injury in fact that supports the individual shareholder’s own Fourteenth Amendment challenge to the law (“Therefore, each shareholder would understand that a failure to vote for a female [director] would contribute to the risk of putting the corporation in violation of state law and exposing it to sanctions. At a minimum, therefore, SB826 would encourage a reasonable shareholder to vote in a way that would support corporate compliance with legal requirements”).
SB826, enacted in 2018, added sections to the California Corporations Code requiring female representation on the Board of Directors of any publicly held domestic or foreign corporation whose principal executive offices are located in California. The law required that such public corporations have at least one female director on its Board by December 31, 2019. The law required even greater female representation requirements by December 31, 2021, requiring that public corporations with six or more directors must have a minimum of three female directors; public corporations with five directors must have a minimum of two female directors; and public corporations with four or fewer directors need only satisfy the one female director minimum. Furthermore, public corporations failing to file board member information with the California Secretary of State or failing to meet the female threshold requirements could be subject to a monetary fine of $100,000 for the first violation, and $300,000 for any subsequent violation.
It is important that the Ninth Circuit did not rule on the merits of SB826 and whether such law is constitutional. Rather, the Ninth Circuit merely remanded the case to the U.S. District Court to permit the matter to proceed in litigation. As such, SB826 has not been enjoined, and publicly held corporations whose principal executive offices are in California should continue to comply with the female diversity requirements set forth in SB826.
It is an open question whether the law will survive the now reinstated lawsuit Plaintiff Meland has brought. Note: the U.S. District Court had previously dismissed Meland’s suit, finding he did not have “standing” to sue.
The Ninth Circuit’s ruling also opens the door to the possibility that individual shareholders may ALSO bring suit to challenge a companion statute introduced in the California legislature as SB979. California Governor Gavin Newsom signed that bill into law on September 30, 2020. It requires publicly held domestic or foreign corporations with principal executive offices in California to have at least one director from an “underrepresented” community on its Board of Directors. SB979 is a sister Act to the female representation law (SB826, the lawsuit at-issue in the Ninth Circuit) designed to force an increase in minority representation on corporate Boards of Directors.
Regardless of the constitutionality of the provisions, it is clear corporations recognize the importance of achieving diversity in their boardroom independent of state-mandated requirements. We previously reported on the extensive number of studies evidencing the benefits of diversity including higher returns on equity, lower debt-to-equity ratios, higher average net income growth, better business decision-making, and the likelihood of out-earning industry peers lacking diversity. Thus, private employers motivated to embrace diversity in the workplace should ensure they “do the right thing the legal way” regardless of the outcome of the challenge to California’s forced Board diversification laws.
This means adopting broadened corporate outreach efforts that courts have generally permitted (as efforts to expand the applicant pool do not constitute an “adverse action” against other races or genders). Also, when hiring based on race and/or sex, this means ensuring the company’s action is remedial in nature to address a “manifest imbalance” on a temporary basis that does not “trammel” the rights of the other races and/or genders (per United States Steelworkers of America v. Weber, 443 U.S. 193 (1979)), or to address a company policy or practice for which there is a “strong basis in evidence” it was unlawful and that the company wishes to self-correct and repair (per Ricci v. DeStefano, 557 U.S. 557 (2009)).
A special thank you to Jay J. Wang of Fox, Wang, & Morgan P.C. for his contribution on this story.