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California Appeals Court Reinstates Injunctions Against California Board Diversity Laws – Directors and Officers

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You may recall that, earlier this year, two Los Angeles Superior
Courts struck down as unconstitutional two California laws
mandating that boards of public companies achieve specified levels
of board diversity and enjoined implementation and enforcement of
the legislation. Those injunctions, however, were temporarily
lifted as the state appealed. Now, the appeals court has vacated
those temporary stays. What does it mean for the diversity
legislation?

The first Crest v. Padilla was filed in 2019 by three
California taxpayers seeking to prevent implementation and
enforcement of SB 826, the board gender diversity law. Framed as a
“taxpayer suit,” the litigation sought a judgment
declaring the expenditure of taxpayer funds to enforce or implement
SB 826 to be illegal and an injunction preventing the California
Secretary of State from expending taxpayer funds for those
purposes, alleging that the law’s mandate was an
unconstitutional gender-based quota and violated the Equal
Protection Provisions of the California Constitution. After a bench
trial, the court agreed with the plaintiffs and enjoined
implementation and enforcement of the statute. (See this PubCo post.) That verdict followed
summary judgment in favor of the same plaintiffs in the second
Crest v. Padilla challenging AB 979, California’s
board diversity statute regarding “underrepresented
communities,” which was patterned after the board gender
diversity statute. The court in that case concluded that the
statute violated the equal protection clause of the California
Constitution on its face because, in the court’s view, it
treated similarly situated individuals differently based on suspect
racial and other categories that were not justified by a compelling
interest, nor was the statute narrowly tailored to address the
interests identified. According to the court, the plaintiffs were
entitled to a “judgment declaring as much and an injunction
preventing the expenditure of taxpayer funds on implementation of
the measure.” (See this PubCo post.)

SideBar

SB 826 required that, by December 31, 2021, all public companies
listed on a major exchange and headquartered in California, no
matter where they were incorporated
, include at least two
women on their boards if the corporation had five directors, and
three women directors if the corporation had six or more directors.
A minimum of one woman director was required if the board had four
or fewer directors. The statute also required that the office of
the California Secretary of State post on its website reports on
the status of compliance with the law. To provide those reports,
the Secretary sought to collect pertinent data from subject
companies. Under the statute, the Secretary could impose fines for
violations, ranging from $100,000 to $300,000 per violation. No
fines for violations or regulations regarding fines had been
proposed or adopted. (See this PubCo post.)

AB 979, California’s board diversity statute for
“underrepresented communities,” patterned after the board
gender diversity statute, was signed into law in 2020. That law
required boards of public companies, including foreign corporations
with principal executive offices located in California, to have a
minimum of one director from an underrepresented community by the
end of 2021. No later than the close of 2022, a corporation with
more than four but fewer than nine directors was required to have a
minimum of two directors from underrepresented communities, and a
corporation with nine or more directors was required to have a
minimum of three directors from underrepresented communities. A
director from an “underrepresented community” means a
director who self-identifies as Black, African American, Hispanic,
Latino, Asian, Pacific Islander, Native American, Native Hawaiian,
Alaska Native, gay, lesbian, bisexual or transgender.

A corporation could increase the number of directors on its
board to comply with these laws. In both cases, the laws were
expected to lead companies to look outside their traditional
channels to find new diverse directors. (See this PubCo post.)

Those cases are being appealed by the State, and, in both cases,
the California Secretary of State petitioned for a writ of
supersedeas seeking stays, pending appeal, of the enforcement of
the permanent injunctions imposed by the lower courts. (See this PubCo post.) In the meantime, the appeals
courthad temporarily lifted the permanent injunctions, to
the extent those injunctions required the State to modify its
procedures for or enjoin collecting and reporting data otherwise
required under the applicable statutes, pending further order of
the appeals court. (See the SideBar in this PubCo post.)

At the end of last week, the California appeals court denied the
State’s petitions for writ of supersedeas in these cases and
vacated the temporary stays-meaning that the injunctions
against implementation and enforcement of these two statutes are
back in place.
Do these Orders suggest that the appeals are
unlikely to succeed on the merits? Some reading the tea leaves
would contend that they do. Former California state senator,
Hannah-Beth Jackson, author of SB 826, the board gender diversity
legislation, told me that, although the court’s Order was a
summary denial, providing no guidance as to its reasoning, she
believes the Order was based largely on the issue of standing
argued in the writ and not on the larger, more substantive issues
that will be addressed in the appeal, which she believes will be
winning arguments. Time will tell.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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