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.
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