Earlier this year, the trial of one of the challenges to SB 826, California's female director quota law, concluded but Los Angeles Superior Court Judge Maureen Duffy-Lewis has yet to release her decision. Crest v. Weber, Cal. Super. Ct. Case No. 19STCV27561. Meanwhile, another challenge to SB 826 is pending in federal court. In December, U.S. District Court Judge denied the plaintiff's motion for for a preliminary injunction and plaintiff has appealed to the Ninth Circuit Court of Appeals, Meland v. Weber, Ninth Cir. Case No. 22-15149.
Last week 17 law professors submitted an amicus brief in support of the SB 826 in which they make the remarkable, albeit incorrect, claim that "Ultimately, the type of board members to nominate remains a board decision". While it is true that boards or board committees typically present a slate of nominees, Delaware law recognizes a stockholder's right to vote includes the right to nominate. Thus, while a Delaware corporation may adopt bylaws requiring stockholders to provide advance notice of nominees, the bylaws must ""must, on [their] face and in the particular circumstances, afford shareholders a fair opportunity to nominate candidates." Hubbard v. Hollywood Park Realty Enterprises, Inc., 1991 Del. Ch. LEXIS 9, *35. This is an important point because if SB 826 is upheld, it will receive a direct injury that is separate and distinct from the corporation.
The law professor's brief undercuts its own argument that the plaintiff's claim is derivative, rather than direct, by emphasizing the authority of the board to make nominations. This means that it is the board, and not the corporation, that is injured by the quota constraints imposed by SB 826.
Corporate boards or board committees routinely make nominations. But does this mean that board's have the inherent right to make nominations or could the bylaws reserve that right to the stockholders exclusively? The Delaware Supreme Court suggested that the board has such a right in Stroud v. Grace, 606 A. 2d 75 (Del. 1992). However, it did not cite the source of this right.
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