On September 30, 2018, California Governor Jerry Brown signed into law a landmark bill (SB 826) requiring boards of directors of California-based public reporting corporations to have a minimum number of female directors. While a handful of states have previously adopted nonbinding resolutions aimed at increasing female representation on corporate boards, this is the first state or federal law to mandate such representation.
Applies to Publicly Traded Corporations Based in California
The law applies to those corporations (1) whose shares are listed on "a major United States stock exchange," and (2) whose principal executive offices, according to the corporation's SEC 10-K form, are located in California. Notably, the law applies to foreign corporations (e.g., those that are incorporated in a state other than California) as long as they meet the requirements listed above.
Phased-In Mandatory Minimums—One Female by End of 2019; Up to Three by End of 2021
All covered corporations must have a minimum of one female on their boards of directors by no later than December 31, 2019, with the definition of "female" tied to a director's self-identified gender, regardless of designated sex at birth. By December 31, 2021, covered corporations must have a minimum of:
- three female directors, if its number of directors is six or more;
- two female directors, if its number of directors is five; or
- one female director, if its number of directors is four or fewer.
Penalties for Failure to Comply
Corporations that do not comply may be subject to fines. The law authorizes the secretary of state to impose fines of $100,000 for a first violation and $300,000 for a second or subsequent violation, in addition to a $100,000 fine for failure to timely file board member information. Covered corporations will likely be subject to reporting obligations to allow the secretary of state to issue annual, publicly available reports regarding compliance with the law&s provisions and levy fines as necessary. However, as long as a female director has held a seat for "at least a portion of the year," a covered corporation will not be subject to fines.
Direct and Indirect Impact
The passage of the law may have wide-ranging direct and indirect effects. According to a committee report, there are currently 761 publicly traded companies headquartered in California. The law may also accelerate efforts by other states, institutional investors and other companies to increase female board representation—and board diversity more generally.
Possible Constitutional Challenges
It is likely that the law will be challenged in court, as opponents have argued that it violates both Article I of the California Constitution (which prohibits disqualifying a person from employment on the basis of their sex) and the Fourteenth Amendment equal protection clause of the US constitution, which subjects laws involving gender classifications to heightened scrutiny. In addition, because it applies to corporations headquartered in California regardless of where they are incorporated, the law may also be challenged for violating the "internal affairs doctrine," a conflict-of-laws principle that recognizes that the state of incorporation should have the authority to regulate a corporation's internal affairs, such as the composition and election of its board of directors.
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