March 27, 2023

Volume XIII, Number 86


March 24, 2023

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9th Circuit: Shareholder Is Injured When California Requires Or Encourages Discrimination

In 2018, California enacted SB 826 to impose female director quotas on publicly held domestic or foreign corporation whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California.  At the time, it was widely acknowledged that SB 826 was on shaky constitutional ground.   Following enactment, at least two lawsuits were filed challenging the constitutionality of the law.  One, Crest v. Padilla, was filed inn the Superior Court in Los Angeles and the other, Meland v. Padilla, was filed in the U.S. District Court for the Eastern District of California.   The Secretary of State challenge the standing of both plaintiffs.   See Secretary Of State Must Answer Legal Challenge To Female Director Quota Law and Judge Dismisses Suit Challenging California's Female Director Quota Law.

Yesterday, the Ninth Circuit Court of Appeals reversed Judge Mendez' ruling in Meland v. Weber, 2021 U.S. App. LEXIS 18378.  Because Meland was filed in federal court, the plaintiff had to establish standing under Article III of the U.S. Constitution.  Importantly, the Court of Appeals concluded that he had because SB 826 required or encouraged discrimination based on sex:

Because Meland has plausibly alleged that SB 826 requires or encourages him to discriminate based on sex, Meland has adequately alleged an injury in fact, the only Article III standing element at issue, and thus has Article III standing to challenge SB 826.  Meland's alleged injury is also distinct from any injury to OSI, and he can bring his own Fourteenth Amendment challenge.  Thus, Meland has prudential standing to challenge SB 826.

The Court also rejected the Secretary's argument that the plaintiff's claim was derivative, and not direct.

Although I agree with the Court of Appeal's conclusion, the opinion begins with an erroneous description of the law, stating that SB 826 "requires all corporations headquartered in California to have a minimum number of females on their boards of directors".  The law applies only to "publicly held domestic or foreign corporations", not all corporations. 

© 2010-2023 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 174

About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...