January 18, 2021

Volume XI, Number 18


January 15, 2021

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Are Diversity Riders Legal?

Some venture capital firms have recently begun including so-called "diversity riders" in their term sheets.  In general, these require that the issuer and the lead investor make commercially reasonable efforts to include a member of an underrepresented community as an investor in the financing.  However well-intentioned the proponents of these clauses may be, the question arises whether they run afoul of state laws forbidding discrimination in private sector.

California's Unruh Civil Rights Act, for example, provides:

" All persons within the jurisdiction of this state are free and equal, and no matter what their sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, primary language, or immigration status are entitled to the full and equal accommodations, advantages, facilities, privileges, or services in all business establishments of every kind whatsoever."

Cal. Civ. Code § 51(b).   The question, of course, is whether an obligation to include particular persons based on sex, race, color etc. runs afoul of "full and equal" advantages.  Notably, the protection of the Act extends to "all persons" and is not confined to a limited class of protected persons.  The use of the word "all" and the phrase "every kind whatsoever" makes it clear that the phrase "business establishments" is to be interpreted in the broadest sense reasonably possible. 

It is quite obvious that if an issuer or lead investor discriminates in favor of one class of persons, it is not treating all persons in a "full and equal" manner.  Further, discrimination in favor of one class of persons (however defined) necessarily involves discrimination against all persons who do not belong to that class. 

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© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 338



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...