California courts have now struck down the second of the state’s two board diversity laws as unconstitutional. The recent decision affects California's gender diversity requirement for certain boards of directors. In April, AB 979, California’s law requiring publicly held California companies to appoint a certain number of board members from what the law termed “underrepresented communities” met a similar result. You can read our update on that decision here.
California Corporations Code 301.3, also known as SB 826, is the gender diversity compliment to AB 979, requiring publicly held California companies to appoint a minimum number of women directors based on board size. At a high level, hearing a similar challenge to what the same plaintiffs made against AB 979, the court held that under a strict scrutiny test, the law’s basis lacked a compelling governmental interest.
It remains uncertain whether California will appeal either decision. In any event, as we covered in our previous alert, other more recent rules remain intact, including for NASDAQ listed companies, that mandate similar requirements. Finally, and again, most importantly, board and leadership diversity initiatives remain popular among the business and investor community. Many, if not most companies subject to the regulations considered here have willingly complied with or undertaken their own board diversity efforts, in part to meet definitive shareholder expectations, or those among their workforce, clientele, or target markets.