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California in the Spotlight - California Passes Historic Law Requiring Women on Corporate Boards

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U.S. Federal and many state laws have long prohibited discrimination in the workplace based on sex or gender. Diverse representation on corporate boards of directors has been the subject of numerous productivity and economic studies. Nonprofits have formed to funnel women into these coveted seats including "leadership training" designed for women-only. Some European countries have implemented board quotas. In 2015, Germany passed a law mandating that its largest public companies allocate 30% of their board seats to women. Belgium, France, Italy, Spain and the Netherlands have tried quotas with varying degrees of success.

And California, once again, moves back into the spotlight to become the first state to mandate women on corporate boards. On October 1, 2018 Gov. Brown signed SB 8261 into law. SB 826 adds two sections to the California Corporations Code, mandating that each publicly traded company whose principal executive offices are located in California have, by the end of 2019, at least one female director on its board and, by the end of 2021, have additional female directors in proportion to the size of the board. For example, boards with five members must have at least two women and boards with six or more must have at least three women. And according to the bill's text, California sees three women as an ideal number for positive corporate impact.

The law cites research that companies with women on their boards have higher earnings per share, return on investment, and net income growth, among other metrics. Gov. Brown wrote in a letter accompanying his signing that while "[t]here have been numerous objections and serious legal concerns" to SB 826, "it's high time corporate boards include the people who constitute half the "persons" in America.2 The bill noted in particular, "If measures are not taken to proactively increase the numbers of women serving on corporate boards, studies have shown that it will take decades, as many as 40 or 50 years, to achieve gender parity among directors." California wants to shorten that window.

Applicability and Scope. SB 826 applies to any publicly held domestic or foreign corporation that has its principal executive offices, as set forth in the corporation's SEC 10-K form, in California. "Publicly held" is defined as a corporation with outstanding shares listed on a major United States stock exchange.

No later than July 1, 2019, the California Secretary of State will publish a report on its website documenting the number of domestic and foreign corporations whose principal executive offices are located in California and who have at least one female director. And no later than March 1, 2020 and annually thereafter, the Secretary of State will publish a report on its website reporting, among other items, (1) the number of corporations in compliance; (2) the number of corporations that moved their US headquarters to California or out of California during the preceding calendar year; and (3) the number of corporations who were subject to the law and are no longer publicly traded.

SB 826 specifies that the requirements set forth shall apply to a foreign corporation that is a publicly held corporation to the exclusion of the law of the jurisdiction in which the foreign corporation is incorporated.

Requirements. By the end of calendar year 2019, any such corporation must have on its board a minimum of one female director which may include increasing the total number of its directors on the board in order to comply.

By the end of calendar year 2021, covered corporations must have additional female directors on the board depending on the total size of the board: if there are six or more directors on the board, at least three must be female; if there are five directors, at least two must be female; if there are four or fewer directors, one must be female.

The law specifies that "female" means an individual who self-identifies her gender as a woman regardless of designated sex at birth.

Enforcement. A corporation is in violation of the statute for each director seat required to be held by a female if that seat is not held by a female for at least a portion of the calendar year. The Secretary of State may impose fines for a first-time violation of $100,000 and, for subsequent violations, of $300,000.

The Secretary of State may also impose fines of $100,000 for a corporation's failure to file board member information.

Potential challenges and conflicts. One-fourth of California's public companies on the Russell 3000 index have no women on their boards of directors; and for the rest of the companies, women hold only 15.5 percent of the board seats. California companies who do not yet meet this requirement in current board composition will have to make some near-term choices about whether to comply or face fines and possible negative media attention by being listed on the California Secretary of State's website.

SB 826 may raise constitutional questions in relationship to the Equal Protection Clause of the Fourteenth Amendment, as the U.S. Supreme Court has held that "statutory classifications that distinguish between males and females are subject to scrutiny under the Equal Protection Clause."3 The Supreme Court recently rejected a challenge to an affirmative action program in higher education, but much of the reasoning in that case applied specifically to the context of education.4 Whether the Court would apply the same logic to [law] remains for a challenge yet to occur. The California Constitution also provides for the "equal protection of the laws" and state law challenges could also occur.

In addition, there is the potential for conflict for companies that have a principal executive office in California but are incorporated elsewhere. Delaware applies the internal affairs doctrine, which holds that only the state of incorporation may govern the internal affairs of a corporation.5 Challenges are likely to arise to SB 826 on the basis that it improperly seeks to govern the internal affairs of corporations incorporated outside California.

In anticipation of the changes to California law that will go into effect on December 31, 2019, companies with principal executive offices in California should consider the compositions of their boards and whether the addition of new directors is in order.

1 Available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB826.
2 Letter, available at https://www.gov.ca.gov/wp-content/uploads/2018/09/SB-826-signing-message.pdf.
3 Craig v. Boren, 429 U.S. 190, 197 (1976) (internal citation and indicia of quotation omitted)
4 Fisher v. Univ. of Texas at Austin, 570 U.S. 297 (2013).
5 See, e.g., Examen, Inc. v. VantagePoint Venture Partners 1996, 873 A.2d 318, 324 (Del. Ch. 2005), aff'd, 871 A.2d 1108 (Del. 2005).

 

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