California Poised to Mandate Greater Diversity on Boards of Directors

Client Alert

On August 31, 2020, the California Legislature passed Assembly Bill 979 (Holden) (AB 979), which requires all publicly held domestic or foreign corporations whose principal executive offices are located in California to increase the diversity of their board members by ensuring their boards include female directors and directors from underrepresented communities at levels at or above those provided for in the bill.

Governor Newsom is expected to sign the bill into law this month based on his past support of similar measures, including signing into law AB 931 (Boerner-Horvath; 2019). Effective January 1, 2030, AB 931 requires cities with populations of 50,000 or more to appoint individuals to local boards and commissions in a manner that ensures gender diversity. Governor Newsom also publicly supported SB 826 (Jackson; 2018), signed into law by then-Governor Brown. SB 826 made California the first state to compel corporate board gender diversity by requiring that every public company in the state have at least one female director by the end of 2019.

Required Number of Women on Boards of Directors

To comply with the new rules under AB 979, a public corporation subject to this new law must satisfy the following requirements no later than the end of the 2021 calendar year:

a) If its number of directors is six or more, a minimum of three of those directors must be female.

b) If its number of directors is five, a minimum of two of those directors must be female.

c) If its number of directors is four or fewer, a minimum of one of those directors must be female.

Required Number of Individuals From Underrepresented Communities on Boards of Directors

In addition, public corporations subject to this new law must satisfy the following requirements to include members of underrepresented communities on their boards of directors:

a) No later than the end of the 2021 calendar year, a public corporation subject to this new law must have at least one director from an underrepresented community on its board.

b) No later than the end of the 2022 calendar year, a public corporation subject to this new law must comply with the following:

i. If its number of directors is nine or more, a minimum of three of those directors must be from underrepresented communities.

ii. If its number of directors is five to eight, a minimum of two of those directors must be from underrepresented communities.

iii. If its number of directors is four or fewer, a minimum of one of those directors must be from an underrepresented community.

Individuals from “underrepresented communities” include those who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, and those who self-identify as gay, lesbian, bisexual or transgender.

Doing the Math

A female director from an underrepresented community is credited under both criteria for purposes of compliance.

Significant Consequences for Failing to Comply

The California Secretary of State may impose fines for failure to comply with either of the above diversity requirements. Specifically, public corporations subject to these new rules that fail to satisfy their requirements may face the following fines:

a) For failure to timely file board member information with the Secretary of State pursuant to regulations implementing AB 979, the amount of $100,000

b) For a first violation of the board representation requirements, the amount of $100,000

c) For a second or subsequent violation of the board representation requirements, the amount of $300,000

These enforcement mechanisms parallel those included in SB 826.

Lawsuits Expected in Effort to Block Enforcement

Throughout the debate on AB 979, business industry and trade groups argued that AB 979’s mandates are unconstitutional. In particular, groups argued the bill violates the equal protection clauses of the U.S. and California constitutions, and that the bill will adversely impact the participation of male and nonbinary persons on corporate boards of directors. Similar arguments were made against SB 826, and lawsuits were filed seeking to enjoin enforcement of SB 826. Some lawsuits challenging SB 826 are ongoing, and challengers seek to invalidate the law on the grounds that it is an unconstitutional gender-based quota in violation of the equal protection clause and is an illegal expenditure of taxpayer funds. To date, however, the courts have not enjoined SB 826.

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