By Eric Gelber
Background
In 2018, the Legislature enacted SB 826 (Jackson and Atkins), requiring that publicly held corporations whose principal executive offices are located in California have a minimum number of women on its board of directors.
In enacting SB 826, the Legislature found and declared that “More women directors serving on boards of directors of publicly held corporations will boost the California economy, improve opportunities for women in the workplace, and protect California taxpayers, shareholders, and retirees, … Yet studies predict that it will take 40 or 50 years to achieve gender parity, if something is not done proactively.”
Shortly after it was signed into law, the bill was challenged in a lawsuit filed against the Secretary of State (now Shirley Weber) by the Pacific Legal Foundation on behalf of Creighton Meland, a shareholder of OSI Systems Inc. (OSI)—Meland v. Weber. The plaintiff alleges that SB 826 discriminates on the basis of sex in violation of the Equal Protection Clause of the Fourteenth Amendment and “seeks to force shareholders to perpetuate sex-based discrimination.”
The complaint alleged that because OSI had seven male board members, SB 826 required it to add one female board member by the end of 2019 and two additional female board members by the end of 
2021. Plaintiff sought declaratory and injunctive relief.
The state moved to dismiss Meland’s complaint for lack of standing. The district court granted the state’s motion, reasoning that Meland had not suffered an injury in fact because SB 826 imposed requirements and potential penalties on corporations, not shareholders. Moreover, the district court held, SB 826 did not prevent Meland from voting for a male director. The district court further concluded that SB 826 places requirements only on corporations and the plaintiff is not alleging that he has been denied the right to vote or is being required to vote in a particular manner. Meland appealed the district court’s decision to the Ninth Circuit Court of Appeals.
Ninth Circuit Reverses District Court
In an opinion issued earlier this week, on June 21st, the Ninth Circuit disagreed with the district court’s finding that corporations, not their shareholders, are the objects of SB 826 because shareholders are one of the objects of SB 826 and therefore have standing to challenge it. The court noted that the only way a person can be elected to OSI’s board if a plurality of shareholders vote in favor of the nominee. OSI itself has no authority to elect its own board members.
The state also argued that nothing in SB 826 requires any individual shareholder to vote for a female nominee. The court rejected this argument because SB 826 necessarily requires or encourages individual shareholders to vote for female board members. “A reasonable shareholder deciding how to vote could not assume that other shareholders would vote to elect the requisite number of female board members. Therefore, each shareholder would understand that a failure to vote for a female would contribute to the risk of putting the corporation in violation of state 
law.”
Alleging that he, as a shareholder, might subject OSI to fines unless he considers sex when selecting a board member is all that is required to establish standing, the court held. The Ninth Circuit also rejected the district court’s finding that, even if Meland had established an injury, his injury was not actual or imminent because OSI was in compliance with SB 826. Thus, the state argued, the case is unripe or moot. In rejecting this argument, the Ninth Circuit held that there is no ripeness or mootness issue because Meland’s injury is not conjectural or hypothetical. His alleged injury is being subjected to a law that requires or encourages him to discriminate based on sex. “That injury is ongoing, because OSI’s shareholders are responsible for electing directors at each annual meeting and SB 826 continues to require or encourage them to vote in a discriminatory manner in order to meet the escalating female-director quota.”
It is important to emphasize that the Ninth Circuit’s decision does not constitute a finding on the merits. It merely means that plaintiff’s allegations are sufficient to withstand a motion to dismiss for lack of standing, not that the claims are meritorious or that the statute is unconstitutional.
In response to the Ninth Circuit’s ruling, SB 826 co-author, State Senator Hannah-Beth Jackson said the law is aimed at addressing discrimination by companies whose boards have long been dominated by men. “Let him make the argument that they should be able to continue discriminating,” she said of Meland.
The case will now be returned to the district court for further proceedings, including a potential trial. A second challenge to SB 826 is currently pending in state court. That case was filed as a taxpayer suit to enjoin the illegal expenditure of taxpayer funds to develop regulations, investigate claims, and enforce violations of the statute’s provisions, as well as costs to produce a required annual report. That case has apparently been scheduled for trial in October.
Implications for Board Diversity Mandates
In 2020, the Legislature enacted AB 979 (Holden), which is similar to SB 826 and requires representation on corporate boards of minimum numbers of directors from underrepresented communities, defined as individuals who self-identify as “Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or transgender.” (See California Capitol Watch: New Law Requires Corporate Board Diversity.)
The appellate court’s determination that Meland has standing to maintain his challenge to SB 826 does not directly impact court challenges to AB 979 but suggests that plaintiffs in lawsuits challenging the constitutionality of that law would have standing as well. AB 979 is also being challenged, in a state court taxpayer action, seeking to prevent the Secretary of State from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional quota in violation of the California Constitution.
It is worth noting that, even if statutory mandates that corporate boards diversify are found to be unconstitutional, corporations may feel obligated to take steps to be more inclusive due to evolving societal attitudes, generally.
Eric Gelber, now retired, is a 1980 graduate of UC Davis School of Law (King Hall). He has nearly four decades of experience monitoring, analyzing, and crafting legislation through positions as a disability rights attorney, Chief Consultant with the Assembly Human Services Committee, and Legislative Director of the California Department of Developmental Services.
