Recent Ruling Impacts California’s AB 979 Effort to Mandate “Underrepresented Community” Board Members

California’s Assembly Bill 979 (California Corporations Code § 301.4) was signed into law in September 2020 and requires public corporations with principal executive offices in the state to include a specific number of people from underrepresented communities on their boards of directors.

Specifically, the statute mandated two end-of-year milestones. By December 31, 2021, all public corporations must have at least one director from an underrepresented community. In addition, by December 31, 2022, corporations with 9 or more directors must have at least 3 directors from an underrepresented community, and corporations with 5 to 8 directors must have at least 2 directors from an underrepresented community.

For purposes of this statute, the term “underrepresented community” refers to an individual who self-identifies as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or as LGBTQ+.

AB 979 Ruled Unconstitutional

On April 1, 2022, a Superior Court judge ruled AB 979 unconstitutional. The court acknowledged evidence of demographically homogenous boards and found that the State had not presented enough information evidencing discrimination or showing a disparity in board selection such that legislative intervention was justified in furtherance of a compelling interest. It is expected that the State of California will appeal the Superior Court ruling. In the meantime, the enforcement of AB 979 is stayed.

Impact of the Ruling

The plaintiffs in the AB 979 case filed a similar complaint in 2019 asserting the unconstitutionality of California’s Senate Bill 826, which requires public corporations with principal executive offices in California have a minimum number of female directors. This case remains pending in the state courts, though there is speculation that the ruling regarding the unconstitutionality of AB 979 will influence the final judgment in this case and SB 826 could suffer a similar fate.

In addition, the SEC was sued in August 2021 for allegedly exceeding its authority by approving Nasdaq’s board diversity rule, which requires listed companies to disclose a matrix of director diversity data in proxy statements, and to have (or explain why the company does not have) diverse directors in such filings. There are 17 states backing the challenge, which remains pending in court.

What’s Next?

Despite the AB 979 ruling and challenges to SB 826 and the Nasdaq diversity rule, there remains increasing pressure from proxy advisory firms, institutional shareholders, investors, consumers and other stakeholders for board diversity and companies continue to face pressure to adopt diversity, equity and inclusion (DEI) initiatives. There has been a pronounced uptick in shareholder proposals regarding board and management diversity this proxy season and we expect to see continued focus in this area, regardless of the outcome of court cases examining government mandates.

Moreover, SEC Chair Gensler and other SEC commissioners have cited the importance of transparency about the people who lead public companies and expressed support for Nasdaq’s diversity rule. Many expect the SEC to adopt similar requirements, though nothing has been announced to date.

We will continue to keep you apprised of any developments regarding AB 979 on appeal, SB 826, and similar rules.