In September 2020, California Assembly Bill 979 was signed by Governor Newsom. The bill required publicly-held corporations (those with publicly traded shares on a stock exchange) to diversify their boards of directors. Specifically, such corporations were required to appoint directors from “underrepresented” communities to their boards. The bill defined “underrepresented” communities as those self-identifying as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native, gay, lesbian, bisexual, or transgender.
Had it been upheld, the bill would have required that a publicly-traded corporation with its principal executive offices in California, even if incorporated elsewhere, have at least one director from an underrepresented community on its board by the end of 2021. By the end of 2022, corporations with between four and nine directors would be required to have no less than two such directors on their boards while those with greater than nine directors would be required to have a minimum of three such directors.
The bill was challenged not long after it was passed by three taxpayers who filed suit in Los Angeles Superior Court. The taxpayers sought to enjoin the California Secretary of State from “spending public funds on California’s race, ethnicity, sexual preference, and transgender quotas for boards of directors of publicly-traded corporations with their headquarters in California.” The lawsuit also sought a judgment declaring the bill unconstitutional under the California Constitution.
The taxpayers challenged the bill as unconstitutional on the basis that requiring a corporation to appoint a specific number of directors based on their race, ethnicity, sexual orientation, or transgender status is a violation of the equal protection clause of the California Constitution.
On April 1, 2022, the Superior Court issued a ruling in favor of the taxpayers. Although the ruling did not discuss the Court’s reasoning, the Court declared the bill unconstitutional and enjoined the State from using taxpayer funds to enforce the bill. Thus, the State may not enforce the bill unless the State successfully appeals the ruling. Even if the bill is declared constitutional, the State may still be enjoined from using taxpayer funds to enforce it pending further proceedings.