Bloomberg reports:
An OSI Systems Inc. shareholder has standing to challenge a California law requiring public corporations headquartered in the state to have a minimum number of women on their boards of directors, the Ninth Circuit ruled Monday.
California Senate Bill 826 “requires or encourages” individual shareholders of public companies to vote for female board members, the U.S. Court of Appeals for the Ninth Circuit said. As an individual shareholder of California-based OSI, Creighton Meland has standing to argue that the law requires him to discriminate on the basis of sex in violation of the 14th Amendment, the court said.
The full text of the opinion is here. The summary explains:
Plaintiff alleged that Senate Bill 826 (SB 826) requires shareholders to discriminate on the basis of sex when exercising their corporate voting rights, in violation of the Fourteenth Amendment. The panel held that plaintiff plausibly alleged that SB 826 requires or encourages him to discriminate based on sex. Plaintiff therefore adequately alleged an injury in fact, the only Article III standing element at issue, and thus had Article III standing to challenge SB 826.
The opinion summarizes the relevant legal rule as follows:
... we have long held that “[a] person required by the government to discriminate by ethnicity or sex against others has standing to challenge the validity of the requirement, even though the government does not discriminate against him.” Monterey Mech., 125 F.3d at 707. ...
We have subsequently relied on Monterey Mechanical’s determination that a person required or encouraged to discriminate on the basis of a protected class, “even if the beneficiaries [of the discrimination] are members of groups whose fortunes we would like to advance,” id. at 708, has suffered a direct personal injury sufficient to confer standing.
California objected that the bill affects only corporations; not shareholders. But the 9th Circuit rejected that argument:
Here, corporate shareholders are an object of SB 826. As a general rule, shareholders are responsible for electing directors at their annual meetings. E.g., Cal. Corp. Code §§ 301(a), 600(b). OSI is no exception. Thus, the only way a person can be elected to OSI’s board is if a plurality of shareholders vote in favor of the nominee at an annual shareholder meeting. OSI itself has no authority to elect its own board members. For SB 826 to hasten the achievement of gender parity—or indeed, for SB 826 to have any effect at all—it must therefore compel shareholders to act. Accordingly, the California Legislature necessarily intended for SB 826 to require (or at least encourage) shareholders to vote in a manner that would achieve this goal.
California also argued that shareholders will not be forced to vote for female directors, but the 9th Circuit rejected that argument as well:
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 and exposing it to sanctions. At a minimum, therefore, SB 826 would encourage a reasonable shareholder to vote in a way that would support corporate compliance with legal requirements. Indeed, the California Legislature must have concluded that SB 826 would have such an effect on individual shareholders; otherwise, if each individual shareholder felt free to vote for a male board member, SB 826 could not achieve its goal of reaching gender parity. ...
California’s argument that SB 826 does not require a shareholder to discriminate, because the law does not impose monetary sanctions directly on shareholders, also fails. A law may require or encourage action whether or not it imposes a monetary sanction for noncompliance.
All of this is way outside my wheelhouse, of course. My own view remains limited to the issue of whether the law is constitutional under the internal affairs doctrine. As regular readers will recall, I believe the law is not constitutional thereunder.
Keith Paul Bishop comments:
Although I agree with the Court of Appeal's conclusion, the opinion begins with an erroneous description of the law, stating that SB 826 "requires all corporations headquartered in California to have a minimum number of females on their boards of directors". The law applies only to "publicly held domestic or foreign corporations", not all corporations.
Kevin LaCroix has a very detailed review of the case and issues. He points out that:
The appellate court’s action has implications both for the board gender diversity statute and the more recently adopted board racial diversity statute, which has also been challenged in court. ...
The appellate court’s ruling that Meland has standing means only that the lawsuit now goes back to the district court for further proceedings. The appellate court’s ruling does not mean Meland’s claims are meritorious, or that the statute is unconstitutional. ...
A complete review of the picture surrounding the legal challenges to SB 826 also requires a discussion of the separate state court challenge to the California board gender diversity statute.
Go read the whole thing.
