A three-judge panel of the US Court of Appeals Ninth Circuit ruled unanimously Monday that a corporate shareholder has the right to challenge the constitutionality of California Senate Bill 826 (SB 826), which stipulated a minimum number of female board members for all public corporations headquartered in California.
The suit was filed in 2019 by Creighton Meland, a shareholder of OSI systems, who alleged that the law violated the Equal Protection Clause of the US Constitution by requiring shareholders to discriminate on the basis of sex while exercising their corporate voting rights.
The law requires publicly held domestic or foreign corporations to have at least one female director by the end of the 2021 calendar year. This minimum threshold is increased to two female directors when the corporation has five directors and further increased to three female directors when the corporation has six or more directors. The Secretary of State may also impose fines for violations of law, ranging from $100,000 to $300,000 per violation.
A judge for the US District Court for the Eastern District Court of California had previously dismissed the case for lack of standing. The appeals court, however, ruled that Meland had adequately alleged a personal injury that was distinct from any injury to the corporation and thus has standing to challenge SB826 under the Fourteenth Amendment.
California had argued that corporations, and not individual shareholders, are the subjects of SB826 and that nothing in the law requires individual shareholders to vote for a female nominee. The court rejected the two arguments, noting that “[i]n determining whether a plaintiff is the object of a government enactment, courts consider the purpose of the government enactment and its practical effect.” It further stated:
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.
Since a reasonable shareholder, when deciding their vote, cannot assume that the other shareholders would vote to elect the stipulated number of female board members, and failure to elect the stipulated number would expose the corporation to sanctions for violating state law, “SB 826 necessarily requires or encourages individual shareholders to vote for female board members.”