New California Law to Require Representation from “Underrepresented Communities” on Boards of Public Companies Headquartered in California

California’s Assembly Bill (“AB”) 979 is set to make waves both within the state and across the country as a groundbreaking new law that would require companies to diversify their boards and reserve seats for directors from “underrepresented communities.”  The bill defines a director from an “underrepresented community” as “an individual who self-identifies 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.”  The bill, which the state legislature passed on August 30, 2020, would require all publicly held companies with headquarters in California to have a minimum ratio of members from underrepresented communities.  If the governor signs the law, it will be the first of its kind in the United States, as no other law mandates representation from deemed underrepresented communities among company board seats.

What the New Law Requires

On August 30, 2020, the California state legislature passed AB 979.  The governor has until September 30, 2020, to sign or veto the bill.  If signed into law by the governor, AB 979 will apply to any publicly held company, both foreign and domestically incorporated, whose principal executive offices are in California, as set forth in the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, and will impose the following board requirements:

• Have a minimum of one director from an underrepresented community on its board no later than December 31, 2021; and
• By no later than December 31, 2022, have, at least,
  
  • Three directors from underrepresented communities if the board has nine or more directors;
  • Two directors from underrepresented communities if the board has more than four but fewer than nine directors; or
  • One director from an underrepresented community if the board has four or fewer directors.

“Publicly held” will mean a company with outstanding shares listed on a major United States stock exchange.  “Director from an underrepresented community” is defined as “an individual who self-identifies 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.”  Companies may increase the size of their boards in order to comply with the law.

Further, no later than March 1, 2022, and each following year, the California secretary of state shall publish reports on its website related to the law. The reports will include information on the number of companies in compliance during at least one point in the preceding calendar year, the number of companies moving their principal executive offices to or from California during the preceding year, and the number of public companies that were subject to the law during the preceding year, but are no longer publicly traded.  The secretary of state may also impose fines in the amount of $100,000 for a first violation and $300,000 for any subsequent violation. Additionally, the secretary of state may fine companies $100,000 for failure to timely file board member information pursuant to this bill.

This new law will likely be met with heavy scrutiny.  California’s previous legislation regulating board composition, Senate Bill No. 826, requires publicly held companies whose principal executive offices are located in the state of California to meet minimum requirements for female board representation.  Senate Bill No. 826 was heavily opposed by the California Chamber of Commerce as well as other state organizations, and has been the subject of at least two lawsuits challenging its constitutionality.  The first suit, which is currently pending, was filed in state court by Judicial Watch on the behalf of three California taxpayers on the ground that the mandate is an unconstitutional gender-based quota under the California Constitution.[1] The second suit, which is currently on appeal, was filed by the Pacific Legal Foundation in federal district court, and alleged that the state’s mandate is in violation of the equal protection clause of the U.S. Constitution because it discriminates on the basis of sex.[2]  AB 979 will likely face similar legal pressure as critics see it as unconstitutional for creating a mandatory quota related to race and sexual orientation.

The bill defends itself from legal challenge within the text, asserting that affirmative action plans to increase the representation of minorities further the legislative goals of the Civil Rights Act of 1964 (the “Act”).  AB 979 states that it is permissible under the Act because the Act:

• Permits affirmative action plans to address past discrimination and patterns of discrimination;
• Permits state actors to create affirmative action plans that are moderate, temporary, and designed to attain a balanced work force; and
• Does not forbid private actors from voluntarily creating plans to increase representation of minorities, so long as they are temporary and do not place an absolute bar against white employees.

Despite potential challenges to the law, companies with their principal executive offices in California should closely monitor this law, as well as their own board compositions. 

[1] See Robin Crest, et al. v. Alex Padilla (LASC Case No. 19STCV27561).

[2] See Creighton Meland v. Alex Padilla (E.D. Cal. Case No. 19-cv-2288-JAM-AC).