California Gov. Jerry Brown recently signed into law a bill that will require all publicly traded companies with headquarters in the state to include at least one female director on their board. The measure is part of an effort to close the gender gap in business, although elected officials have acknowledged there are some potentially significant legal issues.
S.B. 826
The bill makes California the first state to require women on corporate boards. According to the bill’s principal author, State Sen. Hannah-Beth Jackson (D-Santa Barbara), a quarter of California’s publicly-held corporations have no women directors on their boards. In addition, almost half of the 75 largest IPOs from 2014 to 2016 went public with no women on boards, according to legislative findings and declarations to the new law. Jackson touted the measure as a “giant step forward for women, our businesses and our economy.”
Law Requirements
Under the law, any publicly-held corporations whose “principal executive offices” are located in California will be required to have a minimum of one woman on the board of directors by the end of 2019. By the end of July 2021, the bill requires a minimum of two women on boards with five members, and at least three women on boards with six or more members.
Publicly-held corporations are those with outstanding shares listed on a major U.S. stock exchange (i.e., the New York Stock Exchange, NASDAQ). Companies will be allowed to increase the number of directors on their board in order to comply with the law. Companies that fail to comply face fines of $100,000 for a first violation and $300,000 for each subsequent violation. A female director having held a seat for a portion of the year will not be a violation.
Legal Challenges
The law could be susceptible to a challenge on equal protection grounds, according to a state Assembly analysis, which said the creation of an express gender classification could subject the law to scrutiny under the U.S. and California constitution. “The use of a quota-like system, as proposed by this bill, to remedy past discrimination and differences in opportunity may be difficult to defend,” the analysis said.
The report also suggested the bill may conflict with the so-called internal affairs doctrine. This is a legal doctrine that only one state should have the authority to regulate a corporation’s internal affairs. The analysis suggested this could be an issue as it relates to companies that are headquartered in California but are incorporated in another state, such as Delaware.
“Whether or not a court would find that this bill violates the internal affairs doctrine is open to question, but it is reasonable to assume that were this bill to become law it could be challenged under that doctrine,” it stated.
In a letter to the state Senate, Gov. Brown acknowledged that some have raised “serious legal concerns” about the bill that “may prove fatal to [the bill’s] ultimate implementation.” Nonetheless, he signed the bill into law Sept. 30. “Given all the special privileges that corporations have enjoyed for so long, it’s high time corporate boards include the people who constitute more than half the ‘persons’ in America,” the letter stated.
Conclusion
Public companies without a female member on their board of directors will have to move quickly to be in compliance with the law by the end of next year and should begin developing a plan to avoid a violation. Depending on individual corporate charter and bylaw requirements, a stockholder vote may be required to increase the board size. In addition, companies headquartered in California that are considering an IPO will need to ensure they will be in compliance with the law at the time they go public.
