Last Friday, the Los Angeles Superior Court in Crest et al. v. Padilla (“Crest”) held that Senate Bill 826 (“SB 826”), also known as the “Women on Boards” law, is unconstitutional.  The lawsuit challenging the law was brought by DC-based nonprofit Judicial Watch on behalf of California taxpayers.  Earlier this week, the state announced that it would appeal the decision.

SB 826, which Governor Jerry Brown signed in 2018, mandates that publicly held corporations headquartered in California (even if incorporated elsewhere) have a minimum number of female directors on their Boards of Directors, with at least three female directors if the corporation has at least six directors in total.  While violations of this law are punishable by fines of up to $300,000, the state has not fined a company under this law.

In Crest, the Court found that SB 826 violates the state constitution’s Equal Protection Clause by treating groups of people differently based on sex.  Because the California state constitution requires that laws that differentiate based on sex must survive “strict scrutiny” review, the challenged law must not only serve a compelling government interest but also be “narrowly tailored” to that interest.  This means that the state must show that there is no way to achieve its stated goals without differentiating based on suspect classifications.

The Court found the state’s justifications for the law were unpersuasive, including the state’s reliance on studies showing that more women on corporate boards improve corporate performance and boost the state economy.  The Court noted alternative steps the state could take to improve the state’s economy without discriminating based on sex, and thus SB 826 could not be narrowly tailored for that purpose.

This decision follows on the heels of a California court’s ruling striking down as unconstitutional under the Equal Protection Clause a similar law that required corporations headquartered in California to have at least one minority or LGBTQ+ director on their boards.

This decision may also impact judicial review of a Nasdaq rule, approved by the Securities and Exchange Commission, that will require companies listed on Nasdaq’s exchange to have at least one female director and at least one director “who self-identifies as one or more of the following: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, or Two or More Races or Ethnicities” or as LGBTQ+, or explain why they do not.  The Nasdaq rule is currently facing a legal challenge in the Fifth Circuit in the form of a petition for review filed by the Alliance for Fair Board Recruitment.

We will continue to monitor the Crest decision and provide any relevant updates.