Federal District Court Dismissal of Challenge to Board Diversity Statute

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

A federal district court this week dismissed a shareholder plaintiff’s attempt to invalidate the nation’s first law mandating gender diversity on corporate boards. Meland v. Padilla, No. 2:19-cv-02288-JAM-AC (E.D. Ca. Apr. 20, 2020).

In September 2018, California enacted legislation requiring any public company with its principal executive offices in the state to “have a minimum of one female director on its board” by the end of 2019. A shareholder of OSI Systems, Inc., a Delaware-chartered company headquartered in California, sued to block the law, alleging that the statute impaired his right to vote for corporate directors in violation of the Equal Protection Clause of the federal constitution.

The district court dismissed the lawsuit without addressing whether the statute was constitutionally permissible. Reasoning that the statute imposed obligations on a company but not on its shareholders, the court concluded that the action was derivative and that OSI’s shareholders had no standing to bring suit. The complaining shareholder could cast his votes for any board nominee he liked, the court ruled, and so his voting rights were unimpaired. The court also noted that because OSI now has a woman on its board, it faced no threat of penalty, and that any alleged harm to the company was therefore hypothetical.

The losing shareholder has already noticed an appeal of the decision in the Ninth Circuit. And even if the decision stands, it would not bar a corporation, as opposed to shareholders, from challenging the California statute on constitutional or other grounds. But the ruling decreases the likelihood of future challenges and suggests that courts will not be eager to interfere with legislative efforts to promote diversity among directors of public companies. More important, and as we have previously emphasized, investor sentiment favoring board diversity and accumulating financial research confirming its value indicate that mounting pressure for board inclusiveness should be expected and welcomed.

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