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Why California's Gender Quota Bill Is More Likely To Be Unconstitutional Than California's Pseudo-Foreign Corporation Statute

In the waning hours of the current session, the California legislature passed a bill that will impose gender quotas on publicly held domestic or foreign corporations whose principal executive offices, according to the corporation’s SEC 10-K form, are located in California. The bill is attracting some critical attention from some members of the academy.

While supporting more women and minority representation on boards of directors, Duke Law School Professor Kimberly D. Krawiec challenges the evidence for the bill: "the evidence cited in SB 826 to justify intervention in the director selection process does not show what the bill and its supporters claim".  UCLA Professor Stephen Bainbridge challenges the constitutionality of SB 826 on Commerce Clause grounds, citing the Delaware Supreme Court's decision in VantagePoint Venture Partners 1996 v. Examen, Inc., 871 A.2d 1108 (Del. 2005.

The Vantagepoint decision involved the application California Corporations Code Section 2115 to a Delaware corporation.  The Delaware Supreme Court refused to give effect to Section 2115, finding that under the Commerce Clause of the United States Constitution that a state "'has no interest in regulating the internal affairs of foreign corporations.'" (quoting Edgar v. Mite Corp., 457 U.S. 624 (1988)).  

The interest of California in regulating foreign corporations is, if anything, much more defensible under Section 2115 than it will be under SB 826 should Governor Brown sign the bill.  The shareholder and three-factor test under Section 2115 ensure that no other state has a greater shareholder and business connection to California.  Section 2115 also exempts corporations with outstanding securities listed on a national securities exchange.

The jurisdictional hook of SB 826 is much less compelling - the location of a corporation's principal executive offices.  As Professor Bainbridge observes, a corporation may maintain its principal executive offices in California and yet have very few other connections to the state:

"Imagine a Delaware corporation with operations in many countries around the world, as well as numerous U.S. states. While its principal executive offices are located in California, only about 3% of the company’s operations are located in California. A sizeable [sic] majority of the company’s board of directors are domiciles of other states (and even other countries). The board routinely holds conference calls linking directors at locations around the globe. The board’s regular meetings take place in various locations throughout the United States."

The constitutionality of SB 826 is further undermined by the fact that it does the opposite of Section 2115 by specifically including rather than excluding nationally traded corporations.

 

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
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