As noted in prior posts, the Secretary of State has filed a motion to dismiss a federal court challenge to California's director quota laws (SB 826 and AB 979). The Secretary's brief includes several remarkable and troubling assertions. For example, the Secretary argues that corporations can avoid discrimination based on race by discriminating based on sexual preference or gender ("This means that corporations can comply with AB 979 by adding new directors who identify as gay, lesbian, bisexual, or transgender (LGBT) without adding directors from any racial minority group.").
I was puzzled as well by the following example:
Consider, for example, a corporation with nine directors, two of whom self-identify with an underrepresented community and seven of whom do not. If one of the seven directors were to retire, the corporation could reduce the size of the board to retain the eight remaining directors and automatically come into compliance with AB 979.
The first problem with this example is that it assumes that the statute refers to the authorized number of directors rather than the number of directors then in office. In fact, the statute, Cal. Corp. Code § 301.4(b), refers to the "number of directors". Had the legislature intended to refer to the number of authorized directors, it could easily have done so (see, e.g., Cal. Corp. § 307(a)(7) ("A majority of the authorized number of directors . . ."). Assuming that the statute is interpreted to refer to the authorized number of directors, reducing the size of the board is more easily said than done. If the corporation has a fixed number of directors, then the number may be changed only by "approval of the outstanding shares". Cal. Corp. Code § 212(a). For publicly held corporations, which are the only corporations that may be subject to the statute, obtaining the approval of the outstanding shares is both expensive and time consuming. See Can A Corporation Change Its Board Size In Proprio Motu? A further problem with the Secretary's example is that the retiring director may possess a qualification that must be replaced (e.g., financial literacy). Thus, simply reducing the size of the board, even if possible, may not be an option.