California’s statutes requiring that publicly held corporations have a minimum number of female directors and directors from “underrepresented communities” rely upon the individual’s self identification. Cal. Corp. Code §§ 301.3(f)(1) & 301.4(e)(1). Self-identification seems to leave the question entirely up to the individual. However, the self-identification standard raises concerns about potentially liability under the securities laws for allegedly opportunistic or unproved identifications.
First, although self-identification may be regarded simply as an opinion, an opinion may be false if it is not sincerely held. It is conceivable, for example, that some potential board candidates will insincerely identify themselves as female or members of an underrepresented community in order to obtain board positions. Such an insincere self-identification could be actionable under the securities laws because the statement of identification implicitly affirms the fact that the individual actually believes it. When an individual’s self-identification appears at odds with objective facts, an inconsistent self-identification, or community perception, companies may find themselves between the Scylla of questioning the sincerity of someone’s self-identification and the Charybdis of a making a false disclosure.
Second, courts may find that statements of self-identification convey facts about how the individual formed that identification. See Omnicare Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318 (2015). Investors may expect that an individual’s self-identification aligns with information available to the individual or the issuer, community recognition and/or the perceived characteristics of the individual. The problem is compounded by the fact that the racial and ethnic categories specified as “underrepresented communities” in the California statute are not defined.
The self-identification standard is made even more difficult by the fact that individuals may change identities over time based on new information available to them or changes in their own self-perception. If a director has previously self-identified as a white male, but now self-identifies as a female member of an underrepresented community, investors may question whether the change was sincere or opportunistic. If the change is not sincere but is supported by ancestral records, the question becomes whether the impurities of the individual’s “unclean heart” will be actionable. See Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991).