Some venture capital firms have recently begun including so-called “diversity riders” in their term sheets.  In general, these require that the issuer and the lead investor make commercially reasonable efforts to include a member of an underrepresented community as an investor in the financing.  However well-intentioned the proponents of these clauses may be, the question arises whether they run afoul of state laws forbidding discrimination in private sector.

California’s Unruh Civil Rights Act, for example, provides:

” All persons within the jurisdiction of this state are free and equal, and no matter what their sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, primary language, or immigration status are entitled to the full and equal accommodations, advantages, facilities, privileges, or services in all business establishments of every kind whatsoever.”

Cal. Civ. Code § 51(b).   The question, of course, is whether an obligation to include particular persons based on sex, race, color etc. runs afoul of “full and equal” advantages.  Notably, the protection of the Act extends to “all persons” and is not confined to a limited class of protected persons.  The use of the word “all” and the phrase “every kind whatsoever” makes it clear that the phrase “business establishments” is to be interpreted in the broadest sense reasonably possible.

It is quite obvious that if an issuer or lead investor discriminates in favor of one class of persons, it is not treating all persons in a “full and equal” manner.  Further, discrimination in favor of one class of persons (however defined) necessarily involves discrimination against all persons who do not belong to that class.

The post Are Diversity Riders Legal? appeared first on The National Law Forum.