On June 20, Texas Governor Greg Abbott signed into law S.B. 2337, which imposes new regulations on proxy advisory firms — such as Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC — when providing voting recommendations and other proxy advisory services concerning Texas public companies.

The new law, which took effect on September 1, applies to proxy advisory services involving any public company that is incorporated in Texas, has its principal place of business in Texas or has proposed redomiciling in Texas.

It requires proxy advisers to provide detailed disclosures when their recommendations are based, in whole or in part, on nonfinancial factors — including environmental, social or governance principles, or diversity, equity and inclusion considerations — or when they diverge from management’s recommendation or provide conflicting advice across clients.

Any violation of the new law constitutes a deceptive trade practice under the Texas Business and Commerce Code, and is actionable by the company that is the subject of the recommendation, any of its shareholders, advisory clients and the Texas attorney general.

The law has already drawn legal challenges from both ISS and Glass Lewis, which argue that S.B. 2337 imposes unconstitutional and unlawful burdens on proxy advisory firms. These lawsuits also come on the heels of a July 1 US Court of Appeals for the District of Columbia Circuit decision in ISS v. US Securities and Exchange Commission limiting the SEC’s authority to regulate proxy voting advice.

It remains to be seen whether the law will be enjoined before it takes effect or ultimately upheld in the face of these legal challenges.

Scope and Applicability of S.B. 2337

S.B. 2337 will apply to proxy advisory services provided in connection with or in relation to any public company that is organized or created under the laws of Texas, has its principal place of business in Texas, or has made a proposal in its proxy statement to redomicile in the state.

S.B. 2337 defines the proxy advisory services that will be subject to the new requirements as

1. advice or a recommendation on how to vote on a proxy proposal or company proposal;
2. proxy statement research and analysis regarding a proxy proposal or company proposal;
3. a rating or research regarding corporate governance; or
4. development of proxy voting recommendations or policies, including establishing default recommendations or policies.

Disclosure Triggers for Nonfinancial Voting Recommendations

Under S.B. 2337, a proxy advisory service is subject to enhanced disclosure requirements if it:

• “Is wholly or partly based on, or otherwise takes into account, one or more nonfinancial factors” — including those based on ESG principles, DEI, “social credit or sustainability factor[s] or score[s]” — or “membership in or commitment[s] to … group[s] that wholly or partly base its evaluation … on nonfinancial factors”;
• “Involves providing a voting recommendation with respect to a shareholder-sponsored proposal that is inconsistent with the voting recommendation of the board of directors or a board committee composed of a majority of independent directors, … and does not include a written economic analysis of the financial impact on shareholders of the proposal”;
• “Is not based solely on financial factors and subordinates the financial interests of shareholders to other objectives, including sacrificing investment returns or undertaking additional investment risk to promote nonfinancial factors”; or
• “Advises against a company proposal to elect a [director] unless the proxy advisor affirmatively states that the proxy advisory service solely considered the financial interest of the shareholders in making such advice.”

Mandatory Disclosure Obligations for Proxy Advisers

If a proxy adviser provides a proxy advisory service that meets any of the foregoing qualifications, the proxy adviser must disclose to each shareholder — or entity acting on behalf of a shareholder receiving the service — a conspicuous statement that the service is not being provided solely in the financial interest of the company’s shareholders.

The proxy adviser must also explain, with particularity, the basis of the proxy adviser’s advice concerning each recommendation, and that the advice subordinates the financial interests of shareholders to other objectives, including sacrificing investment returns or undertaking additional investment risk to promote one or more nonfinancial factors.

Further, the proxy adviser must also immediately provide a copy of the disclosure to the company that is the subject of the recommendation, and include a conspicuous disclosure on the home or front page of the proxy adviser’s website that its proxy advisory services include advice and recommendations that are not based solely on the financial interest of shareholders.

Notice Requirements for Conflicting Voting Recommendations

S.B. 2337 also includes enhanced notice requirements for a proxy adviser that recommends that one or more clients vote on a proposal in opposition to the recommendation of the company’s management, or that one or more clients who have not expressly requested services for a nonfinancial purpose vote differently from one or more other clients on a proposal or director nominee.

If so, the proxy adviser is required to (1) if applicable, comply with the disclosure requirements for proxy advisory services not solely based on financial interests, as described above; (2) provide written notice to each shareholder receiving the recommendation, the company that is the subject of the recommendation and the Texas attorney general; and (3) disclose which of the conflicting advice or recommendations is provided solely in the financial interest of the shareholders and supported by any specific financial analysis performed or relied on by the adviser.

Enforcement and Remedies

S.B. 2337 provides that any violation of its provisions is a deceptive trade practice under the Texas Business and Commerce Code, and names the recipient of the proxy advisory services, the company that is the subject of the proxy advisory services and any of the company’s shareholders as affected parties that are entitled to bring a claim for injunctive relief.

The bill also authorizes the Texas attorney general to intervene in such a claim. Additionally, the Consumer Protection Division of the Texas Attorney General’s Office may pursue civil penalties for violations of S.B. 2337.

Legislative Context

S.B. 2337 is the latest in a series of pro-business corporate governance reforms, which include S.B. 29 (codifying the business judgment rule), S.B. 1057 (imposing minimum ownership thresholds for submitting shareholder proposals) and S.B. 2411 (allowing officer exculpation), aimed at positioning Texas as a jurisdiction of choice for public companies.

By requiring proxy advisory firms to disclose when their voting recommendations are based on ESG, DEI or other nonfinancial factors, the Texas Legislature has reaffirmed its commitment to a business-first approach that prioritizes transparency and shareholder financial interests.

Federal Court Limits SEC Authority Over Proxy Advisers

On July 1, the DC Circuit affirmed a district court ruling in favor of ISS, holding that the SEC exceeded its statutory authority when it attempted to classify proxy voting advice as a “solicitation” under Section 14(a) of the Securities Exchange Act.

The court concluded that the ordinary meaning of “solicit” does not encompass disinterested voting recommendations provided by proxy advisers in response to client requests. It emphasized that influence is not equivalent to solicitation, and that proxy advisers do not seek to obtain proxy authority or votes, but merely provide advice when asked.

This decision invalidates SEC rules adopted in 2020 that would have subjected proxy advisers to heightened disclosure and procedural requirements unless exempted. The ruling significantly curtails the SEC’s ability to regulate proxy advisory firms under the proxy solicitation framework, and reinforces the legal distinction between providing advice and soliciting votes.

Legal Challenges by ISS and Glass Lewis

On July 24, ISS and Glass Lewis filed separate lawsuits in the US District Court for the Western District of Texas seeking declaratory and injunctive relief to block enforcement of S.B. 2337. Both cases have been assigned to US District Judge Alan Albright.

The complaints argue that the law violates multiple constitutional provisions and federal statutes, and would cause irreparable harm to their businesses. Preliminary relief is being sought, and early rulings could determine whether the law is paused before its Sept. 1 effective date.

Both firms assert that S.B. 2337 violates the First Amendment by compelling speech and engaging in viewpoint discrimination. The complaints argue that S.B. 2337 compels proxy advisers to publicly declare that their recommendations “subordinate the financial interests of shareholders” whenever ESG, DEI or other nonfinancial factors are considered — even when the proxy adviser strongly believes that statement to be false.

They also contend that the law favors pro-management viewpoints by imposing burdens only when proxy advice diverges from company board recommendations. Additional constitutional claims include violations of the due process clause for vagueness, and the contracts clause for interfering with existing client agreements and confidentiality obligations.

ISS also argues that S.B. 2337 is preempted by the Investment Advisers Act. Glass Lewis raised similar preemption concerns under the Employee Retirement Income Security Act, noting that many of its clients are retirement plan fiduciaries that are required to consider all relevant factors, including ESG, in their investment decisions.

Both firms claim that S.B. 2337 imposes burdensome and costly compliance obligations, including disclosures to third parties and public website disclaimers, which could deter clients and disrupt their operations.

Key Takeaways

S.B. 2337 represents a major shift in how proxy advisory services are regulated in Texas, particularly when recommendations are based on ESG, DEI or other nonfinancial factors.

The law imposes detailed disclosure and notice obligations on proxy advisers, including public website disclaimers and individualized statements to shareholders and companies. It also introduces enforcement mechanisms that allow companies, shareholders and the Texas attorney general to bring claims for injunctive relief and civil penalties, framing violations as deceptive trade practices.

With more than 50 Fortune 500 companies headquartered in Texas — and one in 10 US public companies based there — the law will apply broadly, regardless of whether a company is incorporated in Texas or listed on a Texas securities exchange. Public companies headquartered outside Texas seeking to take advantage of the new law may consider reincorporating in Texas.

The legal challenges filed by ISS and Glass Lewis underscore the broader constitutional and statutory implications of S.B. 2337. These lawsuits, along with the recent DC Circuit decision limiting the SEC’s authority to regulate proxy voting advice, reflect growing tension between federal oversight and state-level efforts to assert control over ESG-related proxy recommendations.

S.B. 2337 is part of a national trend toward increased scrutiny of proxy advisers and ESG influence, and its implementation — and the outcome of the litigation — could have far-reaching consequences for proxy advisers, institutional investors, and public companies headquartered in or incorporated in Texas.