/>iThe 89th Texas Legislature passed Senate Bill (S.B.) 2337, “Relating to the Regulation of the Provision of Proxy Advisory Services” (the Act), which introduced new regulations governing proxy advisors that provide proxy advisory services to the shareholders of Texas-based companies.
The governor signed the Act into law on June 20, 2025, and it takes effect on Sept. 1, 2025. The Act aims to ensure that proxy advice is provided to shareholders solely based on the maximization of shareholders’ financial interest. Accordingly, the Act requires proxy advisors to make certain disclosures in the event their recommendations to a Texas company are not solely in such shareholders’ financial interests. The Texas Legislature added several new sections to the Texas Business Organizations Code (the Code) to implement the Act as further explained below.
Legislative Intent and Applicability
Proxy advisors may influence the decision-making of Texas company shareholders by providing proxy advice and voting recommendations. Shareholders customarily expect proxy advisors to reflect the shareholders’ financial interests. The Texas Legislature was concerned by the increased influence that non-financial considerations, including certain environmental, social and governance (ESG) policies, diversity, equity, and inclusion (DEI) factors, and social credit or sustainability considerations have over the advice and recommendations that proxy advisors provide to shareholders.1
The Act imposes disclosure requirements on proxy advisors to shareholders of certain Texas companies. The Act defines a Texas company as a publicly traded for-profit corporation, limited liability company, partnership, or other business entity that: (1) is organized or created in Texas; (2) has its principal place of business in Texas; or (3) has proposed to become re-domesticated in Texas.2
The Act defines a “proxy advisor” as any person who, for compensation, provides a “proxy advisory service” to shareholders of a Texas company or to other persons with authority to vote on behalf thereof.3
A “proxy advisory service” includes specified services such as voting advice or recommendations, proxy statement research or proposal analysis, a rating, or research regarding corporate governance and the development of proxy voting recommendations and polices.4
Disclosure Requirements for Proxy Advisors
Any proxy advisor is required to make the disclosures further detailed below, when: (1) its recommendations are “not provided solely in the financial interest of the shareholders of a company”;5 or (2) such advisor provides advice that is “materially different” to shareholders who have not expressly requested services for a nonfinancial purpose.6
When Recommendations Conflict with Shareholders’ Financial Interests
A proxy advisor is deemed to have given advice not solely in a shareholder’s financial interest if its advice is entirely or partially based on, or otherwise takes into consideration, non-financial factors. The Act provides a non-exclusive list of non-financial factors that includes ESG policies or investment principles, DEI considerations, social credit, sustainability factor, score, or affiliation with an organization that bases its evaluation of the company’s value on similar non-financial factors. Similarly, any advice based on non-financial considerations that subordinates the financial interests of a shareholder to such non-financial considerations will be regarded as advice not provided solely in a shareholder’s financial interest. In addition, any recommendation to vote against a company proposal to elect a governing person that does not affirmatively state that such recommendation is made solely based on the shareholders’ financial interest will also be deemed to constitute advice that is not solely in a shareholder’s financial interest.7
New Disclosure Obligations Under S.B. 2337
If a proxy advisor gives advice that is not solely in the financial interests of shareholder clients, it must comply with new disclosure obligations. Specifically, it must provide a notice to each shareholder (or person acting on a shareholder’s behalf) and the applicable company that: (1) conspicuously states that its advice is not based solely in such shareholders’ financial interest because it is entirely or partially based on non-financial factors and (2) explains the applicable non-financial factors with particularity, including how the financial interests of such shareholder may have been subordinated to such non-financial factors. The proxy advisor must also publicly and conspicuously disclose on the home or front page of the website of such proxy advisor that its advisory services include advice and recommendations that are not based solely on the financial interest of shareholders.8
Additionally, if a proxy advisor provides advice that is inconsistent with the recommendations of the board of directors of a company or a relevant committee comprised of a majority of independent directors, such advice will be deemed to be provided not solely in the financial interest of a shareholder unless the proxy advisor provides a corresponding written economic analysis that explains its reasoning.
The analysis must set forth:
| 1. | the short-term and long-term economic benefits and costs of implementing any shareholder proposal as proposed; |
| 2. | an analysis of whether the proposal is aligned with the investment principles and objectives of the proxy advisor’s shareholder client; |
| 3. | the “projected quantifiable impact” if a proposal were accepted and the corresponding impact on the shareholder’s return on its investment; and |
| 4. | an explanation of the methods and processes used to prepare such written economic analysis.9 |
Disclosure Obligations Concerning Inconsistent Advice
The Act includes new provisions that require proxy advisors to disclose if they provide “materially different” advice concerning voting requirements for company and proxy proposals. The Act defines “materially different” advice as the simultaneous recommendation to various shareholders concerning: (1) inconsistent recommendations to vote for or against any proposal; (2) inconsistent recommendations concerning a vote for, against, or an abstention for a nominee of any governing person of the company; or (3) recommendations that are in opposition to the recommendations of the company’s management team.10
In addition to the disclosure requirements set forth in Sections 3 and 4 above, a proxy advisor that provides materially different advice is subject to other disclosure requirements. Such proxy advisory must disclose the relevant advice to: (1) each shareholder receiving materially different advice; (2) any entity receiving such advice on behalf of a shareholder; (3) the company that the advice relates to; and (4) the attorney general of Texas. Further, such proxy advisor must also disclose which of the advice or recommendations provided is solely in the shareholders’ financial interest and supported by specific financial or economic analysis that the proxy advisor either performs or relies on.11
Enforcement and Compliance
Any proxy advisor’s non-compliance with the Act is deemed to be a deceptive trade practice under the Texas Deceptive Trade Practices-Consumer Protection Act.12 Accordingly, proxy advisors may face increased risk if they do not comply with the Act from claims brought by shareholders, the applicable company, and other recipients of proxy advice. The Act provides that a plaintiff must also notify the attorney general of Texas within seven days of the date that it brings a claim, and the attorney general may intervene in the action.13
Potential Impact on Texas Corporate Governance and Investment Climate
Some critics have raised concerns that the Act may increase compliance costs for proxy advisors and may tilt proxy advisors’ advice in favor of management teams as part of a proxy advisor’s strategy to mitigate its own financial risks arising from non-compliance with the Act. Other critics have suggested that the Act may have unintended consequences due to the breadth of the defined terms used in the Act (for example, proxy advisor) may extend beyond its intended targets.14
Supporters of the Act argue that the new Texas proxy advisory rules are intended to address uncertainty surrounding the methodology proxy advisors have used to establish their advisory decisions and are intended to promote a more accountable business environment. This new disclosure-based framework seeks to strike a balance between free-market principles and a need for transparency and accountability. The Act is part of a series of recent efforts the Texas Legislature has taken to enhance Texas’ desirability for investment, corporate relocations, and to establish the state as a favorable jurisdiction for public companies by bolstering investor confidence and promoting stronger corporate governance.
3New Section 6A.001(3) of the Code.
