Texas Enacts New Law Regulating Proxy Advisory Firms Advising Shareholders of Texas Companies

What is the new law about?  On June 20, 2025, Governor Greg Abbott signed into law Texas Senate Bill (S.B.) 2337 “Relating to the regulation of the provision of proxy advisory services” that imposes new rules on proxy advisors, such as Institutional Shareholder Services (ISS) and Glass Lewis. Unless proxy advisors make voting recommendations regarding Texas companies “solely in the best financial interest of the shareholders,” they must comply with stringent new disclosure requirements in order to avoid committing a deceptive trade practice under Texas law. The new law will become effective September 1, 2025 and apply to proxy advisory services provided on or after the effective date.

Who is a “Texas company”?  A Texas company is any publicly traded, for-profit corporation, limited liability company, partnership, or other business entity that is organized or created under the laws of Texas, has its principal place of business in Texas, or foreign companies that have made a proposal to redomesticate to Texas. Glass Lewis estimates the law would apply to approximately 500 Texas companies, of which approximately 10% are S&P 500 companies.

What is its premise? The underlying premise of the new law is that shareholders who hire proxy advisors expect the services to be performed solely in the shareholders’ financial interest, and advisors who deviate from that expectation must clearly disclose that fact.

Advice is not considered to be provided solely in the financial interests of shareholders if it:

• Is based wholly or partly, or otherwise takes into account, any non-financial factors, such as ESG, DEI, social credit or sustainability scores
• Involves recommendations on shareholder-sponsored proposals that conflict with the recommendation of the board and does not include a written economic analysis of the financial impact of the proposal on shareholders
• Is not based solely on financial factors and subordinates shareholder interests to other objectives
• Is against the company’s proposal to elect board members, unless the advisor positively affirms that its recommendation solely considered the financial interests of shareholders

One issue we considered is whether a proxy advisor could defend its recommendations by asserting, for example, that while a recommendation relates to DEI, it is not a “non-financial” factor because of the proxy advisor’s belief that satisfaction of DEI goals is of financial benefit to the shareholders. As noted in a previous FW Cook publication, the SEC Investor Advisory Committee justified its proposed expansion of reporting of DEI data by referencing studies purporting to show the economic benefits of DEI. While S.B. 2337’s language does not specifically address this aspect, it can certainly be read to say that factors like DEI are conclusively presumed to be non-financial factors.

What does it mean for proxy advisory firms?  If a proxy advisor’s recommendation is based in whole or in part on non-financial factors, the advisor is required to:

• Conspicuously state that the service is not being provided solely in the financial interest of the company’s shareholders;
• Explain the basis for the proxy advisor’s advice concerning each recommendation and that it subordinates the financial interests of shareholders to other objectives, including sacrificing investment returns or undertaking additional investment risk to promote one or more non-financial factors;
• Immediately provide a copy of the statement and explanation to the company; and
• Publicly and conspicuously disclose on the home or front page of the proxy advisor’s public website that the proxy advisor’s services include recommendations that are not based solely on the financial interest of shareholders.

Additionally, if the proxy advisor gives differing voting recommendations about the same Texas company to different clients, the foregoing disclosure requirements would apply, together with a requirement to provide notice to shareholders, the company, and the Texas attorney general.

What are the practical implications for shareholders of Texas companies?

Proxy advisory firm reports relating to the typical annual meeting ballot items may need to be specially customized for Texas companies if voting recommendations are based on non-financial considerations or conflicts with the board’s vote recommendation. For example, additional analyses related to financial implications of proxy advisory policies may be needed; scorecards, such as ISS’s QualityScore, and diversity commentary may be affected. In essence, the analysis underpinning proxy voting recommendation would need to be customized for each Texas company.

What are enforcement implications?

A violation of the law will be considered a deceptive trade practice under the Deceptive Trade Practices-Consumer Protection Act (the “Act”). S.B. 2337 authorizes actions for declaratory and injunctive relief by the recipient of the proxy advisory services, the company, or any shareholder. While the Act also contains provisions authorizing attorney fees, it is not clear whether these provisions would apply to an action brought by a shareholder alleging a violation of S.B. 2337. This may become an important issue for the plaintiffs’ bar as it considers the extent to which S.B. 2337 opens up new business opportunities.

Why does it matter? 

For Texas companies, the new law:

• Affirms the governance authority of the independent board
• Challenges the business model for proxy advisory firms by requiring customized analyses for any vote recommendations that conflict with the board’s recommendation
• Questions the implied benefits of ESG and other stakeholder priorities upon which proxy advisory firms have expanded their influence
• Could be viewed as a competitive jurisdictional advantage

If the new law is perceived to significantly increase the extent to which companies choose to domicile in Texas, we would expect to see other states consider similar legislation.

Observations

The new law is broad and the implications for proxy advisory business related to Texas companies could be substantial. Institutional investors with portfolios that include Texas companies would likely need to rely more heavily on their own policies in assessing various proxy proposals.

The law is effective September 1, 2025 meaning that the proxy advisory firms would have a very short window to adapt their policies and analyses to comply with the new law.

Steven L. Cross
Managing Director & Head of Houston Office

For over 25 years, Steve has served as the outside advisor to the board of directors and executive management in the design and ongoing administration of executive compensation programs.  His experience covers all aspects of compensation advisory services including compensation strategy development, incentive plan design, pay-for-performance assessments, and assistance with compensation committee governance issues.

Bindu M. Culas
Managing Director

Bindu Culas has over 20 years of executive compensation experience. She works across industries with domestic and foreign public companies, pre-IPO companies and privately-held companies. She has deep expertise in designing annual and long-term incentive programs, structuring equity plans and award vehicles, navigating talent attraction, motivation and retention challenges through business cycles, and advising on governance and investor considerations. Previously, Bindu was a partner at Linklaters LLP and she is well versed in the complex regulatory, compliance and tax aspects of executive compensation.