Federal judges sided with Institutional Shareholder Services and Glass Lewis & Co. in a pair of cases last week challenging state anti-ESG laws that targeted proxy advisers. The nation’s two largest proxy advisory firms had challenged Kansas and Indiana laws as unconstitutional, and federal judges in the cases issued preliminary injunctions halting their implementation.
The laws — Senate Bill 375 in Kansas and House Bill 1273 in Indiana — were passed in legislative sessions earlier this year, and ISS and Glass Lewis subsequently filed lawsuits to stop them from taking effect on July 1.
The Kansas state legislature passed SB 375, the “Proxy Advisory Transparency Act” in March, and overrode a veto from Kansas Gov. Laura Kelly, a Democrat, in April to approve the law, according to a legislative timeline. Indiana’s HB 1273 was passed in February and signed into law in March.
Under each law, if a proxy adviser recommended a vote contrary to a company management’s recommendation on a company or proxy proposal, they would have two options: either provide a written financial analysis that satisfies the statutes’ definitions or state that they made “the recommendation or policy without basing such recommendation on a written financial analysis regarding the impact of such recommended action on company investors.”
The preliminary injunctions will halt enforcement of the laws while the cases continue through court.
“These rulings safeguard core First Amendment principles by rejecting speaker and viewpoint discrimination and ensure we can continue to deliver the objective research that our clients have come to expect,” a Glass Lewis spokesperson said in an emailed statement to ESG Dive Wednesday afternoon.
The ruling came down in Kansas first on June 24, as a federal judge for the Kansas District Court ruled the firms’ contention that the law was a form of viewpoint discrimination in violation of the First Amendment is likely to succeed on the merits.
U.S. District Court Judge Holly Teeter agreed with the plaintiffs that it is likely a form of viewpoint discrimination. Because the disclosures are only triggered if the adviser’s recommendations are contrary to company management’s, Teeter said the law “therefore regulates speech based on whether the expressed opinion is for or against company management.”
“The fact that SB 375 doesn’t drill down even further on why a particular voting recommendation goes against company management does not make the statute any less viewpoint-based on its face,” Teeter ruled.
Following the ruling, ISS said in a June 24 statement that SB 375 “was not a transparency law, and it was not in the interest of American investors or businesses.” The proxy advisory firm said the law “required ISS to declare — to clients, to company boards, and publicly — that certain of its recommendations are not based on financial analysis.”
“That declaration is false and its requirement threatens free speech. ISS recommendations reflect rigorous analysis applied to client-selected criteria,” the statement said.
On Friday, two days after the ruling in Kansas, a federal judge in the U.S. Southern District Court of Indiana halted enforcement of HB 1273, also on First Amendment grounds, according to court documents. U.S. District Court Judge Matthew Brookman said the law “mandates disclosures that could themselves be confusing or deceptive” and forces ISS & Glass Lewis “into a lose-lose situation.”
“Plaintiffs can issue a ‘written financial analysis’ that they would not otherwise make,” Brookman said. “Or they can adorn their policy with a scarlet letter, disclosing to their clients, company management, and anyone visiting their website that their recommendations against management are not based on a written financial analysis, which assumes such an analysis would be possible in the first place.”
Last week’s injunctions mark the third legal victory for ISS and Glass Lewis against laws of this kind, as a federal judge stopped a similar one from going into effect in Texas last year. That law would have required advisory firms who advise companies based in the state to make that advice solely on financial interests and make public disclosures if ESG or diversity, equity and inclusion factors played a role in that advice.
“Over the past year, courts in Texas, Kansas, and Indiana have granted preliminary injunctions barring the states’ enforcement of similar laws pushed by outside advocacy groups,” ISS said in a statement Friday. “This most recent decision is further evidence that states cannot seek to impose onerous obligations on proxy advisors simply for making recommendations that do not align with company management.”
Despite the victories in court, ISS and Glass Lewis still face scrutiny from the Trump administration and a variety of Republican-led states.
President Donald Trump issued an executive order targeting proxy advisers — naming ISS and Glass Lewis — in December. Additionally four states — Texas, Nebraska, Iowa and West Virginia — filed state lawsuits against ISS in May, alleging deceptive trade practices over their integration of ESG considerations. Florida’s attorney general also sued the firm over similar allegations in November.
Editor’s note: This story has been updated with a statement from Glass Lewis.
