Dive Brief:
- A federal judge granted a preliminary injunction on Texas Senate Bill 2337, which targeted proxy advisory firms and restricted use of ESG factors, on Friday, preventing implementation of the law that was set to take effect Sept. 1.
- U.S. District Court Judge Alan Albright, of Texas’ Western District, ruled the law is preempted by the Employee Retirement Income Security Act of 1974, the First Amendment and is “void for vagueness.”
- Institutional Shareholder Services and Glass Lewis, the nation’s largest proxy advisers, sued Texas Attorney General Ken Paxton to stop the law’s enforcement in July. Spokespeople for both firms expressed appreciation for the ruling to ESG Dive in separate statements.
Dive Insight:
The Texas state legislature passed SB 2337 during its spring legislative session, and Paxton signed the law on June 2. Had the law been allowed to go into effect, it would have required proxy advisors who serve companies headquartered, incorporated in or re-domesticating to Texas to make public disclosures if ESG or diversity, equity and inclusion factors played a role in the advice given, according to an analysis by law firm Foley & Lardner LLP.
ISS and Glass Lewis alleged in their lawsuit that the law’s requirements violate their First Amendment right to free association and the First Amendment’s prohibition on viewpoint discrimination. The advisory firms’ lawsuit also raised the issues of the law’s vagueness and likely ERISA preemption in their initial complaint.
Judge Albright agreed the firms are likely to succeed on the merits of their challenge because the law “discriminates based on viewpoint and content” in violation of the First Amendment, in addition to being preempted by ERISA and “unconstitutionally vague,” according to the Aug. 29 ruling.
“S.B. 2337 discriminates based on viewpoint when it subjects certain viewpoints to rigorous regulation but not their counterpoints,” Albright wrote. “Worse, it compels private speakers to adopt and parrot the government’s viewpoint on hotly contested topics.”
Regarding ERISA, Albright found the law “governs a central matter of plan administration and disrupts nationally uniform administration.” He ruled the law interferes with ERISA’s requirements by discouraging proxy advisors “from considering facts and factors that must be considered under ERISA;” requiring advisory firms to make disclosures that “stigmatize [their] advice” for making considerations required by ERISA; and exposing fiduciaries to lawsuits for “following a recommendation marred by the Act’s disclosures.”
Albright ultimately found that the plaintiffs would “suffer irreparable harm from violations of its constitutional rights and unrecoverable, substantial compliance costs,” while “an injunction of this unconstitutional law would not harm the State and would protect the public’s interest in free speech.”
An ISS spokesperson said the firm “appreciates the court’s ruling” in an emailed statement to ESG Dive Friday.
“ISS helps our institutional investor clients make informed decisions on behalf of the funds they steward,” the spokesperson said. “We provide our clients with rigorous, fact-based analysis based on the client’s direction, so that they can make their own voting decisions.”
A Glass Lewis spokesperson echoed that sentiment in an email to ESG Dive Tuesday and said the firm “appreciates the court’s thorough consideration of our arguments and is pleased with its decision to grant our motion for a preliminary injunction.”
The ruling is likely to be appealed, and the case will continue at the District Court level, but the injunction prohibits enforcement of the law in the meantime.
The Texas Attorney General’s office did not immediately respond to a request for comment.
