1. S.B. 2337: Proxy Advisors Who Do Not Advise Solely in Shareholder Financial Interest Must Explain Why Not
On June 2, 2025, the Texas Legislature passed Senate Bill 2337 (S.B. 2337), meaningfully regulating proxy advisors like ISS and Glass Lewis when providing proxy voting recommendations concerning Texas companies. The new law requires that proxy advisors make recommendations concerning companies headquartered in, incorporated under the laws of, or redomesticating to Texas solely based on the financial interests of shareholders. If their advice is not made solely in the financial interest of shareholders, then they must provide disclosures explaining, among other things, that their advice subordinates the financial interest of shareholders to non-financial goals.
- For example, recommendations against a Texas company proposal for director election must either affirmatively state they are being made solely in the financial interest of shareholders or specifically explain how the voting recommendation prioritizes ESG policies, DEI, or other non-financial goals above financial returns.
S.B. 2337 was designed to hold proxy advisors accountable for their recommendations. By requiring disclosure concerning the rationale for recommendations based on non-financial factors – including director no-votes based on ESG or other concerns – S.B. 2337 ensures that shareholders, including funds with their own shareholders, are not misled into following voting recommendations that subordinates their financial interests to a proxy advisor's particular ESG, DEI, or other social agenda.
The bill is expected to be promptly signed by Governor Greg Abbott and, once signed, will go into effect on September 1, 2025.
2. Summary of the Bill
S.B. 2337 provides that if a proxy advisor makes a voting recommendation concerning a Texas company that is not provided solely in the financial interest of shareholders, it must make the following required disclosures:
- conspicuously state that the service is not being provided solely in the financial interest of the company's shareholders because it is based wholly or partly on one or more non-financial factors;
- explain, with particularity, 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.
Advice from proxy advisors is expressly considered not to be provided solely in the financial interest of shareholders if the voting recommendation:
- is based on, or takes into account, non-financial factors, including any ESG principles, DEI, social credit, or membership in or commitment to an organization that bases its assessment of the company on non-financial factors;
- provides for a non-management proposal that conflicts with the recommendation of the board of 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 non-financial factors; or
- advises against a company proposal to elect a director unless the proxy advisor affirmatively states that the proxy advisors service considered the financial interest of the shareholders in making such advice.
Finally, a proxy advisor that gives differing voting recommendations about the same Texas company to different clients must give notice of the differing voting recommendations to its clients, the company, and the Texas Attorney General.
A Texas company subject to voting recommendations from proxy advisors that do not comply with S.B. 2337, or any of its shareholders, may bring a claim for injunctive relief under the Texas Deceptive Trade Practices Act, and the Attorney General is authorized to intervene.
3. Analysis and Implications
S.B. 2337 reshapes proxy advisory regulation in Texas, protecting the rights of shareholders significantly.
Proxy advisors seeking to operate in Texas must implement systems to disclose non-financial factors, report conflicts within 24 hours, and disclose director no-vote recommendations based on non-financial factors in order to avoid liability and injunctive relief under the law. This increased reporting benefits Texas companies and their shareholders by requiring voting recommendations focused on the financial interests of shareholders, and increased director "no" vote disclosures facilitating transparency in director elections and other matters put to a vote of shareholders. In particular, the new law will prioritize and encourage proxy advice based solely on shareholder financial return and not on ESG, DEI, or other non-financial metrics.
4. Other Legislation
S.B. 2337 is one of a series of corporate reforms, including Senate Bills 29 and 2411, adopted this session of the Texas Legislature, intended to show Texas's commitment to strong corporate governance for the twenty-first century, including through the provision of a stable and predictable legal environment. As Governor Abbott has said, "Texas is the reigning and undisputed champion for doing business in the United States of America. There is a difference between becoming a champion and repeating as a national champion year after year. To remain at the highest level requires constant innovation and improvement, and that is what we constantly work at to keep Texas as the best business climate in America."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
