Texas has enacted S.B. 2337, a statute set to reshape proxy advisory practices for publicly traded companies that are either organized in Texas, have their principal place of business in the state or have proposed becoming a domestic entity within Texas.
Signed into law on June 20, 2025, and effective as of September 1, 2025, S.B. 2337 is intended to ensure proxy advice prioritizes shareholder financial interests, while introducing new transparency requirements if non-financial factors — including environmental, social and governance (ESG) and diversity, equity and inclusion (DEI) considerations — shape recommendations.
Both Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co. (Glass Lewis) have initiated legal action challenging the new law, filing separate complaints in federal court against Texas Attorney General Ken Paxton in his official capacity, challenging its facial and as applied constitutionality. See Glass Lewis & Co. v. Paxton, No. 25-01153 (W.D. Tex. filed July 24, 2025), and Institutional Shareholder Services Inc. v. Paxton, No. 25-01160 (W.D. Tex. filed July 24, 2025).
As of now, the court has not yet issued a decision on their claims, and a hearing regarding the motion for a preliminary injunction is set to take place on August 28, 2025.
Here is what boards, investors and legal counsel need to know.
What Does the Texas Law Change?
Proxy advisors — firms paid to provide voting analysis and recommendations — play a central role in major corporate decisions, from director elections to governance proposals. Legislators expressed concern that advice is increasingly influenced by factors beyond financial returns, such as sustainability or diversity goals. S.B. 2337 is intended to refocus proxy advice on financial objectives, or at minimum, require advisors to clearly flag when it's influenced by other considerations.
The law applies to:
- Any proxy advisor servicing publicly traded, for-profit corporations, limited liability companies, partnerships, and other business entities;
- The company is organized in Texas, has its principal place of business in Texas, or has proposed to become a domestic entity within Texas; and
- Advice is delivered by the proxy advisor to shareholders or to those authorized to vote on their behalf.
New Disclosure Requirements
When are disclosures required?
- Any time a proxy advisor's recommendation is not based solely on shareholders' financial interest, whether due to ESG, DEI, sustainability or similar non-financial priorities
- When materially different advice is given to different shareholders, especially if it counters management's position
Required disclosures must:
- Notify affected shareholders and the company that advice incorporates non-financial factors
- Specify what those factors are, and explain how financial interests may be subordinated
- Publicly state on the proxy advisor's website that some recommendations are not strictly financial
If advising against board or committee recommendations, a detailed economic analysis is required, detailing:
- Short- and long-term financial impact of the proposal
- Alignment with the client's investment objectives
- Quantifiable effects on shareholder returns
- The methodology used in preparing the analysis
For "materially different" advice (e.g., conflicted votes, opposition to management):
- Disclose specifics to shareholders, the company and the Texas Attorney General
- Clarify which recommendations are solely in shareholders' financial interests, with supporting analysis
Enforcement and Legal Risk
Non-compliance is deemed a deceptive trade practice, exposing proxy advisors to private lawsuits and enforcement by Texas's Attorney General. Plaintiffs must notify the Attorney General within seven days of bringing a claim.
Conclusion
S.B. 2337 brings substantial changes to proxy advisor disclosure requirements in Texas, with direct implications for public companies, boardrooms, and the broader investment community. Stakeholders should review their governance and advisory relationships promptly to ensure compliance and manage risk.
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.
