A federal judge in Oklahoma City put a temporary block on a new Oklahoma law that restricts shareholder proxy advisory firms that recommend votes against company management.
U.S. District Judge Patrick Wyrick said House Bill 4429 likely violates the First Amendment and granted a preliminary injunction for the plaintiffs, proxy advisory firms Institutional Shareholder Services Inc. and Glass Lewis. & Co. LLC.
Federal judges in three other states have temporarily blocked their states’ versions of the law, a model bill called the Proxy Advisor Transparency Act. It was pushed by Consumers Defense, a Virginia-based nonprofit that said it fights so-called woke capitalism and environmental, social and governance goals.
Shareholders of public companies vote annually on a variety of issues, including routine matters such as executive pay, board of director elections and selecting audit firms. Shareholders can also ask companies to put other items on the agenda, such as corporate statements on the environment or human rights. Proxy advisory firms offer their advice on how shareholders should vote.
Wyrick issued his order Oct. 31, one day before Oklahoma’s law was set to take effect. He said the companies challenging the law would lose their free-speech rights. The law puts extra requirements on proxy voting advice that goes against company management. It imposes no restrictions when proxy advice aligns with management.
“Because the act burdens plaintiffs’ speech when they make a recommendation against company management, but does not burden plaintiffs’ speech when they make a recommendation in favor of company management, the law is viewpoint discriminatory,” Wyrick wrote in his order.
Wyrick said the government must meet a higher burden, called strict scrutiny, when it passes laws found to discriminate on viewpoint. He rejected arguments from the attorney general’s office that the new requirements on proxy advisory firms didn’t address whether they supported or rejected environmental, social and governance shareholder resolutions.
“The statutory preference is for agreement with management, regardless of the underlying issue,” Wyrick wrote.
A spokeswoman for Attorney General Gentner Drummond said the office had no comment on the preliminary injunction.
House Speaker Kyle Hilbert, R-Bristow, and Sen. Julie Daniels, R-Bartlesville, authored HB 4429. Caroline Estes, a spokeswoman for Hilbert, said the judge’s order was not a final determination on the law’s constitutionality.
“The intent of HB 4429 is straightforward: shareholders deserve transparency and accountability from the firms providing recommendations that can influence their investment decisions,” Estes said.
In a written statement, ISS said the court’s decision aligned with preliminary injunctions granted by federal judges against similar state laws in Kansas, Indiana and Texas.
“We remain sharply focused on providing our clients with independent, rigorous data and research that informs their decisions,” ISS said.
The preliminary injunction on HB 4429 comes as the Securities and Exchange Commission is taking public comments on a rule change that could make it harder for shareholders to propose changes to company management in the proxy process. Any changes, if approved, would not apply until the 2028 proxy season.
The SEC said it would rather not have to get in the middle of such disputes and wants to leave the process to existing state laws and company governing documents. Opponents to the rule proposal said few states have specific laws regarding shareholder ballot access, creating uncertainty and a patchwork of state laws.
Opposition to the rule change comes from both proponents and opponents of ESG measures that have dominated recent shareholder proposals. Those include religious groups with investments in publicly traded companies, as well as individual shareholders and large institutional investors.
“Shareholder proposals helped make annual director elections, majority voting and effective clawback policies on unearned executive compensation common practice,” the Council of Institutional Investors said in a Nov. 5 public comment. “In addition, many prompted productive company-investor dialogues that led to mutual agreements on salutary governance reforms without ever going to votes.”
Two firms that advise the state’s Tobacco Settlement Endowment Trust board of investors filed public comments on the proposed SEC rule change. The trust’s investment advisor, Innovest, said the rule ensures a cost-effective way to challenge management policies without resorting to legal action. Another consultant, Prospr Aligned, supported eliminating the rule but said states must be given time to make the necessary changes to address its elimination.
“Only recently have state fiduciaries begun to audit how their shares are voted and to align those votes with their own policies, state statutes and their beneficiaries’ interests,” Prospr Aligned’s CEO Derek Kreifels wrote in an Oct. 30 public comment. “That work is in its early stages. Shutting off the shareholder proposal channel now, just as these fiduciaries arrive, would tilt the outcome.”
Both Innovest and Prospr Aligned have been instrumental in Treasurer Todd Russ’ efforts to steer TSET’s investment policies away from ESG measures.
This article first appeared on Oklahoma Watch and is republished here under a Creative Commons Attribution-NoDerivatives 4.0 International License.
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