Regulations proposed by the Texas State Legislature would mark a blow to shareholder rights, subjecting investors, proxy advisors and other shareholder support firms to unprecedented disclosure requirements, and potentially serving to reverse the recent expansion of proxy access.
Texas House Bill 2382 would require ‘activist investors’ in Texas-based public companies to register with the state’s Securities Commissioner, and provide both the state and the company in question with exhaustive disclosure (including “all plans, intentions, motives, strategies, and objectives” along with any related “notes, e-mails, memoranda, letters, communications, proposals, analyses, spreadsheets, presentations, instruments, and any other documents”, and associated costs) within 10 days of becoming a beneficial owner and activist investor. Moreover, the same extensive disclosure requirements apply to all beneficial owners of the activist investor “until the last person named is a natural person”, creating a massive headache for any fiduciary and privacy issues for savers. Failure to comply would constitute a Class C Misdemeanor, equivalent to simple assault or criminal trespassing.
The bill defines activist investors as anyone directly or indirectly seeking to propose a shareholder resolution or nominate a director to the board, or simply acting “broadly in concert with” a proponent. As such, the onerous disclosure requirements could apply not just to investors actively pushing for nominees or agenda items, but also to unrelated shareholders who believe that disclosing their voting intention on AGM business forms part of their stewardship responsibility.
The bill also uses a very broad definition of a Texas-based headquarters, which would include “any location at which the president or other chief executive officer of the entity, a general partner of the entity, or any other senior member of the entity’s management team routinely performs duties.” As such, the scope of the legislation appears to go beyond issuers that are actually based in Texas, such as AT&T, Exxon Mobil and Southwest Airlines, to include companies based across the U.S. with a valid Texas presence.
With respect to proxy advisors, HB 2382 would require disclosure of a firm’s beneficial owners, five years of financial statements, and any documents “relating to the discussions and deliberations that resulted in the proxy advisory firm’s analysis or recommendation regarding the activist investor’s … nominee or shareholder proposal.”
Much like with ‘activist investors’, the bill includes an extremely broad definition of proxy advisors, including any firm “that provides corporate governance ratings, proxy research, analyses, shareholder services, or other similar services to shareholders of publicly traded entity.” This could include a wide variety of firms, from traditional ratings agencies, such as Moody’s and S&P, to ESG ratings such as Sustainalytics and MSCI, proxy solicitation firms or engagement services providers.
In an alert to clients, attorneys from the law firm Olshan describe the scope of the legislation as “unduly burdensome, excessive and inequitable,” and warn that “it could have a chilling effect on shareholder activism and proxy advisory work that have a specified presence in Texas, which, in turn, would help entrench management and the Boards of underperforming Texas-based companies.”
Following submission of HB 2382, a similar bill was proposed in the Texas Senate. While SB 2206 does not cover proxy advisors, and would not treat an activist investor’s failure to comply as a misdemeanor, it would nonetheless implement the same burdensome disclosure regime on investors.
The potential stifling of shareholder rights is particularly concerning in the context of the growing trend of active stewardship across the U.S. market. Shareholder resolutions have seen rising support on key issues ranging from governance practices to climate change to pay equity, and the recent expansion of proxy access provides long-term investors with an opportunity to shape the board itself. In addition, more and more investors are publicizing their voting intentions and working together where appropriate. However, these key rights are less likely to be utilized if they come attached to an onerous regulatory regime.