A federal judge late Friday issued a preliminary injunction that prevents an Indiana statute from taking effect on July 1 which would have required proxy advisory firms to provide a "written financial analysis" whenever they recommended votes that opposed company management, or else disclose that no such analysis had been conducted.
The injunction was granted in a lawsuit brought by Institutional Shareholder Services and Glass Lewis, the two prominent firms that advise institutional investors on how to vote at corporate annual meetings. The decision by U.S. District Judge Matthew Brookman of the Southern District of Indiana sided with plaintiffs who argued the statute infringed on their constitutional rights.
Judge Brookman, among other findings, concluded that the Indiana measure amounted to prohibited "viewpoint discrimination" because its compliance burden applied only when the proxy advisers’ recommendations conflicted with the views of company management. The firms had argued in separate filings that the law violated freedoms including their right to free speech.
Supporters of the Indiana rule had framed the requirement as a way to ensure proxy advice focused on financial outcomes, saying that when advisers recommend votes against management they should back that position with a written financial rationale. Republican lawmakers and other backers have expressed concern in recent years that proxy advisers were unduly favoring shareholder resolutions on environmental, social and governance topics such as workforce diversity and climate change. Critics also cited long-standing business complaints about the firms’ influence over areas like executive pay.
In a statement following the ruling, ISS described the judge’s decision as an important rebuke of what it called an "unconstitutional exercise of power over the free market." The firm pointed to similar federal rulings in Texas and Kansas that have blocked state-level attempts to restrict proxy advisers and said the Indiana decision provides further evidence that states cannot impose onerous obligations on proxy advisers simply for making recommendations that do not align with company management.
A Glass Lewis spokesperson said via e-mail the firm welcomed the recent federal decisions. The spokesperson said, "These rulings safeguard core First Amendment principles by rejecting speaker and viewpoint discrimination and ensure we can continue to deliver the objective research that our clients have come to expect."
The case in Indiana represents the third instance in which the two proxy advisers have gained favorable preliminary rulings in federal court within the past year. The firms won similar injunctions in Kansas and in Texas last year, a string of outcomes that suggests state-level efforts to impose new rules on proxy advisers face continuing legal obstacles.
Several related legal actions remain active. Lawsuits in Texas and Kansas are still pending in federal courts. ISS and Glass Lewis have also filed suit seeking to block enforcement of a comparable rule in Kentucky. Separately, both firms are defendants in a consumer protection and antitrust lawsuit brought by Florida, which they deny, and ISS has indicated it intends to contest related legal actions in four additional states.
Context and implications
The injunction blocks the specific Indiana requirement due to constitutional concerns identified by the court. It does not resolve the broader dispute over the appropriate scope of state regulation of proxy advisory firms, and other pending suits and enforcement actions across multiple states mean legal uncertainty for the firms and for market participants remains.