Investor advisory firms win preliminary injunction in Indiana court case

A federal judge has issued a preliminary injunction that prevents Indiana Attorney General Todd Rokita from enforcing a new Indiana law against two investor advisory firms that say the law violates their First Amendment right to freedom of speech.

Those firms — Rockville, Maryland-based Institutional Shareholder Services Inc., or ISS, and San Francisco-based Glass Lewis & Co. LLC — are what’s known as proxy advisers. That is, they provide information and advice to institutional investors to help them decide how to vote on board elections, board or management proposals and shareholder proposals.

Institutional investors include entities such as pension plans, asset managers and mutual funds, which typically hold stock in many companies and therefore make decisions on many shareholder issues each year.

In separate complaints, ISS and Glass Lewis both filed suit against Rokita to challenge Indiana legislation that originated as House Bill 1273. The Indiana Legislature passed the law earlier this year and it is set to go into effect Wednesday.

ISS filed its complaint April 13 and Glass Lewis filed its own similar complaint a few weeks later, on April 30. Both of the plaintiffs said in their complaints that some of their clients are Indiana-based.

Noting that both plaintiffs have “a reasonable likelihood of succeeding” in the merits of their claims, District Judge Matthew P. Brookman issued preliminary injunctions on Friday that prohibit Rokita from enforcing HB 1273 against the plaintiffs until the litigation is resolved. Brookman also consolidated the two complaints into one case.

HB 1273 focuses on instances in which a proxy adviser recommends that a client vote against a proposal backed by the company’s management.

If this recommendation is based on a written financial analysis — defined in the law as an analysis of the financial impact of a proposal and on which vote on the proposal is most likely to have a positive financial impact on shareholders — H.B. 1273 requires the proxy adviser to disclose this fact to its clients, provide a copy of the analysis to company management and share it with the proxy adviser’s clients upon request.

If a proxy adviser’s recommendation is not based on a written financial analysis, the law says, the proxy adviser must disclose this fact to its clients, notify company management and post a prominent notice on its own website stating that it made a recommendation on a proposal without doing a financial analysis of the recommendation’s financial impact on shareholders.

In their complaints, ISS and Glass Lewis both argue that the law infringes on their First Amendment rights.

“By forcing Glass Lewis to attach misleading warnings to anti-management recommendations, the [law] undermines the credibility and independence of advice that pension funds, university endowments, and other fiduciaries rely on,” Glass Lewis said in its complaint.

Both of the plaintiffs have also framed the issue as part of a larger multistate effort to go after proxy advisers.

“Independent proxy advisors like Glass Lewis have become a focal point of a politically motivated campaign to suppress certain factors from being considered in investment and shareholder voting decisions,” Glass Lewis said in its complaint. “Attorney General Rokita has been a prominent figure in these efforts, suing investors who consider ESG [environmental, social and governance issues] and deriding it as ‘woke’ and ‘left-leaning.’”

In a statement provided to IBJ late Friday, ISS said Brookman’s decision is “further evidence that states cannot seek to impose onerous obligations on proxy advisers simply for making recommendations that do not align with company management.”

ISS also noted that within the past year, courts have also granted preliminary injunctions in cases challenging similar laws in both Kansas and Texas.

IBJ contacted Rokita’s office by email and phone seeking comment on the case, but the office did not immediately respond.