Legislature takes more measures against firms opposing redomiciling in Texas

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(The Center Square) - Texas lawmakers are taking additional measures against proxy advisory firms that oppose companies redomiciling to Texas as Dell shareholders approved redomiciling to Texas from Delaware over the objection of proxy advisers. 

Proxy advisers are financial firms that research shareholder votes and make recommendations to institutional investors. They “hold positions of trust for their clients, and that trust is broken when the proxy advisors recommend votes that are based on politics, social issues, personal vendettas, or anything other than financial returns,” state Sen. Bryan Hughes, R-Minneola, said when he announced the need for a hearing last month. Hughes chairs the Texas Senate Committee on State Affairs.

In May, Dell Technologies announced it was moving it legal home from Delaware to Texas. Its board of directors recommended its stockholders approve its redomestication at its annual stockholder meeting on June 25.

On Thursday, “with 97% approval, Dell shareholders voted to bring our legal home to Texas. This is home and where we’ve always belonged. Texas gave us the talent, the universities, and the environment to build something that lasts. Proud to make it official. Let’s go,” Dell founder and CEO Michael Dell said.

The vote continued a movement known as DEXIT, and in this case, DEXIT to Texas. Just two days before, Axiom Space announced it was redomiciling to Texas, also leaving Delaware.

ExxonMobil also announced it was redomiciling from New Jersey to Texas, prompting proxy advisers New York-based Institutional Shareholder Services (ISS) and California-based Glass Lewis to urge shareholders to vote against doing so. Shareholders ignored them and overwhelmingly supported the move. Attorney General Ken Paxton then sued ISS, alleging it attempted to obstruct ExxonMobil from reincorporating.  

President Donald Trump issued an executive order to address the issue, but it’s been held up in federal court. The U.S. House Financial Services Committee also held a hearing last year, referring to proxy advisers as cartels. 

U.S. Rep. Ann Wagner, R-Missouri, said ISS and Glass Lewis control 97% of the proxy advisory market. “That concentration alone would warrant scrutiny,” she said.

But what was more troubling was their efforts to dictate shareholder vote outcomes, she said. 

She and U.S. Rep. Bryan Steil, R-Wisconsin, filed a bill to “impose new rules on the proxy advisor duopoly that require strong transparency disclosures and prevent conflicts of interest that have tarnished proxy advice and corrupted corporate governance.” It prohibits robo-voting, prohibits proxy firms from providing consulting services and requires their clients to issue annual public reports on proxy voting. 

Roughly 70% of outstanding shares in publicly traded U.S. companies are held by institutional investors. To save costs, many rely on proxy advisory firms’ recommendations on how to vote, the Manhattan Institute explains. 

Last fall, Texas Attorney General Ken Paxton launched an investigation into ISS and Glass Lewis for allegedly “potentially misleading institutional investors and public companies by issuing voting recommendations that advance radical political agendas rather than sound financial principles.” That was after he and 20 other Republican attorneys general launched an investigation in 2023 alleging their diversity, equity, and inclusion (DEI) policies interfered with their ability to honor their legal obligations, The Center Square reported.

Last year, the Texas Legislature passed Hughes’ bill, Senate Bill 2337, which Gov. Greg Abbott signed into law, to ensure that proxy advisers make recommendations based on financial returns and disclose when they don’t. In response, ISS and Glass Lewis sued to block it from going into effect. A federal judge enjoined its enforcement. 

“Proxy voting recommendations that do not look to the financial interests of shareholders are inherently fraudulent and may be inconsistent with the fiduciary duties of the asset managers who rely on them,” Hughes said. “Texas shareholders, and the millions of Americans whose retirement savings are voted on the basis of these recommendations, deserve to understand what is actually driving the conclusions of ISS and Glass Lewis.”

At the Senate hearing, Hughes and others raised concerns about ISS reportedly recommending against state pension plans investing in oil and gas development. Texas law prohibits funds from doing so because of so-called Environmental Social Governance (ESG) policies. Those that do are placed on a divestment list.

Dallas-based Foley & Lardner law firm partner Christopher Babcock and Gibson Dunn appellate law firm partner Brad Hubbard testified that ISS and Glass Lewis weren’t disclosing key information to clients and their practices were conflicts of interest. When advising companies against redomiciling to Texas, “Not once in any of their published recommendations did they disclose that these firms, urging shareholders to reject coming to Texas, were themselves in active litigation with the state,” Babcock said.

Hubbard said the companies providing voting advice and consulting services was a conflict of interest. The practice of “charging public companies hundreds of thousands of dollars for guidance on securing favorable voting recommendations, while simultaneously providing investors with ‘independent’ advice on how to vote on those same company's proposals, creates a significant structural conflict of interest,” he said. 

ISS and Glass Lewis were invited to provide testimony to the committee, Hughes said. ISS declined; Glass Lewis didn’t respond. 

State lawmakers are now considering expanding state regulation, including requiring additional transparency measures.