Investor services and proxy advisory company Institutional Shareholder Services (ISS) announced that it has filed a lawsuit in a federal U.S. court aimed at challenging a new Indiana law – that has been replicated in several states – that would require proxy advisers to provide what it called “a regime of state-law mandated warnings” when recommending voting against company management.
The new law, introduced and passed earlier this year, requires proxy advisors recommending votes against management policies to make disclosures to clients and to the company if the recommendation is not based on a “written financial analysis” that considers the short term and long term financial benefits and costs of the proposal, and if the analysis has been made, to make it available upon request.
In its filing to the court, ISS said that the new law, H.B. 1273, “will subject ISS to a stunningly broad regime of state-law mandated warnings whenever ISS speaks to any of its clients anywhere in the world—all for the act of giving advice to those clients that goes against what company managers want their shareholders to do.”
The filing outlined several problems with the law, claiming that it would require the proxy advisor to make statements that are “patently false” by implying that it hasn’t consider the impact of its recommendations, particularly as many issues cannot be quantified. As an example, the complaint said that “many issues that generally come up for a shareholder vote do not lend themselves to financial prediction—like whether to vote for or against reelecting a particular board member who has missed too many meetings in the past.”
The lawsuit argues that the law is unconstitutional, including by violating free speech by targeting only anti-management recommendations, and by being “unconstitutionally vague,” as well as by extending its application beyond the state’s borders, with ISS saying that “it purports to apply to any counter-management recommendation that a proxy advisor makes to any of its clients, about any company, anywhere in the world.”
The complaint requests that the court decide on a preliminary injunction to halt the application of the law, which is set to come into effect in July 2026.
The new law forms the latest in a series of actions by anti-ESG politicians in the U.S., which has increasingly focused on the proxy advisory firms in the past few months, including an executive order by President Trump in December directing several U.S. federal agencies to increase oversight of ISS and Glass Lewis over their support for ESG and DEI issues, as well as lawsuits and investigations launched recently by Florida and Texas, and a warning from SEC Paul Atkins of plans to examine and propose actions focused on the role of proxy advisory firms over the “weaponization of shareholder proposals by politicized shareholder activists.”
In a statement announcing the lawsuit, ISS said:
“Indiana’s H.B. 1273, which closely tracks a model state bill introduced in approximately 12 U.S. states, is the latest in unconstitutional attempts to target proxy advisors for the advice they provide to their subscribing institutional investor clients. These attempts threaten to distort the free market of information that sophisticated investors rely on when managing their investment portfolios all over the world. As sophisticated institutions, U.S. and global institutional investors do not need government overreach to protect them from receiving the very services they hired ISS to perform.”
