Texas Bill Aimed at Activists, Proxy Advisory Firms Provides a New Twist on State-Based Legislation

April 21, 2017

On the heels of efforts in deep blue states to capitalize on the Dodd-Frank pay ratio by imposing new taxes on public companies, the State of Texas is going the other way with a bill that would mandate a stringent set of public disclosures for activist investors in public companies headquartered in Texas as well as for proxy advisory firms issuing voting recommendations on activist-related proposals and nominations.  The goal of the "Bring Business to Texas and Fairness in Disclosure Act" is clearly aimed at insulating public companies headquartered in Texas from surprise attacks by activist investors.  Specifically, it would define "activist investor" as: any individual or entity that, whether alone or acting in concert with others, nominates "or attempts to nominate" an individual to the Texas company's board, or submits a shareholder proposal.  As defined, any "activist investor" must make a public disclosure within 10 days of becoming a beneficial owner of a Texas-headquartered public company.  The disclosure extends far beyond basic contact information and includes all plans and strategies with respect to the director nominations or shareholder proposals, the costs or expenses paid and anticipated to be paid, and all communications, including notes, emails, memoranda, letters, analyses, spreadsheets, presentations, instruments, and other documents, whether in written, digital or magnetic format. The legislation also would require proxy advisory firms to disclose the last five years of financial statements, the names of all beneficial owners of proxy advisory firms "through the ownership chain until a natural person is reached," and all internal communication and documents relating to the discussions and deliberations that resulted in the proxy advisory firm’s analysis or recommendation."  No action has yet occurred on the bill, but Republicans have a substantial majority in both the Texas House and Senate and the Governor is also a Republican.