Institutional Shareholder Services Inc. v. Rokita

In lawsuits brought by ISS and Glass, Lewis in Indiana, the federal district court for the Southern District of Indiana enjoined H.B. 1273, which imposed similar disclosure requirements when a proxy advisor makes a recommendation against management. The court concluded that H.B. 1273 “runs afoul of the First Amendment because it places a thumb on the scale in favor of management’s recommendation on all issues by burdening the opposite viewpoint.” The court rejected the Indiana Attorney General’s argument that deferential review should apply because the speech at issue was commercial and the law’s disclosure requirements are designed for consumer protection purposes. The court assumed, however, that the regulated speech was commercial and applied intermediate scrutiny, finding that although the State asserted the substantial government interest of consumer protection, it was “difficult to see how H.B. 1273 ‘directly advances’ that interest by requiring Plaintiffs to produce either a ‘written financial analysis’ or to disclose to their clients that they did not do such an analysis any time they disagree with management.” The court noted that the proxy advisors’ clients choose the policy they wish to apply to given shareholder votes, that clients are not bound by the recommendations, and that the defendant did not present evidence that clients had been “confused or deceived” by the proxy advisors’ recommendations. The court also found that the connection between the law’s disclosure requirements and the State’s interest in “keeping consumers and retail investors informed about proxy advisors’ services” was “too attenuated” to “directly advance” that interest. The court further found that the remaining preliminary injunction factors favored the proxy advisors and determined that consideration of the question of severing the unconstitutional portions of H.B. 1273 would be premature. The court did not address the proxy advisors’ claims that H.B. 1273 was unconstitutionally vague and violated the Commerce Clause by attempting to regulate out-of-state companies.