Kansas Proxy Advisory Transparency Act Likely Violates First Amendment

From Judge Holly Teeter (D. Kan.) Wednesday in Institutional Shareholder Servs. Inc. v. Kobach:

SB 375 is known as the Proxy Advisory Transparency Act. Under SB 375, a “proxy advisor” is “a person who, for compensation, provides a proxy advisory service to shareholders of a company or to other persons with authority to vote on behalf of the shareholders of a company.” “Proxy advisory service” is defined as certain “services that are provided in connection with or in relation to a company, or are provided to any person in this state.” This includes “[a]dvice or a recommendation on how to vote on a company proposal or proxy proposal.” Charitable organizations and banks that meet certain criteria are excluded from the definition of proxy advisory service….

If a proxy advisor makes a voting recommendation that aligns with the views of company management, SB 375 does not require any action. If a proxy advisor recommends a vote “against company management,” whether specifically or as default policy, and that recommendation is not based on a “written financial analysis,” the proxy advisor must:

(1) Concurrently with providing the proxy advisory service, include a clear and conspicuous disclosure to each shareholder, or entity or other person acting on behalf of a shareholder, receiving the proxy advisory service that:
(A) Identifies the service being provided;
(B) identifies the recommendation or policy at issue; and
(C) states that the proxy advisor has made the recommendation or policy without basing such recommendation on a written financial analysis regarding the impact of such recommended action on company investors that:
(i) Analyzes the expected short-term and long-term financial benefits and costs to the company regarding the implementation of the company proposal or proxy proposal;
(ii) concludes what vote or course of action is most likely to positively affect shareholder value; and
(iii) explains the methods and processes used to prepare the analysis, including the experience and geographic location of the personnel who formed the recommendation;

(2) provide, concurrently with providing a proxy advisory service under section 3(h)(1)(A) or (1)(B), and amendments thereto, the disclosure under subsection (a)(1) to the board of directors of each company that is the subject of the proxy advisory service; and

(3) while any proxy advisory services are being provided, publicly and conspicuously disclose on the home or front page of the proxy advisor’s website a statement that the proxy advisor’s proxy advisory services include one or more services that include recommendations or policies against company management on company proposals or proxy proposals that are not made based on a written financial analysis regarding the impact of such recommended action on company investors that:
(A) Analyzes the expected short-term and long-term financial benefits and costs to the company regarding the implementation of the company proposal or proxy proposal;
(B) concludes what vote or course of action is most likely to positively affect shareholder value; and
(C) explains the methods and processes used to prepare the analysis, including the experience and geographic location of the personnel who formed the recommendation.

If a proxy advisor makes a recommendation “against company management” that is based on a written financial analysis, the proxy advisor must:

(1) Concurrently with providing the proxy advisory service, include a clear and conspicuous disclosure to each shareholder, or entity or other person acting on behalf of a shareholder, receiving the proxy advisory service that:
(A) Identifies the proxy advisory service being provided;
(B) identifies the recommendation or policy at issue;
(C) states that the proxy advisor has made the recommendation or policy based on a written financial analysis that:
(i) Analyzes the expected short-term and long-term financial benefits and costs to the company regarding the implementation of the company proposal or proxy proposal;
(ii) concludes what vote or course of action is most likely to positively affect shareholder value; and
(iii) explains the methods and processes used to prepare the analysis, including the experience and geographic location of the personnel who formed the recommendation; and
(D) states that the analysis is available upon request;

(2) make such analysis available within a reasonable time to any client of the proxy advisory service upon request; and

(3) provide, concurrently with providing a proxy advisory service under section 3(h)(1)(A) or (1)(B), and amendments thereto, a copy of such analysis to the board of directors of each company that is the subject of the service.

The court concluded that the law was likely unconstitutional because it was viewpoint-based, relying on Chiles v. Salazar (the case that struck down restrictions on sexual orientation and gender identity conversion therapy):

The Court agrees with Plaintiffs that SB 375 is viewpoint-based on its face because the law draws a distinction based on the message conveyed. If a proxy advisor recommends voting with company management, SB 375 does not require any action by the proxy advisor and the speech is unencumbered regardless of the methodology (or lack thereof) or reasons underlying the recommendation. But, if the proxy advisor recommends voting against company management, SB 375 requires the proxy advisor to either (1) disclose a report that satisfies the statute’s definition of “written financial analysis” to the client and the company, or (2) declare to the client, company, and the internet at large that it made voting recommendations not based on a “written financial analysis.” SB 375 therefore regulates speech based on whether the expressed opinion is for or against company management….

And the court held that the speech involved wasn’t mere “commercial speech,” which is more subject to restriction:

“Commercial speech is that which does no more than propose a commercial transaction.” Advertising is the most obvious example. A combination of factors distinguishes commercial speech from non-commercial speech. Speech is more likely to be characterized as commercial speech if “(1) it is concededly an advertisement, (2) it refers to a specific product, or (3) it is motivated by an economic interest in selling the product.”

Plaintiffs’ voting recommendations are not commercial speech. The voting recommendations are not advertisements. Although commercial speech may not be “cabined to advertisements” as Defendant argues, advertisements are the quintessential commercial speech. The recommendations are not referencing a product. The recommendations are not offering a product for sale. The recommendations are the product. Also, although ISS and Glass Lewis offer their services for compensation, that transaction has already occurred before the voting recommendations are made. And the compensation is not for the specific vote, but for the service of providing voting recommendations. The fact that Plaintiffs are compensated for providing voting recommendations does not transform the voting recommendations into commercial speech…. “Commercial speech is speech that proposes a commercial transaction, not speech for profit. Therefore, merely receiving compensation for psychological services cannot be commercial speech.” …

Brian C. Fries and Carrie E. Josserand (Lathrop GPM, LLP) and Bruce D. Oakley, Dana A. Raphael, David M. Foster, Jessica L. Ellsworth, and Michael J. West (Hogan Lovells US LLP) represent plaintiff.