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Chilling, excessive rules for shareholder activists and analysts

Shareholder activists and proxy analysts face up to a year in jail and a fine of up to $4,000 if they fail to comply with a new regulations being proposed in the USA.

The US state legislature in Texas has proposed a bill, which would, if passed, require activist investors and proxy advisory firms owning or commenting on Texan publicly-listed companies adhere to new disclosure requirements that go far beyond current federal rules.

Steve Wolosky, Andrew Freedman and Ron Berenblat, attorneys at the US law firm Olshan, wrote in a client alert:  “The unduly burdensome, excessive and inequitable scope of the proposed disclosure requirements is like nothing we have ever seen proposed by any state.  If the Texas Act is adopted, it could have a chilling effect on shareholder activism and proxy advisory work with respect to public companies that have a specified presence in Texas, which, in turn, would help entrench management and the Boards of under-performing Texas-based companies.

Texan state legislature disclosure act

Texas debates state disclosure rules for proxy advisers and shareholder activists

Under the proposed rules, within ten days of becoming beneficial owner and an activist investor of a Texas-based public company, a shareholder would need to file with the Texas Securities Commissioner.

They would need to provide the company with a certified statement containing  information including the plans, intentions, motives, strategies, and objectives of the shareholder with respect to becoming an activist investor and with respect to the nomination or shareholder proposal. The shareholder would also need to disclose all communications, proposals, analyses, spreadsheets, presentations, instruments, and any other documents relating to the shareholder’s plans, intentions and objectives as well as any costs and expenses paid, incurred and anticipated by the shareholder in connection with these plans.

The proposed rules relating to proxy advisory firms include the disclosure of the past five years of financial statements; the names of all beneficial owners of the proxy advisory firm and any communications, proposals, analyses, spreadsheets, presentations, instruments, and any other documents relating to the discussions and deliberations that resulted in the proxy advisory firm’s analysis or recommendation.

The bill was filed on the 24th March and is due for discussion by the Texas House Investments & Financial Services Committee. Tan Parker, the Republican chair of the committee is sponsoring the bill which if passed the bill creates an Class C offence for those that violate its requirements. The bill has a proposed effective date of September 1, 2017.

What do you think?