Texas and the internal affairs doctrine

Welcome to shareholder Primacy from freefloat media. A podcast about activist investing Securities Law, and all the ways, the financial and legal worlds, intersect in Collide in real life. Together with an Lipton a law professor at Tulane in New Orleans she teaches and research Securities and business law. She holds up the legal end of the podcast. Mike Levin an activist investor who lives and works in Chicago. He covers the financial side of our podcast. I make I make my best for this week and let's talk about Texas about it. Yeah. Oh something like that and it's probably not very effective. What is going on down there? There's a lot of action, right? Or preferred, don't legal domicile. Before we get into that, let's talk about our new email address. Yes, what is it? Anne if you would like us to talk about something on the show or answer questions? Should email us at shareholder at freeflow.com LLC. And in fact Today Show was inspired by one question that we got and we will go through the mailbag as we as we can. Yes. All right, so yeah, shareholder Primacy at free flow, LLC send us your questions, your comments, your suggestions, your complaints, Anyway, as an alluded to we, we got some listener questions and somebody asked us about again. What's kind of the, the legislative and legal environment in Texas, which is been kind of competing to try to win the hearts and minds of boards of directors, to domicile there and in particular, and we'll get into the detail in a moment. They adopted a new law that governs shareholder proposals. There's a lot of other laws. Pending we're going to touch on them, but the one we want to spend a little bit of time on has to do with the secretary proposals, the ESG stuff that shareholders are always A proposed proposing at the companies, our listener asked us to talk about it, what the law is, which companies it applies to because it's not just Texas, domiciled ones, as it turns out, whether this new law that Texas, just approved, and we'll get the status of a minute, whether that violates federal law, that sort of thing. So, what's going on in Texas? And yeah, okay, so, yeah, and I'm actually, yeah, as you said, I'm gonna expand past, just the proposal rule because of their other legislation as well. There's a second Bill currently pending actually about proxy, advisors that raises the same issues. So, I think these two bills together, the proposal, which actually passed in the proxy one that's pending. Actually represent a much greater threat to Delaware's dominance than anything. We talked about So just I mean, you know, in past shows we've talked about how some companies have gotten frustrated but Delaware because they think it's too strict. Meaning, they think courts are too quick to find that boards breach, their fiduciary duties to shareholders and I think courts have made it too easy for shareholders to sue. So Nevada, Texas have been busy trying to capitalize on this dissatisfaction with Delaware to make their states more attractive and buy more attractive. I mean, Make it nearly impossible for shareholders to bring lawsuits and then Delaware revised its law. We talked about that on the show to me, show ya to bring to make these classes really impossible to bring but now Texas is challenging Delaware in another much more fundamental way. It's challenging the internal affairs Doctrine and that's a much bigger corporate governance earthquake than the list. All right so So we for a moment and there's going to be some of our followers that know this already, but a lot probably don't. What do we mean about the internal affairs Doctrine? Okay, great. So whenever we have these conversations about Delaware law versus Texas law, we're implicitly assuming the Eternal Affairs Doctrine. The internal affairs Doctrine is the rule that says, if I'm a Company Incorporated in Delaware organized in Delaware, the Delaware law controls, my corporate governance. Delaware dictates the power of the board yell at where dictates the rights of shareholder at dictates whether shareholders consume and so forth. Now if you think about Strange, and un. Imagine. A kind of does all of its business in Michigan. It's headquarters are in Michigan. The board meets in Michigan. All the Assets in the employees are so it's plants. Its manufacturing everything. It's it's within the borders of the state of Michigan. But if that company is Incorporated in Delaware, then when it comes to the question of board powers and shareholder rights, Delaware law, controls, and that's weird. It's kind of a unique system. It doesn't apply to any other area of law. So, like, normally if your employees are in Michigan, Michigan law, applies to your employees. Oh sure. Like, like if there's some sort of employment dispute, exactly at the state level, right? Michigan law would Prevail but when it comes to shareholders and and shareholders, and the board or whatever, using your example, it would be Delaware law, that prevails because the company elected to, basically Thomas down lower. Okay, exactly. With one little Except. To investors in Michigan and lies. That's not considered Internal Affairs, that's fraud. And Michigan law will apply to that, our Michigan security spot, right? But the rights of shareholders of the new year, he obligations. Once you actually have your shares, that's going to be the state where the company is organized, even if all of its business is somewhere else. So that's the internal affairs. Right? And the Eternal Affairs doctor is sort of an idea. It's not like there's some part of like Federal code or some sort of state code or something like that is actually more complicated. Okay. Um, but so, I mean, this is the thing about the internal affairs Doctrine is, it doesn't, it's sort of a historical accident. It kind of grew up. There's a matter of history and it doesn't, it's not really well but it's not really well thought out. But in general today, if people say that it's Justified for a couple of reasons, the first is like shareholders easily, sell their shares and they sell their shares across state lines. And if you reorganize what law applied to the company, every time somebody sold their shares. That wouldn't make any sense. And the other reason that we have at these days, they kind of, we acknowledge to a contract, the idea that shareholders are sort of in a contract with the board and the company and with other shareholders and they chose in by organizing, in a particular jurisdiction to have their contract governed by the law of the state of, right? So if there's parts of the contract that are unclear or ambiguous, where there's conflict and you need to sue something and one party needs to sue each other. Yet you've elected to in this case to be able to do it. but importantly, like I said, there's not some part of like Federal code or SEC or regulation that says that it's entitled Internal Affairs Doctrine, it's sort of Delaware would actually say that it is required. Oh, right, right. But all right, cool. Well, let's and and this exists. Why? What? Why do we care about exactly? It's Because of this idea that it would be just too much of a pain to figure out what your rights were if shareholders could sell their shares and suddenly they have a whole new set of Rights. And also, this contractual idea that if buying into a company organization, Delaware, you to be bound by Delaware law. Cool. All right. And then I started hinting at it and you started to set me straight about the relationship of federal statute. And I suppose regulation to all this and federal law does not. I mean, I would assume that federal law Somehow prevails here, maybe right? Exactly. So whether or not federal law recognize the internal affairs. After it's actually a sort of complicated question, but what is? And we'll definitely but the depth. But, but certainly federal law, always beats state law. If there's a particular issue, like, so if state law has a particular Rule and federal law has a different rule that conflicts with state law federal law wins. I mean, that's that part is in the Constitution. That's right. There's the Constitution does that. Okay. Go ahead. Exactly. So, the internal affairs Doctrine is about. How do you chose among the states? Like is it, Delaware law or is it Michigan law? But if there's a federal law principle, that conflicts, than the federal law is, is the one that wins. And that's usually the federal Securities laws. We're talking about the Federal Security laws. If it has a, you know, rule that conflicts with the state law, then the federal laws going to control. But a lot of federal Securities laws, especially usually try to make space for the internal affairs Doctrine. Like, usually the SEC kind of Ledges, that makes Rules and Congress legislates around the internal affairs Doctrine on the idea that corporate governance is really a state matter. So state, so federal law can preempt state law, but usually they leave a lot of space for state law to do a lot of the corporate governance work. So federal laws allowed to, but the federal lawmakers and regulation writers tend to be relatively careful. They're all as familiar with internal affairs Doctrine. They made a colleague exactly that. And, and sort of respect that I think is what you try not to trade too far into the areas that are controlled by States for corporate governance and the internal affairs Doctrine is Central to how Delaware has been dominant for so long. In like the market for corporate charters because to be governed by Delaware law, all you have to do is file paperwork and Delaware. You can have your operations, your stockholders, anywhere else in the country. But if you file, the paperwork in Delaware and pay Delaware's fees, your organized in Delaware and Delaware, controls your Governor. So if you imagine like a different world, like let's say the rule were Headquarters dictates your corporate governance. Law Delaware would never control anything. No Delaware has got one company and a bunch of chicken farms and stuff. Yeah. Right. The pain in the ass to get to most companies wouldn't choose to have their headquarters in Delaware just because it's not convenient. So if that were the rule, that the state of your headquarters, controls your governance, then companies would be much more likely to choose a state that made sense operational for operational reasons. So Delaware needs the internal affairs Doctrine in order to maintain its role of corporate governance. And that is what Texas has begun to challenge. I have another example for you, suppose you elect to be traded on an exchange, that's based in Texas. Well that is that regulated Federal Way, that's right. So yeah. So this is the, that's exactly the idea though that that Texas is doing this that it is the gun to start to try to regulate corporate governance. Even for companies that are not organized in Texas based on other basis. And one of the one of those pieces of legislation is this shareholder proposal rule that we got? Let's talk about that. Can we can we delve in for a moment about what that law basically provides for ya? Understand this you're gonna have to we have to talk a little bit about the federal rule is so we Know, I mean we've talked several times about shareholder proposals. And there's a federal rule, 1488 that allows shareholders to include items on the corporate proxy ballot for all the other shareholders to vote on like they'll make a proposal that the company should report on its efforts to reduce carbon emissions or its diversity efforts or its governance stuff. The company should separate chair and CEO and this Federal rule, 1488 has these procedural requirements about which shareholders can make proposals. They have to have certain minimum dollar amounts in their Holdings, that kind of thing, but if they meet the requirements, then when a company sends out a proxy statement with items for a shareholder vote, the company has to include the shareholders proposal in the in the proxy state in the proxy statement and the right shareholders. Vote with Texas, just passed a law that says that companies can if they want to choose to raise the minimum holding requirements above what federal law has, they can do that either by amending their bylaws or by amending their Charter and they can Set, the minimum holding for a shareholder proposal at either one million dollars or 3% of the outstanding shares, which Republican Trading Company. It could be well for like Tesla, which is the one everyone exactly wants to the newest Texas Corporation that's few shareholders other than These are very big numbers obviously. So like very few shareholders would meet this minimum which would mean that if you know, Texas is law, which passed its law. Now needs very few, if a company chooses to opt in very few shareholders, would be able to make proposals and the company also says, in the law also says that companies can forbid shareholder proposals and less the shareholders who make them solicit. 67% of the votes, which I'm honestly not exactly sure what that means. But we'll leave it at the companies can even yeah. Okay. All right, so just go ahead. I'm sorry, man, I don't because I have to say but it's A law applies to, that's the critical thing it applies. According to the statute, it applies to companies that are either listed on the Texas Stock Exchange, which you hinted at, which is new just for everybody. That's a new Stock Exchange. That is actually I have a little bit of rooting interest in there because it's the old Chicago Stock Exchange that got uprooted from Chicago. It's owned by nice right now. It got uprooted and moved to I think Dallas. Yeah, so now that's the new Texas and they're looking for listings. There's nothing on it right now. So like right only applies to companies that are listed on the Texas, that's a null set. There aren't any yet, but it also applies to companies with their headquarters in Texas. Not always in Texas but with their headquarters in Texas. So yes. So headquarters in Texas. Could and again, there's no I don't think. And this is one when I was kind of looking at this to get prepared to talk about this. There's no there's no I think, really clear, legal standards or doctrine or whatever about what it means to have a headquarters somewhere is there? No that would actually you know very often there isn't much of the debate but yeah you could have you could theoretically I mean like like a firm I used to work at Accenture. I, when I was Earth or Anderson, it was it's very long story. Not not for today, but Accenture is a classic example, publicly held company. I'm pretty sure it's a Delaware Corporation. They're like all over the place. Trying to figure out where their headquarters is, is really hard? Is it worthy? CEO keeps a desk. Well, he keeps desks and six different offices, she think. Yeah, so yeah, there isn't a clear. Yeah, it's a facts and circumstances kind of thing, okay, interesting. I have a couple of quick comments or questions about the proposal that I think will set up for like it's. No. Well yeah, that's the first question. The status of it is that The legislature approved it Governor Abbott signed it like like over the weekend or last week or something, right? And and it also refer a company to take advantage of it. I think you have to amend biological Charter. It's easier to buy loss. So right? It's not like you're automatically. Qualify. Even if you're trading on this certain this this exchange with no shares on it, no listing or your headquarters there, you have to affirmatively go amend. The bylaws. Exactly or the charter. And if I shareholders that you're doing it right and Tesla, I think already did that. Well, they did that for the different. Derivative. Oh, they did. Oh. I'm not sure either. Okay, cool. Um, and, Just to be clear and we're going to talk about this a little more. The 1488 Federal requirement. That basically, if you're a shareholder, that kind of qualifies, if you've got the right number of shares and so forth, that requires a company to include your proposal subject to some limits on the company's proxy materials. Yes, so that's like a publicity thing. So that that basically allows a proponent to disseminate their proposal. You know, to all the shareholders and so forth. Okay. And then Implicitly. The company is then required to include your proposal on the meeting agenda. For the AGM where it's going to be forwarded. Because just by definition, if it's going to be in the proxy, it's got to be in the meeting agenda. my sense is is that the proposal law that we're talking about that is related to the internal affairs acting Doesn't really have anything to do with the proxy statement. It's all about whether you have enough shares to even be, okay? Because if you meet the requirements, you have to that has to come from like you have to have let the shareholders come to vote and that's what the Federal. Strong. But the problem is that the Texas law obviously conflicts with the federal law and that the federal law, the holding requirements for how many shares you have to have are much much lower, so taxes if a company chooses to opt in and you know, changes its biological changes, its Charter, it can set. The threshold for what the holding requirements are for shareholder at much higher, to the point where essentially no shareholder would ever need it right. But here's the thing, the federal rule, 1488, the right for shareholders to include proposals, on the company proxy, normally, Federal Beach State. We just said that except 1488 the SEC created that right in order to allow shareholders to exercise the powers, they ordinarily have under state law. So the theory is the whole theory behind for 1488 is that once upon a time companies weren't widely traded, they were all closely held and shareholders all went to the shareholder meeting and once they were there, if they had something they wanted to propose, they could stand up and be recognized by the chair and make their proposal. And have people vote on it, right? When shareholders became a widespread and everyone started voting by proxy, they implicitly lost that ability because you even if you did go to the meeting you'd be the only one there. Like there's you know the company would hold all the proxies, right? So the voting power right? Exactly. So The whole point of 1488 was to restore to shareholders to the position that they were in when before shareholder became a wide space. And essentially allow them to exercise the rights that they already have under state law, it's right there. In the rule itself. One reason that companies can exclude a proposal is if the proposal is not appropriate for shareholder action under state law, so the SEC put some additional bells and whistle on it, their own holding requirements. That's basically about trying to avoid having the proxy become overcrowded but mainly 1488 is supposed to track what shareholders could do under state law. So the implication of that is if state law doesn't allow shareholders to make proposals under certain circumstances, then you wouldn't be able to use. 1488 for that. But that just makes the question, which states lost, right? Yeah. Yes, exactly. It would be the law of the organizing state, if you're chartered in Delaware, we looked at Delaware's law to decide. Shareholder can make a proposal. That's what texas' Texas is law assumes that it has the right to let companies limit shareholder proposals. Even if they are Incorporated in Texas, based on whether they either have Texas headquarters, which as you say, is not a precise thing or a Texas Stock Exchange listing, which doesn't exist yet. So, the argument that Texas law is it is making in a way, is that our law for certain companies. Should govern even if the company is formally organized. Wow, Delaware. So, this is a huge challenge. To Delaware, right? Well, because basically Texas is saying you don't have to change your domicile the way Texas did, you don't have to go and because changing domicile requires a big shareholder vote, then you have to amend the charter. It's actually in Delaware. Okay? For a Delaware company and move out of Delaware. It said it's an, I mean, the only ones we read about all this this, you know, all this noise about people, companies leaving dollar aware. If you look at the numbers, it's not that many and the ones that have are all controlled, right? It's all people that it's all owners are shareholders that had enough votes to, they could change the charter on their own. They didn't need a shareholder vote. What I'm hearing you say is that Texas has, at least attempted here. There's I'm sure this is going to get well, litigated has Texas is basically saying you don't have to read domicile the taxes. You can still Avail yourself of this shelter, proposal. That's what they're, that's what they're asserting. governance, even if domiciled in, Television, since it's defined our Texas headquarters and listening to Texas. Wow. But there is a wrinkle because I said, Company or bylaw. Harry possible. The Delaware would allow that too. Delaware hasn't actually passed a law about, oh, but I think it's very likely that if you put in your Charter, that shareholder proposals were limited, then that would control over 14 a 8 and it's probably, it's also possible that they would recognize it as a violife. I think with a lot less certain but it's certainly for a chart. So if that's right, they're really isn't a direct confrontation with Texas because let's say there's a company that's Incorporated in Delaware that headquartered in Texas. If it adopts Texas is Rule. I'm raising the threshold to 3% and someone were to sue a court would say well, it doesn't matter if you apply Texas, Laurel, Delaware law, the outcome is the same. The bylaw is valid because you amended the Delaware by lawyers to. Exactly. So either way though, Still think. Conceptually this is a shot across the ballot. Delaware and I should mention the original version of the bill before it passed. It actually was limited to companies that were organized in Texas that a Texas Charter. They took that out. So this was a real oh there was an amendment or something in Midstream okay in the drafting. So they really made this deliberate choice that they were going to try to regulate the internal governance of companies that aren't organized in Texas. Wow. All right. Hey We should talk about how this applies to other kinds of shareholder. Proposals, I have some other questions. There's some ways that activists might be thinking about this, and we can also talk about proxy advisors, but let's talk about all that after a quick break, may we Okay. All right, let's do that. So we will take that quick break now. And talk more about Texas here at shareholder Primacy. Cheryl Primacy is brought to you by free float, analytics.com. The only free database of corporate directors their influence and their performance. If you own a Stocker, retirement plan go to freefloat, analytics.com. And look up which of your elected directors are performing well and which aren't use your vote in the alternative democracy and get your data at free flow. Analytics.com. Now, back to the show, Welcome back to shareholder Primacy. I'm Ann Lipton here with Mike Levin. We've been talking about Texas and the moves. It's made to try to compete with Delaware. So, yeah. So we were talking about the shareholder proposal. Yes. And I think we kind of Thoroughly treated. The idea of how the conventional. Kind of ens proposals climate and so forth. Might be hampered. I think it would be a mild word for under this, especially if you know. Companies figure out a way to incorporate in Delaware, but operate in Texas. And then have this 3%, requirement they will be many, many fewer ESG proposals that would have at least gone under the conventional, 1488 route that, you know, where there's hundreds and hundreds of proposals that have been submitted over recent years, but someone fewer in the last year or two. What's going to happen for? other types of proposals and I have two types in mind that don't go through the this conventional 1488 SEC, no action pass the first And and we don't have to talk about him individually, but I think it illustrates it. The first was the really notable. Situation. When the United Mine Workers? We've talked about this on a previous. At least the United Mine Workers submitted you know, four or five proposals at Warrior met. Coal happens to be a Texas company. And was able to get those proposals, but they didn't use 148. They basically treated like a proxy solicitation and did their own solicitation, and so forth and got a bunch of proposals passed. So this, that's the first one, the second. Would be. A good example would be one that I tried last year having to do with the bylaw amendments having to do with shareholder approval of director comp. I mean if you remember, I said it doesn't proposals, they happen to go under 1480. But these were by law on Ministries. Weren't predatory proposals were binding proposals on the company. She always approved him. They'd be lost. So these type of, you know, outside the normal ESG, 1488 process, what is Texas's law? Think about what what do we think Texas's law with think about those? Exact same rule. Oh, really? Yes. So, assuming again, Texas, law controls here, although, once again, I'm not sure that it's different than Delaware law on this respect. I think It's very possible. Delaware law would also recognize. Certainly changing the charter and hospitalization violence that live in sherrills. But but yeah, under Texas law, it doesn't matter if you are, if it's a shareholder proposal, they're not talking about 148, they're just saying that you can't. That it is not a proper action under their law for shareholders to bring anything to the floor. Unless if the company is opted in to write raising the numerical threshold, except director elections, like this doesn't like it's says. So in the law, like, if somebody actually ran a direct or proxy. Oh, so in a proxy contest, this doesn't apply. It's not apply to that but I called like a directory. It says it's free direct elections. Yeah. But if you round your like exactly what the United Mine, yeah, with running. It was like Governor's proposals in a labor relations proposal. Yeah. This is law, says it cannot. You cannot get a share if the company is headquartered in Texas or on a Texas Stock Exchange and has opted in by raising the numerical threshold. Like, you know, it's not the you can, it's just you either have to hold a million dollars for the stock or three percent of the company stock, which You know, certainly most normal people but for real like serious activists, the million dollar holding might not. Oh yeah we say we talk about that. Is that is that is that for like A good example of a shelter proposal from last year was starboard Capital starboard value at newspaper, they wanted them to declass the board or not to class the board to take away the Dual class shares. No? Right. Yes. Take me there. Big enough that I'm not sure they own 3%, but they could, if this was important enough, they could have easily accumulated, 3% of that company. And this would not have mattered to them. Right? Exactly. Yeah. So it's gonna leave out most so you know and I don't know how much you know, United Mine Workers. The greater of 3%. Oh no. Oh, these are all very poorly. So so like all the Cheryl to proposals for the bylaw Amendment on the director comp again that I submitted assuming that one of they were a Texas company. I would have For if I wanted to solicit proxies myself, forgetting 1488, I don't care about the company's proxy statement. I'm not asking me in the company's practicing. I'm going to do all the solicitation by myself and I'm going to pay that kind of money. That would all I couldn't do it. Unless, I know, 3%, statute dropped it, although it's just said, like it's not even clearing unless you're a greater for all, I know the interpreted by Court differently, but the way it's drafted now and he shared a proposal that isn't direct or nomination. Right. And and then and then we're subject to this additional requirement, let's suppose we have Three percent. And let's suppose I wanted to do the 1488 route. I mean, you know, let's let's say, I got, you know, the right ownership requirement. It's a Texas company and I was trying to use 1480. I was trying to use the company's proxy. To communicate my material. I would still be subject to this 2/3, solicitation. Well, that exactly. Isn't it? Then rather than thinking about it, seriously. So it says that you have to solicit 67% of the book. Like, well, it says, once again, the company has to opt in if the company opts in then any shareholder wants to make a proposal has to solicit. 67% of the voting power, but it's not clear. Whether if it being on the company, proxy counts like anyone who, oh, interesting company, proxy is necessarily soliciting. 100%, there's exactly so listening. Okay, but that would be, I mean well this is pointless. So I Court might interpret it differently but I don't know because they yeah, this is clearly aimed at ESG proponents. I mean, I'm I mean, there's based on what we've talked about and based on what I was able to see is that, you know, again the big time kind of badass Financial hedge fund activists and so forth, you know, that they're not filing many proposals. There's probably other things that Texas is trying to do to make life hard for them but the shareholder Proposal law. Seems to be more. I would I would guess that probably Exxon probably. That's what? they're thinking, and X quartered in. Texas. So but this is like an axon Tesla Bill, not like not particularly what. Right. Okay. And what we could talk about this in a minute, but I want to, I wanted to ask you more about this other bill that they're trying to move around proxy advisors, but Trying to figure out what text is trying to accomplish here. They're trying to get people to list on this exchange or they're trying to get people to put a headquarters there or put to employees. Like maybe that's why they took out the organized in Texas piece because they wanted to apply. I don't know. All right. Anyway, so there's another bill write about proxy. Advisors what, what's, what's that trunk to do? Okay, so first of all, I mean, I'll just say, Obviously, you know, because we just talked about this on our very first shareholders, to help guide, how they vote on corporate matters and they've been getting a lot of hate from, I mean, honestly Republicans well yeah, for decades now but yeah. And Partly. That's because they recommend that shareholders vote in favour of ESG, proposals, sometimes, or at least that's the hook. But we said this on the show last time you that you said that it's not necessarily about ESG so much as it is that like, they don't that some don't like the fact that they'll recommend against CEO pay, right? That's really, that's really kind of it hits them where they're at cases, I think proxy advisors help shareholders coordinate their votes. They facilitate the exercise of shareholder of power and that makes them a Target. So, yeah, exactly there. I've long thought, that basically going after proxy advisors is just a way to go after their clients and proxy advisors are just a convenient punching bag. So anyway, but so Texas decided to Senate and we are now recording. I'm gonna mention morning of may just the last day of the house is legislative session. As I understand it like two weeks to every two years or something. So this is on the calendar for today. So when this actually airs, it will be either passed or not pass by. I think they can hold special sessions if they need you. Like even doesn't pass? I don't know. That it's dead forever. It can it. Back. So it may or may not be law by tomorrow, but um, but but it still worth talking about just to see what they're doing, even if it doesn't end up passing. So and like, the Cheryl The Proposal one, it's really badly. Drafted really badly. Like, one of the things that drives me crazy is that it has this definitional section, which is true of any legislation. It starts with, I'm going to Define my terms. So to find a bunch of terms and then it doesn't use the terms. It uses different. Oh you anyway. So it's really bad. You have to this bill starts out. So you have to understand how it starts out by saying that it's going to Define any proxy advice, that's as not as not solely and shareholders financial interest. If that proxy advice is based on ESG or Dei Now, so just by definition, just a premise, that anything along those lines, is not in shareholder interests, it's not their financial interests. It's not actually natural interest if it's based in any way on ESG, or Dei now, obviously that's ridiculous. Climate change. Can be a very serious financial concern, the G. ESG stands for governance. So so empirically, there's there's lots of debate about the extent and nature of the impact. And there's analyzes that show that it's negligible, and there's analysis that show that it's significant, but just assuming it away is not the way advice on financial concerns. If you're worried, if you're worried about corporate, Governance, if the recommendation includes an ESG or Dei consideration that it's definitionally, not solely, and shareholders Financial interests. And then it also says, if there's a shareholder proposal of some kind, and the proxy advisor is recommend voting against management recommendations, which basically means voting in favor of the proposal. Yes, if the proxy advisor, doesn't include a detailed written economic analysis, that also counts as a recommendation. That's not in the shareholders Financial interests. So there are two types of things that are defined just by definition to not be in shareholders solely, and shareholders Financial interests, either using ESG, or d, i or recommending in favor of a shareholder proposal without a written economic analysis. So you can already see, they're sticking this non-financial label on these recommendations, but it bottom, it's really just about stigmatizing anything that would challenge management, right? And so anyway if you're a proxy advisor last Louis or ISS, and you make a non-financial recommendation, under this rule you have to say in your recommendation that you aren't solely concerned about shareholders Financial interests. You have to put a note on your website that says, your recommendations are not based solely on shareholders, Financial interests, and you have to give a copy of your advice to the company. And they are give I mean they already do it. I think. dance cops, but there's more if you give Two different shareholders, different recommendations and that happens all the time because shareholders have their own. Oh yeah. Because they have different policies traffic. If you give Two shareholders voting, different voting recommendations, then if the client that you're giving the recommendations to haven't, specifically said they want non-financial recommendations. Then you also have to make these same disclosures, and you have to notify the Attorney General of Texas, what that you're making different recommendations and then you have to identify, which of the two is the financial one. And if you don't do all of this, that counts as a deceptive trade practice under Texas and so you can, you could get like hauled before a Texas court for exactly and this. law, like the Proposal traded and either organized in Texas or headquartered in Texas headquarters. Meaning this rely to companies that have Texas headquarters, but are Incorporated in Delaware, So, all right. so let's, let's say Wow. They're trying to even just think of an example as hard. Yeah, let's say you've got an investment fund. that's that's that's say it's Fidelity, which is based in Boston, okay. So it's a Massachusetts fund, okay? And their subscription. They I know they buy ISS. They also buy glass Lewis. They can afford it, they don't necessarily follow it. But that's what they do. Okay. And There they're, they're looking at a Texas company that's headquartered headquartered or trading. Is it the same to only had quarter in this one? So it could be? Excellent mobile, it could be American Airlines. It could be Tesla. There's you know yes that's good point. But the other ones I listed there's I mean in Texas is Number within the top three of Fortune 500s. I mean, there's a lot of companies that are kind of Base. There. But however, but it has a Delaware corporate charter. Okay, so Massachusetts fund. Buying advice from ISS which is based in Maryland. I'm not sure that matters and it's Texas. Company Incorporated in Delaware, this law would mean ISS would have to jump through all those Hoops or just give up. Yes. That is exactly. A duck adopted a rule. Very similar to this but not for proxy. Advisors it was for brokers who made recommendations to clients in Missouri. So it was much more territorial. Oh, and The Brokerage industry challenged, the rule and a Court held that the rule violated. The First Amendment and was really. So, like a buy sell, was viewed as expression of First Amendment. Well, it was just having to put this, I am doing non-financial recommendations. Was viewed as a violation of the First Amendment and unconstitutionally vague precisely, because we've said, it's such a weird label to put on things that might very well be Financial. So, I'm just throwing out there that this proposed this bill, which may or may not be law by the time this episode airs, right? Yes, it's good. It may have constitutional speech problems but putting that aside from Corporate perspective, the claim that Texas is making. I think they're calling this a deceptive trade practice. They're claiming it's about fraud. They're trying to protect shareholders from being defrauded that's what they claim. And I said before Texas does have the right to regulate fraudulent investment information. Sure in Texas but as your example shows right just like a Maryland company sending a report to someone in Boston. Exactly it. Normally Texas does not have the right to regulate happened. Let's say a Delaware Incorporated company. Boston investment fund, I'm not even sure Delaware could regulate this because Dello but at least Delaware would have a much better claim because the internal affairs Doctrine says, if he's organized in Delaware then Delaware control shareholder rights including the information shareholders. Receive in fact I think Delaware if we thought of Delaware doing this it would be on safer ground. If it's said something like A shareholder vote does not count as fully informed, if it doesn't receive for sharing of advice, okay? But that would be. Delaware regulating a Delaware organization, Delaware Corporation, or company, that opted into Delaware's exactly system. Text is trying to regulate Delaware organized companies as well by anchoring its legislation around, where companies are headquarters. So, this is very aggressive. So this, this takes us back to where we started, which is the internal, you know, the idea the internal affairs Doctrine in the idea that, you know, companies sort of internal. And by internally mean, kind of, you know, between the company its state of domicile, right? Texas is kind of invading that. Yeah, well, it's kind of thing. Dating the, you know, the governance of companies it's claiming the right to to regulate the governance of companies that are not organized in Texas, and this gets back to your what you would said before. But like, put the internal affairs, Doctrine isn't a federal statute or anything, and that's true, but Delaware would say, and this is where it gets fuzzy. That the internal affairs Doctrine is constitutionally required. Okay? So there's no specific law, but there's ways to read the US Constitution on parchment. That it's actually unconstitutional for Texas to try to control the internal affairs. Doctrine of a Delaware company and Delaware gets this from Some support precedent, that sort of supports, that, and you as Supreme Court, not like US Supreme Court. So, back in the 80s, when hostile takeovers first, like were a thing, some States, passed anti-takeover legislation. The tech did. Company overseers. If doing business in the state, this legislation it didn't care about whether the companies were chartered, it cared where the company had its headquarters, or where they had a lot of operations. Whether or, like where they had a lot of business and support held that this anti-takeover legislation. Represented in illegitimate attempt, by states to regulate economic activity that took out place outside of their own borders. Oh interesting. But then yeah, States like revised their laws and they started adopting anti takeover religiously that explicitly said it only applied to companies that were Incorporated within the state and then the Supreme Court okayed it So that was some very specific legislation under some very specific circumstances but Delaware's kind of run with that very limited president to say that the internal affairs Doctrine is constitutionally commanded. So that that would mean that Texas's laws here. It's not our, it's not that they conflict with Federal exactly. Is that, they are literally unconstitutional that said, right this second I'd say we're in a period of constitutional upheaval. Yeah. Right. Right. It's not, it's not clear. Whether this current Supreme Court would even consider something already kind of my dad. Yeah, it was already very shaky precedent to begin with. I mean, Delaware had its reasons for climbing. Yeah, the internal affairs Doctrine. It's solid constitutionally, and it really was never that strong to begin with, but there was some precedent for it. But I honestly don't know if Texas decides to keep running with this, I don't know how this fight shakes out. Yeah. Wow, okay. So And I was going to ask, let's kind of sort of see where this goes but there's really no way to know it. Yeah. I mean, I don't even know whether the proxy advisor rule will pass by the time, you know? Right. There's and there's and there's, you know, I saw there were two or three other bills that there's the one that has to do with the rivet of legislative lawsuits. There's there's several here and and maybe in a few weeks we can do a little wrap up and sort of see what what happened in Texas and what I mean, but importantly, not just what it means for like activists and over the law. Yeah, to see what their, what their whole collection with their whole portfolio of. Of legislative changes means in their effort to. I'm not even sure what they're trying to do. Her attract companies headquarters, know they got plenty of those domicile know, they just took that off the table, they're trying to are they trying to boost this stupid Stock Exchange, I don't know. I proposal rule not just apply to companies or organized in Texas with specifically for Exxon. Right. Yeah. And and all right. Well, all right, cool. Let's uh my head hurts. Hopefully we'll do we'll talk more about Texas in a few weeks or whenever when when they have a little more clarity in some of this stuff. All right, let's wrap up. Thanks Anne terrific, talk you about these? I think it's terrific. It's just, it certainly is made, you think hard? We will talk more later. This is shareholder Primacy hosted by Anne Lipton and me Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations and is the Michael EMF. Fleischman professor in business, law, and Entrepreneurship at Tulane law school, and an affiliate of two Wings, Murphy Institute, you can find me Mike at the activist investor.com. And Anne at two lane.edu, our podcast is produced and distributed by free float media. Thanks for listening. We'll talk again soon. My mom.