The ASX Listing Rules up for review but still fit for purpose: the case for retaining the existing policy settings on reverse takeovers

Is there a case for amending the approval threshold? 6 min read

Merger transactions without a vote of the shareholders of each merger party are back in the headlines as a second deal sparks fresh tension and mounting calls from the Australian investment community for ASX to step in.

Earlier this month, Southern Cross and Seven West announced a transaction under which Southern Cross will issue 49.9% in new scrip to Seven West shareholders. Southern Cross shareholders won't get a vote on the deal. That puts them in the same camp as James Hardie shareholders, who back in April sparked an outcry following James Hardie's entry into a $14 billion tie-up with US building materials group AZEK and the transfer of its primary listing to the NYSE.

Both deals are structured to comply with ASX's Listing Rules and sit squarely within publicly articulated guidance. However, while the ASX's policy settings operated as intended and consistently with past practice, this provides cold comfort for some shareholders who have seemingly no way to directly oppose transactions they see as value-dilutive.

This scrutiny did not halt the James Hardie deal and, assuming Seven West shareholders (with the help of SGH's substantial stake) approve the formalities of the scheme, we don't expect it will stop the Southern Cross merger, either. However, the extraordinary focus has spurred ASX into action in reviewing its policy settings for shareholder approval requirements in control transactions. We are told a consultation paper is due imminently.

We've been here before, with ASX last considering this issue in 2017. Then, it decided not to require member approval for dilutive issuances in M&A transactions unless the listed entity is pursuing a reverse takeover,¹ reasoning that a 'convincing case (had) not yet been made' for a lower threshold to apply. Has 2025 now delivered two such convincing cases?

There are two relevant factors here. First, what are the right policy settings for ASX to adopt? Second, how should boards and management teams think about shareholder approval in the context of strategic transactions?

Whilst we apprciate ASX needs to show it is listening, fresh inquiries will lead to the same conclusions as before

Should members have a say in dilutive transactions?

Under Australian company law, it is the role of the board to determine the strategic direction of the company. That strategy can include decisions to acquire or divest of strategic assets or businesses and offering scrip is a usual and effective tool to fund such acquisitions. It is conventional Australian law logic that shareholders' ability to safeguard their interests is through their right to appoint and remove the directors.

Short of a reverse takeover or there being unacceptable circumstances, it is not for members or ASX to determine how a board's authority is to be used. This is as true in the M&A context as it is determining organic expansion plans or the adoption of new technologies. Disempowering boards from making independent decisions on transformative M&A could have implications for the authority and accountability of directors and, at a practical level, would impact competitiveness by introducing additional conditions to closing and, therefore, inherent deal uncertainty. In some cases it may also be appropriate for the board to consider a voluntary shareholder vote, but in the vast majority of cases this is unlikely to be palatable to bidder or target.² Mandating that shareholders have a say could result in boards needing to give undue weight to strategic vetoes by shareholders for reasons that do not necessarily align with the interests of the company (or its shareholders) as a whole. The proposed reforms may operate against the interests of the majority of shareholders by substituting power and accountability from the board to a handful of influential (and outspoken) shareholders.

Is ASX an outlier relative to other major exchanges?

Whilst some peer exchanges do indeed have lower approval thresholds for dilutive transactions, the international comparison is more nuanced than simply comparing the numbers. Relevant factors include the need to take into account the duties placed on officeholders, the exceptions that apply and whether there are any other corporate regulators in those jurisdictions that would separately regulate control transactions.³  ASX considered its policy settings were appropriately positioned amongst peer international exchanges and we expect the same logic—that it is designed to sit within rather than exceed our robust regulatory framework—to hold strong.

In the context of these important considerations which go to the core of corporate governance principles, it is difficult to see how ASX could compromise on these issues which they recognised in 2017 in now changing the current policy settings. Through this lens, whilst there may be good cause for introspection of recent board decisions in light of investor feedback, there does not seem to be a basis for any lower threshold of share issuance that requires member approval. If there were to be one, it would be arbitrarily determined through horse trading by ASX with those at the negotiating table. Where do we draw the line – 35%, 25%, 20%? And why is that lower number the right one compared to the current reverse takeover threshold of 50%?  

Without a reasoned basis to pick an alternative threshold, it is not clear to us that introducing one will lead to better outcomes.

If the intention is to bolster shareholder rights, one needs to think carefully about whether such a threshold would introduce an incentive to structure transactions with less scrip and more cash or debt to sit just below whatever threshold is put in place, in exactly the way it is no co-incidence that Southern Cross shareholders are being diluted by 49.9% to sit just below the current reverse takeover threshold. Similarly, if we pretend the ASX Listing Rules did currently require member approval for dilutive issuances of 35%, would James Hardie members have felt any better off being diluted by 34.9%?

To us, these two deals aren't the smoking guns that should trigger a change in the Listing Rules. There have been 28 waivers of Listing Rule 7.1 granted by ASX over the last decade⁴ in the context of dilutionary scrip transactions. This tells us two things. First, this is certainly not a prolific issue—on average, there are only two or so deals a year in this space, and that number falls substantially when you look at more significant transactions with a deal value over $250m (of which there have been nine).

Second, in analysing the market reaction, there is generally a muted shareholder response and marginal movement in share price following announcement of a deal, with few outliers resulting in significant increases or decreases. On average, ASX-listed companies that received waivers of LR 7.1 in order to enter into a scrip transaction during the period experienced a movement of +2.06% in share price in the five trading days following announcement. For deals valued over $250m, there was an average movement of -3.30%.

The market reaction to the James Hardie / AZEK deal obviously stands out, but at the other end of the spectrum the recently announced merger of Predictive Discovery with Robex Resources saw a 20% jump in Predictive Discovery's share price, indicating the deal has been well received by the market. James Hardie isn't the first time we have debated the strategic value of a merger, and it won't be the last, but that isn't grounds for systemic, fundamental reform to Australia's corporate governance settings for who should be responsible for the decision.

What this intense scrutiny does show is that there is scope for investors to turn this spotlight onto the companies themselves to ensure company strategies appropriately account for member interests. If they don't, shareholders should reflect on the rights and mechanisms currently available to them in being the ones that appoint the board and hold it accountable.⁵ On the contrary to some of the pessimistic takes on the state of our market, the options already available to shareholders to take action and for boards of companies to engage with their register is an opportunity to show corporate governance is alive and well.

We look forward to receiving ASX's consultation paper and participating in the process in the coming weeks and months.