ASX to Review M&A Rules Amid Discontent Over James Hardie Acquisition

Highlights:

• ASX initiates review of its M&A rules regarding shareholder approvals.

• Investors voice concerns over James Hardie’s acquisition of AZEK.

• James Hardie plans to hold a shareholder vote before any changes to listing status.

The Australian Stock Exchange (ASX) is known for its regulatory oversight of companies listed within the country. Recently, a growing issue has arisen related to mergers and acquisitions (M&A) processes, particularly regarding the ability of companies to issue shares for acquisitions without requiring shareholder approval. This situation has led the ASX to announce a review of its listing rules. The current system allows firms to make such decisions unilaterally, a practice that some groups of investors have found to be controversial.

James Hardie’s Proposed Acquisition and Investor Backlash

A significant factor driving the ASX’s decision to revisit its rules is the planned acquisition by James Hardie, a leading manufacturer of fibre-cement products. The company intends to acquire AZEK, a building materials supplier, in a deal. The scale of the acquisition has raised alarm among certain investors, who argue that it would lead to severe dilution of existing shareholders' stakes without their consent through a formal vote. The concern centers on the alteration of shareholder rights without the opportunity for approval, a process that critics deem unfair under the current regulations.

Investors Call for Review of Share Issuance Practices

The dissatisfaction among investors is rooted in the fact that, under the current listing rules, companies can issue shares for acquisitions without first obtaining shareholder approval. This is seen as a significant point of contention, especially in cases where such acquisitions involve large-scale transactions that could substantially impact shareholder equity. The investors have pointed to the James Hardie deal as a case in point, arguing that the dilution effect would be significant and that shareholder interests could be compromised without their explicit consent.

James Hardie’s Response and Shareholder Vote Plan

In response to the concerns raised, James Hardie has stated that it will hold a shareholder vote before making any alterations to its ASX listing status. This decision came in the wake of mounting investor pressure regarding the governance of the proposed acquisition. The company has indicated that, under its current listing status, shareholder approval is required for equity issuance to directors, a requirement that will remain intact even after the completion of the AZEK transaction.

However, the company's move to shift its primary listing to New York as part of the acquisition deal has raised further concerns. Critics argue that this shift could reduce the level of oversight Australian shareholders have over the company, as their ability to hold management accountable would diminish with the new primary listing.

ASX’s Review Process and Potential Revisions

The ASX's review of its listing rules comes at a time when questions regarding corporate governance, shareholder rights, and the balance of power between management and investors are gaining traction. Although the review is still in its early stages, it could lead to changes in the M&A process, particularly in terms of whether or not shareholder approval will be mandatory for share issuance related to acquisitions. The debate surrounding these issues has intensified with the James Hardie acquisition, which has brought to light the broader implications for shareholder engagement and decision-making power within the ASX-listed companies.

The ASX’s decision to review its rules signals an awareness of these concerns, and its findings may reshape how future M&A transactions are handled within the Australian market. It is yet to be seen how the ASX will ultimately respond to these concerns and what changes, if any, will be made to the existing framework for shareholder approvals in M&A scenarios.