The James Hardie / Azek merger, investor backlash and ASX’s response – is more say for investors on deals coming next?

At a high level, Listing Rule 7.1 provides that the equity securities a listed entity can issue without shareholder approval over any 12-month period is limited to 15% of the fully paid ordinary securities it had on issue at the start of that period, unless an exception applies. There is an exception for the issuance of equity securities to provide consideration under an Australian scheme or takeover, provided that, following the 2017 amendments discussed below, the number of securities issued is not greater than the number of securities the entity has on issue (ie it is not a “reverse takeover”).

The ASX granted a waiver to James Hardie which extends the scheme/takeover exception to apply to the merger on the basis that the Azek shareholder approval and merger process under US law is considered by the ASX to be sufficiently similar to an Australian scheme. The condition to the waiver is that the issue of shares under the transaction will not effect a reverse takeover. This is consistent with ASX’s published guidance, which provides that, where the ASX listed entity is to acquire a foreign entity through a mechanism that is sufficiently similar to Australia’s regime, the ASX will give a waiver so that the foreign acquisition is treated as if the scheme/takeover exception applies.

The ASX publicly released its reasons for its waiver decision. Those reasons also refer to Listing Rule 11, which provides that, if an entity is proposing to make a significant change to the nature or scale of its activities (generally 25% of relevant financial metrics), the ASX may impose a shareholder approval requirement or may require that the entity meet the requirements for admission and quotation as if it were applying for admission and quotation on the ASX for the first time. This is in effect to prevent so called ‘backdoor listings’ without proper disclosure and approvals. Listing Rule 11 also provides that shareholder approval must be obtained if an entity is disposing of its main undertaking (ie 50% change in relevant metrics). The ASX confirmed that, in following its published guidance, the only applicable consideration was whether the merger amounted to a backdoor listing of Azek on the ASX, and found that this would not be the case, as the merger would not result in a doubling of any of the specified financial metrics.

On the face of the technical position and as confirmed by the ASX, not requiring bidder shareholder approval in this situation is not out of step with the ASX’s published guidance. So why has it become such a fiercely debated topic for James Hardie shareholders and the wider financial press? The shareholder view is set out in a letter signed by 21 Australian fund managers, which, according to media reports, cites that a dilution of shares to the proposed extent and the expected shift of James Hardie’s primary listing away from the ASX to the NYSE ought to have been approved by shareholders.

Context is everything. Here the backdrop includes the announcement of what some commentators are calling an overpriced deal during a period of significant market turbulence (following imposition of new tariffs and other news), a broader trend of dwindling IPOs combined with a steady a stream of public to private M&A transactions and a transfer of a primary listing by an ASX50 company which has previously shifted itself away from Australia in circumstances where it had historic liabilities for asbestos related illnesses. 

James Hardie seemed to have listened to shareholder views, within the confines of the agreement for the merger, and confirmed around one month after the merger was announced that it would not be shifting its primary listing away from the ASX by seeking Foreign Exempt Listing status and, in any event, would hold a shareholder vote before any decision to change ASX listing status. The effect of this proposal is that, subject to any further waivers, James Hardie will have to comply with the full listing rules of both the ASX and NYSE in the meantime (as we expect that the merger would tip the number of James Hardie shares held on the NYSE to over 50%, revoking its “foreign private issuer” status for NYSE purposes). This is understood to involve added cost and governance restrictions.  

This is not the first time that shareholders have voiced concerns with a dilutionary scrip merger that did not require shareholder approval.

In 2014, Roc Oil and Horizon Oil proposed a scheme of arrangement whereby Roc Oil would acquire all issued capital in the larger Horizon Oil, resulting in Horizon Oil shareholders owning approximately 58% of Roc Oil. Horizon as the target required shareholder approval but, as the bidder, the smaller Roc Oil did not require shareholder approval even though it would essentially be taken over by Horizon Oil.

The transaction did not proceed as Roc Oil received a superior proposal. However, the shareholder outrage in response to the proposed scheme (including an activist shareholder convening a vote seeking to amend the constitution to not allow an issue of securities in excess of 30% of its existing capital without a shareholder vote, which did not pass) prompted reforms to the ASX Listing Rules such that reverse takeovers are no longer able to benefit from the scheme/takeover exception, taking effect in 2017.

Perhaps ironically, James Hardie would not be able to proceed with the merger without approval of its shareholders if its primary listing were on the NYSE. In the US, the NYSE rules mandate shareholder approval for transactions or a series of related transactions which involve an issuance of 20% or more of a listed company’s shares on issue or the issuance of a number of shares equal to or greater than 20% of the voting power of the company prior to the issuance (the “20% rule”). The Nasdaq has a similar 20% rule. There are a number of exceptions and limitations in respect of the 20% rule. However, unlike in Australia, there is no exception for shares issued in connection with a merger and bidders in public M&A transactions are not generally seeking waivers and exceptions to avoid shareholder approval requirements – a shareholder vote in an acquisition where a bidder exceeds the 20% rule is a well-accepted fact of public M&A in the US. Though James Hardie does already maintain a NYSE listing, it is expected that it currently benefits from “foreign private issuer” status on the NYSE, meaning that the ASX is its primary listing, and as such is not subject to the 20% rule.

By comparison, the UK has moved further away from requiring bidder shareholder approval for transactions. Prior to reforms enacted in 2024, the position under the listing rules in the UK was that shareholder approval was required for any “significant transaction”, being any transaction outside the ordinary course of business where the size of the transaction compared to the company was greater than 25% (based on certain percentage ratios).

Under the new regime, there is no such approval requirement for transactions greater than 25% other than in the case of a reverse takeover. The new requirement for significant transactions is that the entity must announce sufficient information regarding the proposed transaction and such announcements are not subject to prior FCA approval. While the listing standards have relaxed, share issuances require shareholder approval under UK company law, with the approvals required by any company for up to one-third of issued share capital (and a second third for a fully pre-emptive issue) routinely subject to resolutions at each AGM (in accordance with institutional investor guidelines).