01 Oct ASX accused of being out of step with international listing rules

Source: The Financial Review

By: Joyce Moullakis and Sam Buckingham-Jones

Seven West Media’s proposed $420 million tie-up with Southern Cross has sparked accusations the ASX’s listing rules are out of step with those in major international markets as the corporate regulator takes an increased interest in the exchange’s review of the regime.

The proposed merger of two of the nation’s biggest media companies is the latest in a string of controversial transactions announced on the local bourse that have raised the ire of Australian-based investors. The frustration is focused on waivers and exemptions under existing ASX listing rules that can allow major transactions to occur after a vote by investors on only one side of the deal.

Dean Paatsch, the co-founder of proxy advisory firm Ownership Matters, said the proposed merger of newspaper and television group Seven West and radio group Southern Cross highlighted “the absurdity” of the prevailing listing rules.

“It’s ridiculous that SWM shareholders get to vote on the transaction and that [Southern Cross] shareholders don’t,” he added. “The incumbent board could have insisted on a vote – if it was such a good deal for both parties, the vote would have flown through. The ASX has the balance wrong and is out of step with most major capital markets.”

The furore over shareholder rights has already caught the attention of the Australian Securities and Investments Commission, which is assessing ways to enliven sharemarket listings alongside more closely scrutinising burgeoning investments in private markets.

ASIC is actively engaging with the ASX on how the exchange is proposing to respond to shareholder concerns over the listing rule regime, according to sources with knowledge of the matter. During that engagement, the regulator has expressed frustration to the ASX over loopholes within the existing rules, said the sources, who are not authorised to speak publicly.

The exchange’s decision to allow James Hardie to acquire US decking group Azek – through the issuance of 35 per cent more shares – without an investor vote triggered a backlash earlier this year.

That occurred because the ASX granted James Hardie waivers to its listing rules. Typically, when a company issues more than 15 per cent of new shares to shore up its balance sheet, it must seek shareholder approval. The threshold for acquisitions under exceptions to ASX listing rules, is higher, at up to 100 per cent.

The pushback over James Hardie’s investors being carved out of a vote on the acquisition prompted the ASX in April to announce a sweeping review of the listing rules. That followed intense pressure on the ASX from a powerful alliance of large investors including AustralianSuper, UniSuper Aware Super, HESTA, Airlie Funds Management, Allan Gray and Fidelity Australia.

The James Hardie transaction came after embattled funds manager Perpetual completed the cash and scrip purchase of rival Pendal in early 2023, with only the target’s investors voting on the transaction.

Under the proposed media deal, investors in Kerry Stokes-backed Seven West will receive 0.1552 shares in Southern Cross for every Seven West share, and own 49.9 per cent of the combined group. Southern Cross shareholders would own 50.1 per cent.

In light of the transaction, the Australian Council of Superannuation Investors, the members of which manage more than $1.9 trillion, on Wednesday called on the ASX to expedite the listing rule review to better protect shareholder rights.

“The Seven West transaction highlights the fact that there is a clear loophole on the ASX listing rules,” said Louise Davidson, ACSI’s chief executive.

“As the James Hardie transaction showed, the ASX is out of step with international markets. If this deal involved two NYSE-listed companies, investors on both sides would have a vote.”

The New York Stock Exchange requires investor approval for share issuance or mergers and acquisitions if the transaction is equal to or exceeds 20 per cent of the number of shares or voting power. Davidson declined to comment on the value of the proposed Seven West and Southern Cross transaction.

“As a principle, shareholders should have a vote on any transaction that significantly changes a company and results in dilution of their interests,” Davidson said.

“Unfortunately, this [Seven West/Southern Cross merger] demonstrates that the James Hardie deal was not a one-off incident. Investors are still waiting for the ASX to protect shareholder rights and the ASX should expedite its process to close this loophole.”

The James Hardie deal and other listing rule waiver examples prompted fund manager Allan Gray – which owns 20 per cent of packaging group Orora – to recently seek the backing of the company’s board to change the constitution. The change will ensure Orora won’t be able to issue shares equivalent to 25 per cent of its stock without shareholder approval.

An ASX spokeswoman said the exchange was finalising a consultation paper as part of the listing rule review, and specifically shareholder approval requirements.

“This is expected to be released in the final quarter of this calendar year,” she said.

Investors, many of whom have met with the ASX as part of the review, expect the consultation paper to be released later this month or early November. That implies any changes to the rules will not be locked down until next year at the earliest.

The prior listing rule review in 2017 was conducted by the ASX and looked at reverse takeovers. It spanned 18 months, and it took about another six months before changes were implemented. That review included analysis of the experience in other sharemarkets and how many Australian transactions would be caught by requirements if a lower investor approval threshold was imposed.

But some fund managers don’t believe a change in the listing rules will make a difference to investors.

“You can have rules in place but if companies want to do deals, and they are desperate to do it, they’ll find a way,” said Nathan Parkin, Australian Ethical Investment’s head of equities. “You’ve got to trust the board and put a lot of weight on the board’s interest in the deal and the wherewithal for them to assess it properly. If directors own shares it’s always better we find.”

There is also opposition among some investment bankers and lawyers to making any changes to ASX listing rules, given they could impede or slow deal activity.

King & Wood Mallesons partners Nicola Charlston and Will Heath, writing in The Australian Financial Review, argued what some investors were pushing for would impose more red tape on listed companies.

“The arguments in favour of change are overstated and illogical,” they said.

“In the public M&A context, a listed company that requires its own shareholders to approve scrip issuance under a transaction may be viewed as a less attractive and competitive bidder to a potential target.

“Additionally, the target may seek the largest lawful reverse break fee to be paid if the listed company’s shareholders vote against the scrip-for-scrip issuance.”

The ASX has already introduced a change so that companies have to disclose that the exchange granted a listing rule waiver within one business day of receiving it. If the waiver involves a confidential transaction or deal that is still subject to negotiation some leeway is provided, allowing the disclosure to be made when the transaction is announced or completed.