Let's Let Listed Company Directors Take Risks

"The ASX's current listing rules and waivers fail Australian shareholders. This has made it necessary for shareholders to take matters into their own hands and to constitutionally enshrine protections, the likes of which are afforded to shareholders in many other countries. Even third-world countries have better protection than ours on this front." - Simon Mawhinney, Allan Gray

"If the ASX doesn't shut the loophole in the listing rules that allows companies to shaft their owners by issuing equity to vendors for acquisitions, then investors will shut the loophole themselves." - Dean Paatsch, Ownership Matters¹

With a large serving of hyperbole, an activist investor and a proxy adviser recently claimed that Australian listed company law fails shareholders. That claim apparently justifies two movements for change: first, proposed amendments to the ASX Listing Rules and, second, proposed amendments to listed company constitutions to tip the balance in favour of shareholders.

This note examines the arguments in favour of change and argues they are overstated and illogical. Moreover, the imposition of more red tape on listed companies, their boards and executive teams is not productivity enhancing. It will stifle potential economic activity and will distort the foundations of Australian company law, which vest decision-making in listed company boards and officers who, unlike shareholders (activist or otherwise), owe statutory duties to act in good faith in the company's best interests.

How did we get here?

James Hardie Industries Plc – which is not an Australian public company but was and remains listed on ASX – announced on 24 March 2025 that it would acquire AZEK, an NYSE-listed company. The acquisition was structured in part as a 'scrip-for-scrip' deal: James Hardie agreed to pay a cash amount and also issue a certain number of ordinary shares so that, on completion of the transaction, James Hardie and AZEK shareholders would own approximately 74% and 26% of James Hardie respectively.

The proposed issue of shares by James Hardie under the acquisition enlivened ASX Listing Rule 7.1. The rule generally prevents a listed company from issuing more than 15% of its equity capital in a 12-month period unless shareholder approval is obtained or an exception applies. Two well-recognised and deployed exceptions facilitate scrip-for-scrip takeovers and schemes. These exceptions exist because it would otherwise be difficult for a listed company (as a bidder) to complete a takeover or scheme were it required to seek approval from its own shareholders. ASX Guidance Note 21 also expressly states that ASX will consider granting a waiver for a listed company to make a cross-border scrip-for-scrip acquisition into certain countries including the US and UK. James Hardie obtained a waiver from Listing Rule 7.1 on this basis and was therefore able to acquire AZEK without a shareholder vote.

Following announcement of the transaction, there were criticisms that the transaction overvalued AZEK² and exposed James Hardie to too much leverage.³ These criticisms snowballed into claims that James Hardie shareholders should have been given a vote on the transaction and that the ASX Listing Rules should be changed so a transaction of this kind "never happens again".⁴

As a result, and as discussed in our separate note here, ASX is undertaking a consultation on Chapter 7 of the ASX Listing Rules and others matters.

Regardless of the outcome of ASX's consultation on Listing Rules, shareholder activism has pushed further. Encouraged by substantial shareholder and activist Allan Gray,⁵ one listed company⁶ is proposing to amend its constitution so that it may not undertake a non-pro rata share issuance in excess of 25% of its equity capital in any 12-month period without shareholder approval. The proposed amendment "aims to restrict significant share issues without shareholder approval such as those made under a takeover bid or scheme arrangement [sic] where the company shares are offered as scrip consideration in a material acquisition".^[7] Allan Gray stated: "This is something all companies should adopt. It's about shareholder rights and good corporate governance."

But is it?

The flaws in the case for more red tape

The case for change to the ASX Listing Rules and the push for more restrictive listed company constitutions is based on a sweeping assertion that Australian company law offers less than 'third-world' shareholder protection where 'loopholes' exist to allow shareholders to be 'shafted'.

There are a number of flaws in the assertion:

• First, Australian listed company directors and officers are subject to very strict statutory (and in the case of directors, fiduciary) duties that, amongst other things, require them to act in good faith in the best interests of the company and with reasonable care and diligence. These statutory duties cannot be modified or 'contracted out of', unlike certain comparable duties of directors of foreign companies. Australian company directors' and officers' statutory duties require an independent and honest decision to be taken having regard to the interests of the company and shareholders as a whole, not merely those shareholders with the biggest voice.
• Second, shareholders in Australian listed companies are well protected by a robust regime of shareholder rights. Listed company shareholders enjoy the right to vote at least annually on a 'two strikes' resolution, on director election/re-election, and on various other matters under the Corporations Act and ASX Listing Rules. Further, listed company shareholders enjoy various specific rights relating to board composition which ensure the board remains accountable to shareholders. These rights include the right to nominate candidates for board election, the right to remove directors at any time under section 203D of the Corporations Act, and certain rights to call general meetings (or to propose resolutions). Unlike other jurisdictions, these appointment, removal and requisition rights exist in statute and/or the ASX Listing Rules and generally cannot be eroded by a company 'contracting out' in its constitution. These rights are also the result of extensive policy and parliamentary consideration, and should not be changed on a whim.
• Third, whatever your views on them, ASX Listing Rule 7 and Guidance Note 21 – which set out ASX's approach to new share issuances – have always been publicly available to all shareholders and the market as a whole. The claim that there are 'loopholes' is an exaggeration – the waiver obtained by James Hardie was clearly within ASX's stated guidance and analogous transactions.

Behind its hyperbole, the activist push for further restrictions in ASX Listing Rule 7 and listed company constitutions is in substance a call for greater anti-dilution protection. Such protection may not be in the best interests of listed companies nor their shareholders as a whole. In particular, constitutional requirements for shareholder approval of new non-pro-rata equity issuances above a specified level may come with new costs and create unintended consequences.

• 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. That is, the 'ask' for a vote by activist shareholders of a bidder can become a 'gun to their heads'.
• From a fundraising perspective, a constitutional requirement for shareholder approval of non-pro-rata equity issuances above an equity 'ceiling' may unduly constrain listed companies' fundraising options. Much will depend on the level of the 'ceiling' and the drafting of what constitutes a 'pro rata' offer, but a critical point is that company constitutional provisions cannot (unlike the Listing Rules) be waived. Equity fundraising circumstances can also be time-critical and may not fit neatly with listed company shareholder approval processes which typically take over a month.
• Shareholder approval requirements do not guarantee that shareholders will not be 'shafted'. As we have seen in public M&A and other contexts, it is the shareholders on the register at the time of the vote that have the say. After announcement of a transaction, shorter term investors like hedge funds can and do enter the fray before a shareholder vote and can influence the outcome contrary to the expectations and views of existing long-term holders.
• Restrictions on non-pro-rata equity issuances may encourage listed companies to look at leveraged financing alternatives or (as was the case in James Hardie) a combination of (leveraged) cash and scrip funding for transactions.

These are but some of the complex issues associated with any new anti-dilution red tape in the ASX Listing Rules and listed company constitutions. We think great caution should be exercised before changing the rules because of one transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.