ASX slammed by fund managers over James Hardie deal

An unprecedented protest by top fund managers is targeting ASX governance and transparency amid the $14bn listed company takeover.

The battle now is over James Hardie’s wish to convert to a US listing as its primary domicile. Picture: Bloomberg

Australia’s top fund managers and superannuation funds have joined together in an unprecedented move to protest at the Australian Securities Exchange’s apparent decision to allow James Hardie to proceed with its US acquisition without seeking shareholder approval.

In a letter to the ASX chair David Clarke and chief executive Helen Lofthouse the group, which controls a large swag of Australian savings, has written to protest the move and lack of transparency from the ASX.

The letter noted the issues involved in the $14bn Hardie-Azek merger “create investment risk for shareholders invested in ASX listed companies generally, and we would encourage the ASX to have proper regard to the rights of longstanding investors in these important decisions.”

The attack comes soon after the ASX’s own governance standards were attacked by its regulators — the Australian Securities and Investments Commission and the Reserve Bank — over its appalling track record in technology, including trading breakdowns and mishaps in the CHESS settlement system replacement.

This time it’s the ASX regulation of the Australian listed market which is being questioned.

The letter is signed by a who’s who of Australian fund managers including Mark Delaney from Australian Super, Fidelity’s Paul Taylor, UniSuper’s John Pearce, Allan Gray’s Simon Mawhinney, Airlie’s Matt Williams, Troy Angus from Paradice, Andrew Fleming from Schroder and Ausbil’s Paul Xiradis.

The ASX has already granted a waiver to let the deal through but the battle now is over James Hardie’s wish to convert to a US listing as its primary domicile. The fund managers want a shareholder vote on this issue but the ASX may reject their demand and simply grant the request without seeking shareholder approval.

The letter, sent to the ASX on Wednesday night, said “[we] are writing to express our concern

about the consequences arising from the application of the ASX Listing Rules, and the exercise of ASX discretion under the Listing Rules, that have been highlighted by the proposed James Hardie – Azek merger.

“If the ASX has exercised its discretion to allow the issue of shares under the merger, and allows a change of ASX listing status, the James Hardie – Azek merger will result in a significant dilution of interests for existing James Hardie shareholders and irreversibly change their rights, without any shareholder vote of James Hardie occurring.”

The fund managers said “we think that it is unreasonable that ASX listed entities are able to issue a large amount of securities as part of domestic or foreign mergers and acquisitions, without a shareholder vote.

“The flow-on effect of this type of transaction occurring is that an ASX listed entity is able to significantly dilute and change the existing shareholder base, and (in the case of foreign mergers and acquisitions) take steps to shift the listing jurisdiction, thereby fundamentally altering shareholder rights.”

It added the “ASX should consider aligning itself with best practice in other jurisdictions where securityholders must approve transactions which involve an issuance beyond specified

thresholds as part of any transaction. We do not believe there is a compelling rationale for

maintaining the current Australian position of allowing an exception for issuances for schemes

and foreign takeovers (or, through waiver, equivalent transactions in other jurisdictions) as other jurisdictions which do not allow this exception still maintain competitive public market

transaction processes.”

The ASX reportedly issued a waiver to James Hardie which was not released.

The fund managers said “we would encourage the ASX to publish all Listing Rule waivers that were granted to facilitate this transaction. The waiver process should be transparent, and we do not believe there is any reason to maintain confidentiality of these waivers once a transaction is announced. We believe that ASX’s policy should be updated so that all waivers which are material to shareholders, are made public at the time any transaction is announced.”

They noted at close of the proposed James Hardie – Azek transaction, only 26 per cent of James Hardie shares will trade on the NYSE, yet James Hardie is moving its domicile to the US.

The fund managers noted: “A shift of primary listing would result in a permanent alteration of the rights of James Hardie shareholders, as there are clear differences between the listing rules of the ASX and the NYSE which are detrimental to James Hardie shareholders.”

The fund managers said: “We would encourage ASX to make shareholder approval a condition of allowing James Hardie to alter its ASX Listing. In 2010, the company’s shareholders approved its redomicile to Ireland on the basis that it would maintain its ASX Listing.

“We consider that it is an unreasonable consequence of the application of the ASX Listing Rules if the issuance of a minority of an entity’s securities trading on a foreign exchange (in this case 26 per cent of James Hardie shares traded on the NYSE) could be the catalyst for an ASX listed entity to eventually delist from ASX, without any reference to its owners. If this is the outcome from the James Hardie process, this is a clear loophole that warrants immediate attention,” they added.

They noted “more broadly, we consider that this transaction creates an immediate need for the ASX to reconsider the exercise of ASX discretions in these types of circumstances, and refresh ASX guidance and the ASX Listing Rules (in particular Rule 7.1 and the exceptions to it in Rule 7.2), to ensure that ASX can continue to uphold shareholder rights.”

Originally published as ASX slammed by fund managers over James Hardie deal