Shareholders should have a say in takeovers

INVESTORS in Federation Centres have recently discovered one of the more bizarre anomalies in the Australian takeovers regime.

The Glen shopping centre, owned by Federation Centres. Picture: Lawrence Pinder

INVESTORS in Federation Centres have recently discovered one of the more bizarre anomalies in the Australian takeovers regime: they won’t get a vote on the future of their company.

The approval process for the $11 billion merging of shopping centre owners and managers Federation Centres and Novion again raises governance concerns over the seemingly inalienable right of management teams of listed entities to dilute investors’/owners’ interests without their consent.

Whether or not the proposed transaction is in the best interests of Federation Centres’ securityholders, the process leaves them disenfranchised. Many will be left asking: if we are dealing with a merger of equals, what about equal voting rights?

Even though Federation Centres is notionally considered the bidder under the terms of the transaction, Federation’s investors will be left owning just 36 per cent of the merged entity. So Novion securityholders will not only get a vote but will hold the majority of securities post-merger. In other words, the playing field is tilted heavily in favour of those who may have the most to gain.

This scenario is a repeat of the Roc Oil-Horizon Oil saga of 2014, which amply demonstrated the effect of current ASX Listing Rules that allow one entity to ‘‘acquire’’ another with no approval required from investors in the ‘‘bidder’’ (or are they really the ‘‘target’’?), regardless of the extent to which their interests are diluted by the transaction.

The loophole arises from an exemption to the general rule that securityholder approval is required for an equity issue (without pre-emptive rights) that would expand the capital base of an ASX-listed entity by more than 15 per cent in any 12-month period. Listing Rule 7.2 explicitly exempts approval for an issue of securities that is consideration for a takeover offer, or which would fund a takeover.

The only circumstances in which Federation Centres investors would get a vote under the current proposal is through securityholder proposals to either replace their board, or amend the company’s constitution to enshrine investor protections on ­dilution levels (as super fund HostPlus and asset manager Allan Gray valiantly attempted at Roc Oil).

The loophole is particularly concerning when we consider the disagreements over merger ratios in recent deals, such as last year’s Westfield Retail Trust restructuring. In fact, the Australian market is so out of step that if Federation Centres was listed in London, New York, Singapore or Toronto, its securityholders would have a vote on the proposal.

There is little doubt that the ASX will revisit the issue during its review of Listing Rules this year. This would be a timely decision and welcomed by the many institutional investors currently experiencing a dismaying sense of deja vu with the Federation Centres/Novion transaction.

Edward John is ACSI executive manager, governance and engagement.