Now that ASX has published the much talked about listing rule waiver on which James Hardie will rely to acquire Azek without getting shareholder approval, below are 16 thoughts on this matter from a regulatory and corporate governance perspective.
1. Irish company listed on ASX and NYSE
James Hardie is an Irish company, registered as a foreign company in Australia with a primary listing on ASX. It also currently has a secondary listing on NYSE through its sponsored ADR program. James Hardie's stated plan is that this NYSE listing will transition to its primary listing following closing of the Azek deal, with a direct (non-ADR) listing on NYSE of the new shares it issues to the Azek shareholders under the deal.
2. CDI's and ADR's
As a foreign company, James Hardie shares cannot be traded through ASX – rather the shares are held by a depositary nominee and beneficial interests in those shares, in the form of 'CDI's', are traded on ASX. ADR's (also called ADS's) are the American equivalent of CDI's, and James Hardie ADR's are currently traded on NYSE.
3. Shareholder interests
James Hardie did not need to get the ASX waiver in question, and could have made the takeover conditional on obtaining ASX Listing Rule 7.1 approval from its shareholders. A responsible board would ask itself if it was in shareholders' interests to seek the waiver.
4. ASX scrip takeover exemption
It is specifically permitted for ASX-listed companies to not seek shareholder approval for share issues made under Australian-regulated takeovers, and the waiver granted to James Hardie (done so on the basis that the Azek takeover is a foreign equivalent to an Australian-regulated takeover) is a fairly standard one.
5. NYSE rule
There is an equivalent NYSE rule, known as the 20% rule, that on its terms would also have required James Hardie to obtain shareholder approval for this transaction. I have seen it suggested that, for foreign companies (such as James Hardie) listed on NYSE, it is understood that the NYSE will issue a confidential letter ruling (upon request by the company) allowing the company to use its home country practice regarding the 20% rule. It is likely that James Hardie has obtained, or will obtain, that ruling, presumably on the basis it is complying with Irish law and the ASX Listing Rules (its primary listing). That ruling would not have been available if the NYSE was its primary listing (as is planned post-closing).
6. Irish law authority
Under James Hardie's articles of association, the board has the authority to issue additional shares up to its authorised capital, provided that shareholders resolve to renew that authority every 5 years. The five year renewal is a requirement of Irish company law. In its 2023 Notice of AGM, James Hardie sought approval from shareholders extending the board's authority to issue new shares, per the 5 year requirement, which was granted by resolution passed at the 2023 AGM. That authority is what James Hardie will rely on to issue the merger consideration shares.
7. 2023 shareholder approval
In its explanatory note for that resolution, James Hardie said the following: "Your approval of Resolution 8 will simply provide our Board of Directors with continued flexibility to issue Shares up to the maximum of our existing authorised but unissued ordinary share capital, subject to the shareholder approval and other requirements of the ASX, the NYSE and the SEC....Renewal of this authority would not exempt James Hardie from applicable ASX or NYSE requirements to obtain shareholder approval prior to certain share issuances or to comply with applicable ASIC and/or SEC disclosure and other regulations, and our Board of Directors will continue to focus on and satisfy its fiduciary duties to our shareholders with respect to share issuances."
8. Consistency with Azek takeover
It's open for debate whether relying on an ASX and NYSE waiver from the requirement for shareholder approval is consistent with the prior shareholder authority granted to issue shares, which was obtained on the basis that that authority would be subject to the shareholder approval restrictions in the ASX and NYSE rules.
9. Market disclosure of waiver
What James Hardie most assuredly did not do (which perhaps it should have) is disclose any of the above in its market announcements. It's gone to a reasonable amount of work to get around the requirement for shareholder approval. However, recent Australian practice for disclosing this ASX waiver in the transaction announcement is mixed. In 3 deals in 2024 where it was obtained, 2 disclosed it in the deal announcements on ASX (although the disclosures were very easy to miss).
10. Correcting false market?
In terms of public market announcements, James Hardie has continued to remain shtum despite the widespread commentary and conjecture about the ASX waiver. There's a decent argument that such a widespread rumour led to a false market in James Hardie securities, and ASX could have required James Hardie to make an announcement confirming (or denying) it having obtained a waiver. However, given all the criticism also being levied at ASX here, perhaps ASX preferred to just keep its head down also.
11. Timing of board spill
There's also been a lot of talk about how shareholders cannot do anything to prevent this deal from closing, despite how much they hate it. Perhaps that is correct. If they were to fight it, first, shareholders would need to get an EGM convened for a board spill. I've seen it suggested that would take 3 months, by which time the deal will have closed. I'm no expert on Irish law, but 3 months seems too long based on James Hardies' articles of association, and there is no ASX rule that requires that long a timeframe. Things are complicated by the fact that many shareholders hold in the form of CDI's, the holding of which does not give direct rights as a shareholder. That makes it a bit more difficult. As for the timing of closing of the merger, the announcements are not specific – it only says the second half of this calendar year, which may well mean after July. If shareholders sacked the existing board before the merger closed, then the new board would then control James Hardie and could take steps to back out of the deal.
12. No reverse break fee
There has also been mention in the press of a punitive reverse break fee on James Hardie. That is an error. There is no reverse break fee. The break fee obligation is on Azek only if it fails to close (another arguably false market rumour that could have been corrected).
13. Specific performance
What the Merger Agreement does have is a specific performance clause, which permits a party to seek an order from the Delaware court requiring the counterparty to close the merger. It was this type of clause that basically forced Elon Musk to close on his Twitter takeover, even though he had come to view the price as too high.
14. NYSE listing condition
There's a difference to the Twitter takeover here though. That was a cash takeover. This is for cash and scrip, and that new scrip needs to be admitted to a listing on NYSE – that is a condition to closing in the Merger Agreement. I have seen it suggested that the Delaware court will not order specific performance on complex conditions that remain outstanding, on the basis that the court is not in a position to supervise enforcement of its order. The practice of Delaware courts is outside my area of expertise, but a condition that requires James Hardie to (in effect) obtain a primary listing on NYSE may be one that a Delaware court does not feel it can specifically enforce.
15. Potential for damages
If James Hardie, under a new Board, refused to obtain the NYSE listing (contrary to its reasonable best efforts obligation to do so under the Merger Agreement), refused to waive that condition to closing under the Merger Agreement, and the Delaware court declined to make an order for specific performance, what then? James Hardie could be liable to Azek for damages. This is where the absence of a specific break fee payable by James Hardie becomes relevant. A break fee effectively sets both a floor and cap on potential damages payable. In the absence of one, the court would go through its usual process of determining damages. In doing so, it may well have reference to the clause in the Merger Agreement that says that liability for damages may include 'amounts representing, or based on the loss of, any premium or other economic entitlement the stockholders of [Azek] would be entitled to receive....if the Merger was consummated'. Partly that would involve an exercise of valuing the James Hardie shares that Azek shareholders were to receive if the merger proceeded. Given the value of James Hardie shares seems to be so tied up with the question of whether the merger goes ahead, it seems a conceptually difficult exercise.
16. Azek shareholder approval
Finally, if Azek shareholders vote the merger down, the deal's off. Unlike James Hardie shareholders, they get a vote on it.
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