ASX's proposed 25% scrip cap: when listed bidders will need shareholder approval for M&A

What ASX is responding to

ASX began its review in October 2025 after institutional investors raised concerns about the dilution that bidder shareholders can suffer in acquisitions funded by an issue of securities. The transaction that brought the concern to the fore was the acquisition of The Azek Company Inc (Azek) by James Hardie Industries plc (James Hardie). That transaction was a merger conducted under Delaware law, and because it fell outside the words of Exception 6 of ASX Listing Rule 7.2, James Hardie obtained a waiver so that the exception applied. This permitted James Hardie to issue new shares equal to approximately 35% of its issued share capital as consideration under the merger without a vote of James Hardie shareholders on the basis that ASX considered the Azek shareholder approval and merger process under US law to be sufficiently comparable to an Australian scheme of arrangement.

The concern the investors raised was structural. A bidder can issue a substantial number of new securities as scrip consideration or to fund a regulated acquisition, with a corresponding dilution of its existing holders' proportionate interests, and under the current exceptions it can do so without those holders having any vote on the issue unless it amounts to a 'reverse takeover'. In its response, ASX recorded broad support for strengthening protections against scrip dilution in regulated transactions, with differing views on the appropriate threshold and scope, and a consistent emphasis on execution certainty and predictable, non-discretionary rules.

How the rules apply at present

The starting position is Listing Rule 7.1, which prevents an entity from issuing more than 15% of its ordinary securities in any 12-month period without security holder approval. Listing Rule 7.1A gives certain smaller entities, being those outside the S&P/ASX 300 with a market capitalisation of no more than $300 million, a further 10% if their holders approve it by special resolution. Against that background, Exceptions 6 and 7 to Listing Rule 7.2 take securities issued in a takeover bid or scheme of arrangement outside the 15% limit. The two exceptions deal with two different scenarios. Exception 6 applies to securities the bidder issues under the transaction itself, as scrip consideration to the target's holders. Exception 7 applies to securities the bidder issues to raise the cash that funds the cash consideration.

Securities issued under either exception are not counted towards the 15% limit, so no security holder approval is presently required for them. The only constraint is the 'reverse takeover' restriction, which requires approval where the securities issued equal or exceed 100% of the bidder's ordinary securities on issue at the date the transaction is announced. The practical position is that a bidder can issue securities approaching 100% of its existing capital without a vote of its own holders. ASX has, to date, extended Exceptions 6 and 7 to comparable foreign transactions on a case-by-case basis by granting waivers, as it did for the acquisition of Azek by James Hardie. For our earlier analysis of the October 2025 consultation paper, including the proposed changes to shareholder approval for changes in admission status and voluntary delisting of dual-listed entities, and the broader context of rising shareholder activism in Australia, see our earlier article.

A 25% limit for entities in the S&P/ASX 300

These exceptions are relied on in only a small proportion of acquisitions. ASX's analysis of acquisitions by ASX-listed bidders between FY21 and FY25 found that, of the 1,857 that involved a share issue by the bidder, only 98, or approximately 5%, could have been eligible to apply the existing exceptions for regulated takeovers or mergers within the reverse takeover limit. The reform is therefore narrow in its practical reach, even though the individual transactions it captures can be among the largest in the market.

The exposure draft narrows Exceptions 6 and 7 for entities in the S&P/ASX 300 Index, with index membership tested on the date the transaction is announced. Such an entity will not be able to rely on those exceptions to issue more than 25% of its fully paid ordinary securities, unless it has first obtained security holder approval for a higher figure or set a higher threshold in its constitution. ASX gives effect to the limit by adding three new defined terms to Chapter 19, being “regulated takeover or merger”, “prescribed transaction” and “prescribed threshold”, and by making Exceptions 6 and 7 unavailable where the issue is made under a prescribed transaction. A prescribed transaction is a regulated takeover or merger by an entity in the S&P/ASX 300 where the securities issued under the transaction, taken together with any securities issued to fund the cash consideration, equal or exceed 25% of the entity's ordinary securities on issue at announcement.

Entities outside the S&P/ASX 300 Index are not affected and retain the existing exceptions, subject only to the unchanged 100% reverse takeover restriction. ASX adopted index membership rather than the $300 million market capitalisation test it had also canvassed, on the basis that index membership is a clearer and more stable measure of size that does not move with daily share prices.

ASX has also proposed consequential amendments to other Listing Rules (including Listing Rules 7.6, 7.9 and 10.11) to align cross-references and approval mechanics with the narrowed Exceptions 6 and 7.

The proposal in international context

To situate ASX's proposal against international peers, it is useful to note how the United Kingdom and United States regimes currently approach shareholder approval for scrip-heavy M&A.

Following the United Kingdom’s listing reform effective from 29 July 2024, the prior “Class 1” shareholder-vote trigger at the 25% threshold has been removed. Most transactions that would previously have been Class 1 now require an announcement rather than shareholder approval under UKLR 7, with a vote generally reserved for reverse takeovers.

By contrast, both the New York Stock Exchange (NYSE) and Nasdaq continue to require shareholder approval where a listed company issues, in a single transaction or series of related transactions, at least 20% of its pre transaction outstanding shares or voting power, subject to familiar exceptions. In practice, US votes at the 20% level are most commonly engaged for discounted private placements and acquisition related share issues and qualifying public offerings at or above the relevant “Minimum Price” are typically exempt.

ASX’s exposure draft would require entities in the S&P/ASX 300 to obtain their own security holders’ approval before issuing more than 25% of their fully paid ordinary securities in a regulated takeover or merger, counting both securities issued as consideration and any securities issued to fund the cash component. Framed in this way, the Australian proposal broadly aligns the approval trigger with US style dilution thresholds (although, at 25%, the ASX trigger is slightly more permissive than the 20% US threshold) while being stricter, in terms of shareholder voting, than the UK’s post reform regime, which no longer requires a vote at the 25% “class test” level.

How the 25% is measured, and why structuring matters

The limit is a numerical test, and the way it is measured affects how a transaction is structured. It compares the number of new equity securities the bidder will issue, both as consideration and to fund any cash component, against the number of fully paid ordinary securities the bidder had on issue on the day the transaction was announced. That existing number is fixed at announcement, so a bidder cannot reduce the percentage by issuing further securities later in the transaction. Because the test counts the number of securities as opposed to the market values of those securities, the structure of the consideration issued in a scheme of arrangement or takeover bid determines the outcome. The proportion funded by cash rather than securities, whether any cash is raised through debt or equity, and any cap placed on the scrip component of the consideration will each affect whether the issue is above or below 25%. ASX has retained its aggregation power, so separate issues that form part of the same or a larger commercial transaction are counted together, and a staged or multi-step structure cannot be used to keep each issue below the limit.

Importantly, the limitation on Exceptions 6 and 7 does not prevent an entity in the S&P/ASX 300 from using other Listing Rule 7.2 exceptions to fund part of a transaction without shareholder approval. For example, an entity could use an underwritten pro rata issue with a placement of the shortfall (under Exceptions 1, 2 and 3) or any available 15% placement capacity available to it under Listing Rule 7.1, to fund some or all of the cash consideration without engaging the 25% cap. An entity undertaking a regulated takeover or merger cannot, however, use other exceptions to extend the application of Exceptions 6 and 7. For example, if an entity proposed to issue securities equal in number to 110% of its fully paid ordinary securities on issue at announcement, whether as consideration for a regulated takeover or merger or to fund the cash consideration, it could not rely on Exceptions 6 and 7 for 99% of the issue and another exception or its available placement capacity for the remaining 11%.

Approving a higher limit in advance: new Listing Rule 7.3B

Listing Rule 7.3B, proposed as part of ASX's exposure draft, would let an entity put in place the capacity to issue above 25% of its fully paid ordinary securities ahead of any particular transaction. To do so, the entity must obtain the approval of its ordinary security holders, by ordinary resolution at a general meeting, of a higher prescribed threshold. The notice of meeting must set out the entity's reasons for seeking the higher threshold, the threshold proposed (which must be below the 100% reverse takeover threshold), the period for which the approval is to operate, and the number of securities already issued under Exceptions 6 and 7 since listing or since the entity last obtained such an approval.

The approval is valid until the earlier of 36 months and the date on which holders approve a transaction under Listing Rule 11.1.2 or 11.2. An entity may instead fix a higher threshold in its constitution. Draft Guidance Note 21 makes clear that the approval is forward-looking. The entity need not disclose any confidential or incomplete proposal it is considering for the purposes of Listing Rule 7.3B, and the resolution authorises the board to issue up to the approved limit at its discretion rather than approving a particular issue. An entity may therefore seek this approval at a general meeting of its security holders well before any transaction is contemplated, and larger entities would be well advised to consider doing so as a matter of forward planning.

Reverse break fees are not addressed in ASX's response paper. ASX acknowledged in its initial consultation that its proposals to further limit Exceptions 6 and 7 will introduce increased execution risk as a consequence of a security holder approval condition on a bid, and that this may impact the commercial terms of a transaction, including any reverse break fee that may be required by the target. The position concerning the scope and amount of reverse break fees in Australian-regulated takeovers and schemes remains a developing area. Unlike the position regarding target break fees, there is little existing Takeovers Panel or ASIC guidance on reverse break fees (although ASIC has noted that it may consider whether a reverse break fee is coercive if triggered by the bidder's shareholders voting down a reverse takeover resolution). Although not directly addressed in ASX's response paper, obtaining security holder approval in advance under Listing Rule 7.3B, or by constitutional amendment, is one way to remove the additional execution risk and potential for reverse break fees arising from ASX's proposed amendments to Exceptions 6 and 7.

ASX also acknowledged broader risks from further limiting Exceptions 6 and 7, including: increased transaction complexity (and a potential tactical disadvantage for listed bidders compared with unlisted bidders) due to the need for a general meeting; constraints on funding flexibility that may affect cost-effective financing; and an increased regulatory burden that may discourage listing or encourage delisting where greater transactional flexibility is perceived.

Foreign transactions: a standing definition in place of waivers

The new definition of “regulated takeover or merger” applies regardless of the jurisdiction in which the transaction is conducted. It covers Australian takeover bids and schemes, certain registered scheme acquisitions effected by amendment to the scheme's constitution after judicial advice, and foreign takeovers and business combinations effected by a public offer process, a security holder approval process on another exchange, or a court or regulator-approved process under foreign law. This standing definition replaces the previous practice of assessing each foreign transaction on its own and extending the exceptions by waiver.

In place of the waiver practice, ASX has set an expectation about advice and disclosure. Where it is unclear whether a foreign process falls within the foreign limb of the definition, ASX expects the entity to obtain local legal advice, and where that advice is qualified or equivocal, ASX expects the entity to seek security holder approval rather than rely on the exception. The entity should also be able to demonstrate to ASX and to the market the basis on which it concluded that the exception applied.

A timing risk for entities approaching index inclusion

A specific risk arises for a company that is close to entering the S&P/ASX 300. The index is rebalanced twice a year, in March and September. ASX has said in draft Guidance Note 21 that it is very unlikely to grant a waiver to an entity that expects to enter the index before its transaction is announced. A company in that position should plan for a security holder vote rather than assume it can complete a dilutive issue in the window before the next rebalance. Flexibility available outside the index may not continue once the entity joins the S&P/ASX 300.

What ASX’s consultation sought feedback on

As this is an exposure draft, the framework is not yet settled, and ASX has invited submissions on four questions. First, it seeks feedback on whether there are interactions with other Listing Rules or Guidance Notes that ASX should address so that the amended framework operates as intended. Second, it asks whether the key definitions are clear, objective and administrable, or whether targeted drafting refinements are needed. Third, it seeks views on whether the proposed commencement date is appropriate and what existing scenarios should be dealt with expressly through transitional provisions, examples or further guidance. The fourth concerns post-approval timing. Listing Rule 7.3.4 currently applies different time limits for issuing securities after approval depending on the transaction type, and ASX has asked whether that period should be standardised to 12 months for all approvals under Listing Rules 7.1 and 7.4. The 25% figure itself and the range of foreign transactions that qualify may also change before the rules are finalised.

What listed bidders should do now

Entities in the S&P/ASX 300 and their advisers should start preparing before the rules are finalised.

• First, they should assess their likely capacity to issue securities against the proposed 25% cap and consider whether to seek Listing Rule 7.3B approval, or set a higher threshold in the constitution, at the first suitable general meeting after the rules are finalised and come into effect.

• Second, they should build the 25% test into transaction structuring at an early stage. This includes the mix of cash and scrip, the funding of any cash component, and the application of the aggregation rules.

• Third, entities approaching S&P/ASX 300 inclusion, or those considering a foreign-law transaction, should proceed on the assumption that there will be limited scope for waiver relief and should allow for security holder approval where the application of the exception is uncertain.