The key protection against dilution for a shareholder in an ASX company is the rule that prevents more than 15% of new shares being issued in any 12 month period. So should an issuer be able to buy a more valuable competitor by issuing an unlimited amount of scrip without seeking shareholder approval? We don’t think so, but this has happened all too often in the Australian market.

We see this as an issue of property rights – why should the economic interest in the property you own (a share) be fundamentally transformed by a “merger” with a third party at a price that you and a majority of other owners don’t agree with?

Many jurisdictions, including the UK and South Africa, give both sets of shareholders a say in major transactions, including on the very specific situation of this note: all scrip mergers.

However, Australian law and the ASX listing rules only requires approval from the company nominally being taken over (usually by way of a scheme of arrangement) even when the situation is effectively a reverse takeover because it is much smaller than the prey.

This has created a loophole for clever players in the market for corporate control who can choose which set of shareholders get to vote, regardless of the number of new shares being issued. Surprise, surprise, it is often the shareholders who are giving too much value away who don’t get to vote.

This wouldn’t matter so much if a capital base was only being expanded by 15% (the current limit) through the issue of new shares, but under Australian law there is no limit to the amount of new shares which can be issued as part of a takeover without shareholder approval.