The popularity of passive funds and ETFs is having a knock-on effect on Australia’s M&A environment by creating a less responsive shareholder base.
According to Betashares, total funds under management in ETFs stand at $321 billion as of end of October and index funds represent around 15 per cent of the market in Australia.
Because these funds track the index, they are forced to hold the company in their allocation rather than holding it because they have a high conviction stance in that particular company in the way that active fund managers would.
This has left the shareholder bases of these companies dominated by passive entities rather than active, engaged investors.
As a result, law firm Minter Ellison said this has created a shareholder base which is reluctant to engage if a company receives a takeover bid.
The report Top trends from 2025 and outlook for 2026 found shareholder activists are playing a greater role in the public M&A landscape which can take the form of public campaigns, strategically building stakes or engaging proxy advisory firms to vote against transactions.
But at firms where a large stake in a company is held by passive funds or ETFs, this is seeing a different scenario play out compared to when there is an engaged shareholder base.
Rather than having a view on the deal, passive funds are unlikely to accept a conditional offer or pre-commit to a takeover which can slow the progress of a bid. If a bidder accumulates a significant shareholding then this will dilute those of the passive fund and they will be forced to sell shares.
It said: “While shareholder activists continued to influence M&A outcomes in 2025, we observed a growing trend with passive funds, such as index trackers and ETFs, collectively holding meaningful stakes on the registers of many large ASX companies.
“Where passive funds account for a significant proportion of the share register, this can create a less responsive shareholder base during takeover bids as passive investors generally wait until a bid become unconditional before tendering acceptances.”
The law firm urged companies to monitor their share register and mix of shareholder in order to avoid passives holding too large of a stake.
This is expected to continue to be a problem going into 2026 as shareholder activism is expected to continue apace as a “significant force” in Australia’s M&A environment. This is being driven by assertive hedge funds and institutional investors such as superannuation funds.
“If a proposed transaction is perceived to be opportunistic, undervalued or is otherwise misaligned with stakeholder values, shareholder activists are likely to mobilise opposition and exert pressure on prospective acquirers and target boards to seek improved terms or to lobby for strategic alternatives.”
Minter Ellison gave the example of L1 Capital which publicly opposed a proposed conversion to the Platinum Capital listed investment company (LIC) into an ETF and later was voted to take over management of the LIC itself.
The use of public statements can “stifle momentum” for a scheme or a takeover bid, the firm said, particularly if the party is a substantial shareholder who can materially impact a vote.
“This outcome underscores the importance of engaging with substantial investors in public transactions, as L1 Capital’s aggressive engagement ultimately forced a solution that all sides could live with, albeit a very different one than initially contemplated.”
