Eumundi Group: a novel approach to the dual scheme/takeover structure

The recent SEQ/Eumundi transaction involved a variation on the dual scheme/takeover bid structure that we have seen in recent deals, where the takeover bid was made at the same price as the scheme with a 90% minimum acceptance condition (and subject to the scheme not being implemented). This contrasts to how dual scheme/takeover bid transactions have typically been structured in Australia, where the scheme has usually been priced higher than the takeover bid and with a 50% minimum acceptance condition to encourage shareholders to vote in favour of the scheme.

In brief

• The recent SEQ/Eumundi transaction involved a takeover bid which was made at the same price as the scheme, with a 90% minimum acceptance condition and subject to the scheme not being implemented.
   
• This contrasts to other recent dual scheme/takeover transactions (e.g. most recently Azure Minerals) where the scheme has had a 50% minimum acceptance condition and usually been priced higher than the takeover bid to encourage shareholders to vote in favour of the scheme. In Eumundi, the takeover was the ‘default’ structure rather than the scheme, with the purpose of the scheme being to provide an alternative pathway to obtaining 100% of the scheme shares if the 90% minimum acceptance condition was not met under the takeover bid.
   
• As it played out, in Eumundi, SEQ’s bid only reached approximately 79% acceptances before the scheme meeting. The scheme therefore went ahead (and was ultimately implemented this month with strong shareholder support) and the bid was withdrawn.
   
• By way of practice point, the Court’s decision at the first Court hearing also highlighted the importance for targets utilising these structures to include a clear explanation in the scheme booklet of the interaction between the takeover bid and the proposed scheme, including in the Chair’s letter.
   
• In the Eumundi case, the Court required the target to amend the scheme booklet at the first Court hearing to ensure it was clear at the outset of the booklet that, if neither the 90% minimum acceptance condition was met nor the proposed scheme is capable of being approved, target shareholders could become minority shareholders of a company controlled by the bidder.

The Eumundi transaction

In October 2024, SEQ Hospitality Group Ltd, a hotel and liquor retail operator, offered to acquire all the shares of ASX-listed Eumundi Group Limited, a hotel and retail property investment company by way of a scheme of arrangement under Part 5.1 of the Corporations Act. SEQ simultaneously made an off-market takeover offer at the same price.

As compared to the dual scheme/takeover structure seen in recent deals, the takeover was not conditional on the scheme of arrangement not proceeding. Rather, SEQ would make the takeover bid first, the bid being conditional on (amongst other things) SEQ receiving acceptances of at least 90% and the scheme not being approved by Eumundi shareholders or the court. If the takeover did not become unconditional prior to the scheme meeting, the scheme meeting would proceed. However, if the takeover offer became or was declared unconditional prior to the scheme meeting, Eumundi would apply to the Court to vacate the orders convening the scheme meeting and the scheme would not proceed, with the takeover bid becoming the relevant transaction for shareholders.

The commercial rationale for the structure was to maximize the possibility of SEQ acquiring 100% of the Eumundi shares. This was because there was at least one large shareholder of Eumundi who might not have been in favour of selling for the scheme consideration or takeover offer which could mean the 90% minimum acceptance condition may not be satisfied.

As things played out, SEQ’s bid indeed only reached approximately 79% acceptances before the scheme meeting. The scheme therefore went ahead and the bid was withdrawn. The scheme ultimately received strong shareholder support and was implemented this month.

The Court hearings

As at the time of the first Court hearing on 19 December 2024, SEQ had secured acceptances in about 68% of the shares, leading the Court to note there was utility in convening the scheme meeting because the 90% minimum acceptance condition had not been satisfied.

While the Court considered that the hybrid structure did not mean it should not make orders convening the scheme meeting, the Court noted this may be a matter that features in the exercise of the Court’s discretion to approve the scheme at the second Court hearing. In particular, the Court noted that the “sheer volume” of information that shareholders would receive within a relatively short period of time of a similar nature was “a circumstance that is ripe to create confusion and misunderstandings about the process and consequences for scheme members (shareholders) when making decisions to accept (or not the takeover offer or vote in favour (or against) the proposed scheme”. The Court’s concerns in this regard resulted in the Court requiring the target to make further amendments to the scheme booklet to clarify at the outset the implications if the 90% minimum acceptance condition was not satisfied and the scheme did not proceed.

At the second Court hearing, the Court accepted there was a valid commercial rationale for the dual nature of the transaction, and its purpose was not to avoid the operation of Chapter 6. The Court noted that, in substance, the purpose of the scheme was to provide an alternative pathway to obtaining 100% of the scheme shares if the 90% minimum acceptance condition was not met under the takeover bid. The Court further noted that “In effect, the scheme is subordinate to the takeover bid under Ch 6 and was intended to be utilised if SEQ was not able to take advantage of the provisions of Ch 6A to compulsorily acquire any remaining scheme shares at the end of the offer period.”

Commentary

The SEQ/Eumundi transaction was a novel approach to the typical dual scheme/takeover structure we have seen in recent years where the takeover bid was the ‘default’ transaction and the scheme was the backstop if acceptances did not reach 90% to allow the bidder to move to compulsory acquisition. In the Eumundi case, SEQ’s bid indeed did not reach 90% before the scheme meeting, so the scheme went ahead and the bid was withdrawn.

In addition, and by way of practice point, the matter is an important reminder to both targets and bidders that the Court will carefully consider the complexity and information provided to target shareholders when dual scheme/takeover structures are used. In the Eumundi case, the Court (and ASIC) were focused on there being a clear explanation in the scheme booklet of the interaction between the takeover bid and the proposed scheme, including in the Chair’s letter. Of note is that even after amendments were made to the booklet following comments from ASIC, at the first Court hearing, the Court required further amendments to be made to the booklet. These changes required the target to clarify at the outset (not just in the body of the booklet) the risks if shareholders did not accept the takeover offer (and the 90% minimum acceptance condition was not satisfied) and voted against the scheme, and that those shareholders could in those circumstances become minority shareholders in a company controlled by the bidder.