In Potash Corp. of Saskatchewan Inc.'s quest to buy K+S AG, one of its biggest hurdles may lie in the German company's corporate structure.
K+S has two boards of directors, one comprised of executives and another of employee representatives and shareholders.
The employee-shareholder group, known as the supervisory board, has enormous influence over the company with the power to hire and fire executives.
Unlike most takeovers, where a high enough bid will succeed, the buyer must also deal with the supervisory board, which takes into account the employees.
"The representative of the employees represent different interests," said Martin Imhof, a partner at law firm Heuking Kuhn Luer Wojtek, who specializes in cross-border mergers and acquisitions in Germany.
"They try to protect employees, so no employee is made redundant in a takeover."
Half of the directors on K+S's 16-member supervisory board are employee representatives and union reps. It voted unanimously along with the executive board to reject Potash Corp.'s $8.7-billion (U.S.) bid, saying it was too low and citing potential job and production losses.
Potash Corp.'s offer represents a 57 per cent premium over K+S's stock over the past year – a significant amount, especially in a soft commodities market.
But even though Potash Corp. is open to raising its bid if it found more value, that may not be the sticking point.
"What it takes in reality is a great deal of diplomacy and diplomatic communication and conviction rather than by throwing money at people," said Ralf Thaeter, managing partner with law firm Herbert Smith Freehills Germany LLP, who has worked on cross-border mergers in Germany for more than two decades.
"The style in Germany is to reconcile interests of shareholders and employees. At the very end, the owners will always prevail but it is not as easy as [saying] 'I have the majority and you are out of here.' That's just not going to work," he said.
Although Potash Corp. said it does not plan to slash jobs or shutter mines, K+S wants more assurances. According to a source close to K+S, the company wants more than a legal and binding document. It wants a comprehensive, detailed set of commitments, as well as a mechanism to enforce the commitments after the merger.
The companies started talking about working together late last year, according to one source close to Potash Corp. Then the chief executives, Potash Corp.'s Jochen Tilk and K+S's Norbert Steiner, spoke in February. A source close to K+S described the meeting as unsubstantial and irrelevant.
Tension erupted after K+S received Potash Corp.'s takeover proposal late in May. Potash Corp. wanted to meet to discuss the terms. But K+S refused and sent Potash Corp. a list of questions instead. K+S has said Potash Corp. was evasive when it asked for a commitment to protect 14,000 K+S employees.
The source close to K+S scoffed at a suggestion that they were not negotiating in good faith and said negotiations and diligence were something that is earned with a convincing proposal.
Regardless, K+S cannot ignore the huge premium Potash Corp. is offering. The source close to Potash Corp. said K+S shareholders like its offer. The Germany company has also heard that the premium is spectacular. But the source close to K+S said shareholders should not be blinded by the premium as it is based on what it sees as its undervalued stock. K+S has said Potash Corp.'s offer trivializes its large potash project in Saskatchewan, called Legacy.
K+S executives are now reaching out to shareholders to defend their decision. K+S shares are trading 10 per cent lower than Potash Corp.'s offer of €41 ($58) per share, suggesting that investors are not convinced that the deal will succeed.
K+S has not specified what is a fair price, except to say that it believes Legacy is worth €21 per share. That has led to speculation that K+S's target is around €50.