Deal Reporter
• Business combination agreement could be used
• BaFin likely to closely monitor offer document promises if hostile
Potash Corporation [NYSE:POT] has legal options at its disposal to demonstrate commitment to K+S’ [ETR:SDF] German operations and employees, according to independent lawyers.
The German group’s rejection of Potash Corp’s EUR 41 per share proposal cited valuation, jobs and break-up concerns. The rejection gained support of German politicians after they had met with Potash Corp management to discuss the matter.
“The main problem with Potash Corp’s approach towards K+S is that they have given no contractual guarantees about safeguarding jobs and about preserving the company’s future activities in Germany,” said K+S employee representative Ralf Becker.
K+S directly employs 14,000 people globally, with 70% of its workforce in Germany. There are more than 30,000 direct and indirect jobs associated with K+S production in Germany, CEO Norbert Steiner said in his rejection statement.
Reports have speculated that Potash Corp is mainly interested in acquiring K+S for its Legacy Project in Saskatchewan, Canada, to limit the global supply of potash. This has led to concerns it would have little regard for the company’s higher-cost German operations.
Potash Corp has two options at its disposal to try and convince K+S it will protect jobs, a lawyer said. One is that it could use a binding business combination agreement in its offer. This can be used to safeguard jobs and operations for a period of between one and five years, a second lawyer said.
These agreements are typically used to outline matters like board composition, business strategy, head office location and the merged entity’s name. They are generally the hallmark of friendly, rather than hostile, deals, the first lawyer noted.
The companies are still thought to be in contact. K+S is seeking concrete commitments to ensure promises on German jobs are not broken, a person familiar said. K+S has also raised concern that Potash will sell its salt business post-acquisition.
One example of such an agreement is Bayer’s [ETR:BAYN] acquisition of Schering in 2006, the first lawyer said. Bayer agreed to treat Schering and Bayer employees equally when there were redundancies. A bidding war against a hostile Merck included Bayer indicating its deal would result in fewer job losses.
Schaeffler’s shareholder agreement with target Continental [FRA:CON] ended a hostile process with promises to protect the interests of employees and shareholders. However, in this case Schaeffler also agreed to limit its Continental stake to 49.9% for four years before being able to move for a full merger. The agreement was terminated in 2013.
The other option is that Potash Corp can merely outline its intentions on jobs in the offer document, although this is more difficult to legally enforce, said the first lawyer.
German law is designed to favour employees through full and adequate disclosure, the first lawyer said. In a hostile bid situation Germany’s Federal Financial Supervisory Authority, BaFin, would seek detailed disclosure on such issues and would monitor the situation closely, he said.
Despite its resistance on the jobs front, K+S’ management board does need to stay neutral due to its responsibilities also to shareholders, a lawyer familiar with the matter said. Ultimately, it will be up to K+S shareholders to decide on the bid, he said.
K+S’ US shareholders view the deal as a sensible option to consolidate in an oversupplied potash market, according to a person familiar with the German company. About 21% of K+S institutional investors were US-based at the end of 2014, according to the company’s latest annual report. This was greater than in Germany (18%).
With this in mind, Potash Corp may be more focused on securing the backing of the wider investment community, rather than on the jobs front, the lawyer familiar said. There have been cases of hostile approaches succeeding in Germany when there is employee opposition, such as ACS/Hochtief [ETR:HOT], he noted.