Mining group Xstrata gave its long-awaited blessing on Monday to a revised $33 billion bid from trader Glencore, bowing to investor pressure by changing the deal to ensure it isn't sunk by a payment plan to retain top managers.
Xstrata dropped its insistence that the overall deal be tied to a shareholders' vote on the controversial package, which offers over 70 top executives a total of roughly 140 million pounds ($226 million) to dissuade them from quitting.
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Now, through a complex structure of votes, investors will be able to express views against the retention plan without endangering the merger, bringing the deal closer to a conclusion almost eight months after it was announced.
"I am glad that they have recommended the deal and also very pleased that they have unbundled the remuneration issue," said one of Xstrata's 40 largest institutional investors.
"As much as I, personally, think that the two companies will be better off merged, it would have been hard to vote in favor of the retention packages."
In the original all-share agreement, backed by Xstrata's board in February, shareholders had to support both the retention plan, then worth more than 170 million pounds, and the Glencore offer itself - or neither.
Xstrata argued its executives would be responsible for achieving the bulk of future profit. The board members later said changes to Glencore's bid last month - which put the trader's own chief executive at the helm instead of Xstrata's veteran boss Mick Davis - made the plan even more necessary to stop its top executives leaving.
But after months of public and private grumbling from institutional shareholders such as BlackRock, Legal & General and Schroders, Xstrata has agreed to split the issues.
For some shareholders, this is still not enough - Threadneedle Investments, the 25th largest shareholder in Xstrata, said even Glencore's revised, higher deal was giving away the miner "on the cheap" and it remained "firmly opposed".
Threadneedle holds 0.4 percent of Xstrata stock, but in a complex deal that could still be blocked by shareholders accounting for just 16.5 percent of shares, every vote counts.
"No one should be in any doubt that this is effectively seen as a takeover, which will ultimately see a significant change in culture, leadership, quality and risk profile for Xstrata shareholders," Iain Richards, head of governance and responsible investment at Threadneedle, said in a letter to Xstrata's board.
Activist fund Knight Vinke, a top-20 shareholder and a vocal opponent of the deal so far, also argued the deal involved a change of control and was not a merger of equals, criticizing what it said was an insufficiently robust Xstrata board.
"We will now consult with other shareholders with a view to taking steps that will strengthen the independence of the Xstrata board," it said in a statement.
The major unknown, however, remains Qatar, Xstrata's second-largest shareholder and an unexpected kingmaker in one of the largest ever mining deals. A source familiar with the matter said the Gulf state's sovereign wealth fund, which owns over 12 percent of Xstrata, was considering its position.
Glencore, Xstrata's largest shareholder, had to raise its offer last month to 3.05 new shares for every Xstrata share it does not already hold, up from 2.8, after Qatar rejected the initial terms and threatened to sink the plan to create a mining and trading powerhouse.
Glencore's conditions for the higher price, however, included naming its boss and top shareholder, Ivan Glasenberg, as chief executive, ousting South African rival Davis.
Xstrata's non-executive directors had been expected to support the higher, revised bid, having supported the original - but they said on Monday that their recommendation for the deal was conditional on the approval of the retention plan.
Without it, and given the imminent replacement of Davis, the deal could see Xstrata's team depleted at an important time for its development, they said. The miner is shifting from an acquisition-heavy first decade to a phase of self-generated growth, which should boost volumes by 50 percent by 2014.
"This view was reaffirmed by major shareholders, in particular in the light of the change of CEO, and remains the rationale for retention arrangements," Xstrata Chairman John Bond, set to retain the role in the enlarged group, said.
"Nonetheless, some other shareholders remain opposed either to the principle of retention payments or to the originally proposed inter-conditional nature of the merger resolutions."
NOT IN THE BAG YET
Shares in Xstrata rose on Monday after the announcement, trading up 2.5 percent at 1220 GMT at 982 pence, while Glencore was flat. The prices implied a ratio of almost 2.9 - closer to the revised ratio and up from 2.8 at Friday's close, meaning the market considers the deal more likely to happen as a result of Monday's changes.
"(To say it is) in the bag is probably too strong. The merger ratio is probably going to be found adequate to get the deal done," Macquarie analyst Jeff Largey said.
"I think the new vote structure is unique, to say the least, and we'll see if, perhaps from a corporate governance point of view, this ruffles a few feathers."
Under the structure unveiled on Monday, Xstrata shareholders will be called to vote on two resolutions at a court meeting this month. The first is on supporting the merger, subject to the retention plan being approved at a later general meeting, while the second is on supporting the deal only if the pay plan is rejected. Shareholders who back the deal regardless of the retention issue can vote in favor of both options.
Shareholders will then hold a general meeting to vote on the incentive scheme for managers. Based on the results of that meeting, where a straightforward majority will be enough to approve the plan, one of the two court votes will be applicable.
Xstrata added that Davis would be replaced on the board by an Xstrata executive when he leaves next year, retaining the current balance. Xstrata will have six out of 11 board members.
Glencore's Glasenberg, who is also Glencore's largest shareholder, has given an "irrevocable undertaking" that he will support the current structure for at least two years.
Xstrata said Davis, one of the best paid CEOs among FTSE 100 companies, had waived his right to his 2012 retention award but would receive 9.6 million pounds on terminating his contract - equivalent to annual salary, 2011 bonus and other benefits.