KPN may unleash a risky "poison pill" defense to stop the bid by Mexican tycoon Carlos Slim for more than a quarter of the Dutch telecom operator, if only to buy time for a side deal with Telefonica that it thinks better values its assets and bolsters its independence.
But the move - handing preference stock to KPN's "Stichting" or foundation that could outvote other shareholders - is fraught with uncertainties and could backfire through legal challenges by Slim's America Movil (Mexico City, Mexico) or KPN's (The Hauge, Netherlands) own shareholders.
"Inherent in the mechanism is that it is a rather large gun. You have to be careful in how you use it," said one Dutch lawyer who asked for anonymity because his firm was advising a party in the KPN-AMX face-off. "The general view is that unless there is a specific threat, it would be difficult to trigger the foundation defense, so it might be too early for KPN to go this route."
America Movil has made an offer for up to 27.7% of KPN at $10 a share, which KPN sees as undervalued.
But as the clock ticks down on the tender's June 27 deadline, KPN is weighing all of its options to block the move, including merging its German business E-Plus with Telefonica's O2 Germany.
Another scenario is the "Stichting," which can deploy shares with special voting rights to shield companies from predators.
Such foundations have been used as a tactic in high-profile corporate battles including LVMH's failed hostile takeover of Gucci in 1999 and hedge funds' efforts to replace the board and break up chip equipment maker ASM International in 2008.
But America Movil would likely challenge it in court and judges could later decide that its use by KPN was unjustified, specialist lawyers said.
KPN's other shareholders could also oppose the ploy because it deprives them of having their say over the company's future, leading to share price turbulence, analysts say.
Many Dutch public companies have "Stichting" provisions written in their bylaws. They act as a safeguard in an economy that is very open with little political protectionism, unlike in France or Italy where governments step in to scupper takeovers of companies they see as strategic. The tactic has been popular since the 1970s as a way for managements to buy time for alternatives to a hostile offer.
KPN's foundation was set up as the former state-owned monopoly was being privatized as a way to protect key national infrastructure.
Its mission is to defend the company "from influences that may threaten the continuity, independence and identity" of KPN, according to the company's annual report.
If KPN's supervisory board felt Slim's bid represented such a threat, it could ask the foundation to invoke a call option to acquire from KPN Class B preference stock, which carries voting rights.
The five-member foundation board, which is independent from KPN, must decide whether to trigger the call option. The option effectively dilutes the voting rights of other shareholders, and would neutralize the power of America Movil to influence strategy. It would also buy KPN time to work on a solution that it believes would deliver more value to shareholders.
Robin Bienenstock, analyst at Bernstein Research, said KPN could use the extra time to finalize a deal with Telefonica to merge E-Plus and 02 Germany, which are the third and fourth-largest players in that market.
"KPN will only trigger the poison pill if they have a material offer from Telefonica for German business," said Bienenstock. "But doing so would likely introduce a lot of uncertainty around the KPN share price."
If America Movil challenged the foundation's decision to issue preferential shares, a court would then have to rule whether the move was an "adequate and proportional response to credible threat to the company," a second lawyer explained.
To date, Slim's America Movil has not sought a board seat or tried to influence the direction of KPN, although its chief financial officer recently told the media it opposed KPN's idea of selling assets in Belgium and Germany.
And since America Movil is only seeking a minority stake, lawyers uninvolved in the case said it may be difficult for KPN to prove that Slim's offer poses a real threat to its future.
In earlier "Stichting" cases, the company did not always win out when challenged in court.
Dutch industrial conglomerate Stork injected the poison pill in 2006 after hedge funds Centaurus and Paulson bought one-third of its shares and sought to replace the board and break-up the company. A court later ruled that Stork's use of the foundation shares was unfair to shareholders and ordered it to reverse it.
Four major international law firms have been tasked with representing the various sides in the KPN-America Movil battle, according to two people familiar with the situation. KPN has counsel, the supervisory board has hired separate attorneys, as has America Movil, the people said.
"We are reviewing all the strategic options at our disposal. Because the foundation is an independent body, KPN cannot speak for it," KPN said on Tuesday. Walter Samuels, a spokesperson for KPN's foundation, declined to say whether the five-member panel had been consulted by the company or its board to date.
"We have followed the developments on KPN in the past few weeks and we will continue to follow them carefully," he said. "The foundation is fully independent."
Jan Maarten Slagter, an official from VEB, the Dutch investors' association, said it was opposed to companies using the foundation system to scupper takeovers.
"In this case, I don't think that it is warranted because it is normally used for a hostile takeover, and this is a partial offer," he said.
"If KPN used it, it would be using the nuclear option."
(Additional reporting by Sara Webb; Editing by David Cowell)