A court in Chile is expected to rule this week on an agreement permitting China’s biggest lithium company to take a major stake in the South American country’s flagship producer of the metal critical to batteries and electric vehicles.
Tianqi Lithium Corp. 002466 -0.70% reached a roughly $4.1 billion deal in May to acquire shares equivalent to a 24% stake in Sociedad Quimica y Minera de Chile SA SQM 0.58% . Tianqi is buying the stake from Nutrien Ltd. NTR -0.41% , a Canadian fertilizer company that is selling to comply with requirements by Indian and Chinese regulators over a separate transaction.
In September, Tianqi and Chile’s competition regulator agreed to limits on how much influence the Chinese company could wield at SQM, as Sociedad Quimica y Minera is called. SQM has said that deal doesn’t provide strong enough protections against potential harm from a competitor becoming its second-largest shareholder. It has asked the court, called the Tribunal de Defensa de la Libre Competencia, to reject the agreement.
Ultimately, the battle centers on control of the Chilean company: If Tianqi isn’t able to acquire the shares and Nutrien sold them piecemeal, SQM’s predominant shareholder, a billionaire son-in-law of deceased Chilean strongman Augusto Pinochet, could have less resistance in influencing actions taken by SQM.
In acquiring the stake, Tianqi will have the ability to name three directors to SQM’s board. Under the agreement with regulator Fiscalía Nacional Económica, Tianqi’s board nominees can’t be its own executives, directors or employees, and they can’t join board committees unless nominated by independent directors. The Tianqi-nominated directors also are forbidden from disclosing SQM’s commercially sensitive information, according to the agreement, which would remain in effect for up to six years.
“I think it’s a testament of the size of the prize, that Tianqi is willing to sign up to this deal that limits it in various ways for a fixed period of time, likely because down the line it will look to increase its influence,” said Hugo Brennan, a political analyst at risk consultancy Verisk Maplecroft, who has written about the Chinese government’s lithium strategy.
SQM said in a statement last month the pact doesn’t “effectively resolve the risks that it intends to mitigate” and shouldn’t have an end date as long as the concerns about Tianqi exist. A company spokeswoman declined to comment further.
Tianqi’s board seats would give it “strategic insights into SQM’s growth plans, so it is no surprise that SQM is pushing back very hard on this,” said Chris Berry, founder of House Mountain Partners LLC, a New York-based adviser to battery-metals companies and investors.
A spokeswoman for Tianqi declined to comment.
Earlier this year Tianqi President Vivian Wu described the SQM stake as an “attractive investment,” noting in a statement that its shareholders would benefit from SQM’s “stable financial returns and steady dividends.”
SQM controls valuable lithium deposits in Chile, said Priscilla Yung, an analyst at IHS Markit who covers lithium and battery materials, adding that the dry weather in northern Chile makes processing “a lot quicker compared to other places.” SQM also produces specialty plant fertilizers, iodine and industrial chemicals.
People familiar with Tianqi’s investment in SQM played down the potential influence the Chinese company could have on SQM and the broader lithium market. SQM’s bylaws don’t permit any investor to obtain more than 32% of shares, a person familiar with the company said.
Right now, the single-largest shareholder in SQM is Julio Ponce Lerou, a Chilean billionaire and son-in-law of Mr. Pinochet, who ruled Chile from 1973 until 1990.
Though he is no longer a board member at SQM, Mr. Ponce, who holds a 32% stake, is still influential at the company and doesn’t want Tianqi to threaten his position as SQM’s major shareholder, according to people familiar with the company.
However, Mr. Ponce also considered selling some of his SQM shares in the past, and Tianqi was one of the suitors for that deal, according to a person familiar with the sale.
Attempts to reach Mr. Ponce for comment through an attorney who has represented him were unsuccessful.
Last year, lithium producers saw their stocks rise as investors anticipated strong prices and demand from electric-vehicle makers. However, shares of publicly traded lithium producers have fallen off this year due to supply concerns.
SQM and Tianqi control the world’s second and third largest supplies of lithium, giving the companies 18% and 10%, respectively, of total production capacity, according to a recent IHS Markit analysis. Charlotte-based Albemarle Corp., the market leader, controls 25% of the potential supply, according to IHS Markit.
If the Chilean court rejects the agreement between Tianqi and the competition regulator, Tianqi still has other options. The company could appeal the ruling or renegotiate terms in its pact with the country’s competition regulator.
Write to Micah Maidenberg at micah.maidenberg@wsj.com