Schaeffler Group, strapped by 11 billion euros ($14.3 billion) in debt after its purchase of Continental AG shares, has one way out: gaining full control of Europe’s second-largest car-parts maker.

Continental will hold an emergency supervisory board meeting tomorrow, arranged after Schaeffler demanded the resignation of Chairman Hubertus von Gruenberg and threatened to force out all 10 investor representatives on the 20-member body.

The clock is ticking on Maria-Elisabeth Schaeffler, 67, the billionaire widow of the company’s founder, who owns the ball- bearing maker with her son Georg. Full control would allow her to access Continental’s cash and combine units to cut costs amid the worst auto-industry slump in almost two decades. It would also spread its debt over the combined company.

“An independent Continental board and management are not in Schaeffler’s interest,” said Robert Heym, a Munich-based corporate partner and automotive expert with law firm Reed Smith. “Schaeffler needs control, and they would have enough shares to replace the board at the next shareholders meeting.”

Continental, the Hanover, Germany-based maker of brakes, tires, and ignition systems, sank 68 percent in Frankfurt trading last year. European car sales dropped 18 percent in December and full-year registrations fell the most in 15 years as the recession and tighter credit shattered demand.

The abruptness of the collapse caught carmakers off guard, forcing companies including Volkswagen AG, the biggest customer for both Continental and Schaeffler, to shutter plants to clear stocks.

Chairman Sacrifice

Schaeffler plans to tighten its grip on the board to steer strategy, including a combination of the auto units, to help cut costs for production and loans. Maria-Elisabeth Schaeffler wants to be chairman of the supervisory board, Financial Times Deutschland said last night.

The company, which makes transmission parts and bearings for cars, planes and fishing reels, has enough Continental stock to dominate any shareholder meeting, even though limits were set in an August agreement between the companies. Schaeffler controls 90.2 percent of Continental’s shares and doesn’t have any board seats yet.

At tomorrow’s meeting, the board could offer Schaeffler four seats the investor has been promised, though it’s unclear whether von Gruenberg will be sacrificed, said Tim Urquhart, an analyst at researcher IHS Global Insight.

“They need to start pulling together,” London-based Urquhart said. “Given the disastrous collapse in the market, neither company is in a great situation. Schaeffler definitely wants to increase control. It’s kind of an insane arrangement to spend 10 billion euros and not have any control.”

Destroying Trust

Von Gruenberg, 66, a physicist who initially supported Schaeffler’s approach against the wishes of Continental’s then- Chief Executive Officer Manfred Wennemer, has “sabotaged” integration efforts, destroying trust, Schaeffler spokesman Detlef Sieverdingbeck said in an interview Jan. 20.

If von Gruenberg fails to resign, Schaeffler may call an extraordinary investor meeting before the next planned shareholder gathering on April 23.

A woman who answered von Gruenberg’s phone at Continental said he wasn’t available and directed queries to the press office, which declined to comment. Schaeffler’s Sieverdingbeck also declined to comment on tomorrow’s meeting.

Werner Bischoff, an executive at the IG BCE union and deputy chairman of Continental’s board, said on the union Web site that the dispute should be brought to a rapid conclusion and that employees are “deeply unsettled.”

Close Ranks

In building the largest stake in Continental, Schaeffler agreed to support the management’s strategy and hold off on taking a majority holding. It directly holds 49.9 percent of Continental’s capital after transferring 40.3 percent to private German banks B. Metzler seel. Sohn & Co. and Sal. Oppenheim Jr. & Cie KGaA for possible sale later.

“Control of the supervisory board would enable them to influence management, but their biggest problem remains the investor agreement,” said Reed Smith’s Heym. “Given their debt and the tense market environment, it would probably be legitimate and commercially sensible for Schaeffler to remove the agreement. The question is how much it would cost.”

Costs Triggered

Abandoning the pact, which is being monitored by former Chancellor Gerhard Schroeder, would trigger change-of-control clauses and force Schaeffler to renegotiate 11.8 billion euros in loans that Continental owes. Schaeffler would also have to pay Continental 522 million euros to compensate for higher financing rates and a potential loss of tax credits, according to the agreement.

Schaeffler’s banks, however, may be keen to have their loans backed by Continental’s assets rather than the declining value of its shares. The company’s creditors are led by Royal Bank of Scotland Group Plc, which said Jan. 19 it may post the biggest loss by a U.K. company.

Schaeffler’s banks are reviewing a full takeover that would squeeze out minority shareholders, Handelsblatt reported Jan. 21. Schaeffler said it hasn’t asked banks to review increasing its stake.

Continental is about three times the size of Schaeffler in terms of sales and generated more than 900 million euros in cash through the third quarter, largely because of its tire business, Europe’s second-largest after Michelin & Cie. The stock is 76 percent below the 75 euros a share that Schaeffler bid.

Schaeffler has estimated 899 million euros in interest expenses in the first year of the deal -- enough to suck up 84 percent of operating profit, based on first-quarter 2008 figures reported in the Continental offer Since then, weaker car markets have likely eroded profits and Schaeffler’s expenses may have risen after raising the bid in August.

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