Ryanair has changed tack in its battle with Aer Lingus over the Irish flag-carrier’s pension scheme, dropping demands for an emergency shareholder meeting but threatening legal action should the group, in which it is the largest shareholder, agree to help cover the €500m deficit.

Accepting defeat in an acrimonious month-long fight for an emergency general meeting, waged through open letters to Aer Lingus’s board, Michael O’Leary, Ryanair’s chief executive, blamed Irish company law. “The shareholders can’t compel the board to hold an EGM. The only remedy you have is to hold the EGM yourself, and then they can ignore whatever resolutions are passed at that EGM,” he said.

“Welcome to Ireland. That’s why we’re bankrupt,” he added.

The low-cost carrier, which holds a 29.8 per cent stake in its Dublin-based rival, wants two things of Aer Lingus’s board: access to a company-commissioned report on a redundancy scheme that led to a €30m fine by Ireland’s inland revenue; and assurances that the group will not make any further payments into a defined-benefit pension scheme that was changed to a defined-contribution plan at the time of the airline’s 2006 stock market flotation.

Mr O’Leary said that in the case of pension payments “shareholders have clear right of legal action”.

Aer Lingus’s management agree with their biggest shareholder that no money is owed to cover the pension plan’s estimated €500m deficit. But the company will take part in talks next week over addressing the gap, which unions argue the group must fund.

Observers suspect Aer Lingus has the stronger legal case. But Joe Gill, an analyst with Bloxham, thinks it is willing to pay for a resolution. “They recognise it’s an issue that hangs over the company and hangs over the share price,” he said.

Shares in the group have hovered in the €0.70 range for the past six months – compared with €2.20 at flotation – valuing the equity at just €370m, in part because investors fear a pensions settlement would eat into the group’s more than €300m net cash. Mr Gill thinks the ultimate cost could be significantly less than the outstanding deficit but believes Ryanair “will continue to campaign that any payment above zero is unacceptable”.

Meanwhile, the failure to force an EGM will add ballast to Ryanair’s position in relation to an Office of Fair Trading investigation over whether it has influence over Aer Lingus.

Aer Lingus on Friday welcomed the decision to drop the EGM request.

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