Potash Corporation of Saskatchewan successfully defends historic $43.1 billion hostile takeover bid

January 2011

Following an arduous three-month battle, Jones Day’s client, Potash Corporation of Saskatchewan Inc., successfully repelled BHP Billiton’s hostile $43.1 billion tender offer for all of PotashCorp’s shares in November 2010.  If consummated, the transaction, which was one of the largest hostile tender offers in history, would have been the largest Canadian acquisition ever.  

During its pendency, the tender offer grabbed headlines around the world because of its enormous size, speculation about whether others, including state-owned enterprises, would mount competing bids, litigation in which PotashCorp claimed that BHP had violated the securities laws in connection with the tender offer, and the looming specter of a decision by the Canadian government on whether to approve the transaction under Canada’s foreign investment laws.  The tender offer involved complex and novel legal and business issues in several jurisdictions around the world. 

PotashCorp relied upon the legal counsel of Jones Day and Canadian law firm Stikeman Elliott, and the investment banking advice of Goldman Sachs & Co., Merrill Lynch Canada Inc. and RBC Dominion Securities Inc. 

Background to the Offer

PotashCorp is the world’s largest fertilizer enterprise.  Potash, a key ingredient in fertilizer, is vital to ensuring crop growth and high crop yield.  PotashCorp’s common shares are listed on the Toronto Stock Exchange and the New York Stock Exchange.  The transaction was subject to both U.S. and Canadian securities laws and BHP and PotashCorp made securities filings in both countries. 

BHP is the world’s largest mining company and one of the largest companies in the world.  It is a dual-listed company, comprised of two entities, one listed on the London Stock Exchange and one listed on the Sydney Stock Exchange.  BHP’s bid for PotashCorp would mark BHP’s third recent, high-profile transaction attempt.  In late 2007, BHP launched a $149 billion hostile bid for Rio Tinto in what became the largest failed acquisition on record.  BHP and Rio Tinto subsequently proposed a $58 billion joint venture that was blocked by antitrust authorities in October 2010. 

During the recent recession, global potash demand plunged, driving PotashCorp shares from a high of about $240 per share in 2008 to a recent low of $85 per share in July 2010.  On August 12, 2010, at the request of BHP’s CEO, BHP’s CEO met with PotashCorp’s CEO and delivered a letter offering to purchase all of PotashCorp’s outstanding shares for $130 per share in a negotiated transaction.  On August 16, after discussing and evaluating the offer with PotashCorp’s legal and financial advisors, PotashCorp’s board of directors voted unanimously to reject the proposal. 

The next day, PotashCorp preempted a formal offer from BHP by issuing a press release disclosing BHP’s $130 offer and the PotashCorp board’s rejection of it.  PotashCorp’s board felt that BHP’s offer was timed to take advantage of depressed stock prices in the fertilizer industry, did not reflect the value of the company and as such was grossly inadequate.  PotashCorp’s shares immediately rose from around $112 per share to over $143 per share.  On August 20, 2010, BHP formally commenced a tender offer for all of PotashCorp’s shares for a price of $130 per share, which was almost $20 below the then-current market price for PotashCorp shares.  The company’s shares continued to trade significantly above the $130 offer price throughout the duration of the BHP bid.

The Shareholder Rights Plan

Canadian corporations cannot employ the arsenal of takeover protections that U.S. corporations commonly implement in anticipation of or in response to an unsolicited bid, including, for example, classified boards, supermajority voting for the removal of directors and locked-in charters and bylaws.  Although Canadian corporations may adopt a shareholder rights plan (“poison pill”) in response to an unsolicited bid, the purpose of such plans historically has been to ensure that shareholders are treated equally and in a non-coercive manner by a bidder and rights plans have been permitted to remain in place only for a period of time determined by provincial securities regulators to be necessary to permit a target to explore its strategic alternatives and increase shareholder value (typically, 45 to 60 days from the date of a bid). 

On August 17, 2010, PotashCorp announced that its board of directors had adopted a shareholder rights plan with a 180 day duration.  The plan provided that certain bids, including those open for at least 90 days and supported by a majority of PotashCorp shareholders, would not trigger the poison pill.  BHP objected to the rights plan and the Saskatchewan Financial Securities Commission scheduled a hearing for November 8 to determine whether to “cease trade” (rescind) the plan. 

Although that hearing never took place because BHP would withdraw its tender offer, PotashCorp argued, in a brief to the securities commission, that its rights plan should not yet be rescinded because, among other things:

· PotashCorp required more time to explore its strategic alternatives given PotashCorp’s unusual size, global presence and complex business and the unsettled financial markets;

· The continued operation of the rights plan would not deny any real benefit to PotashCorp’s shareholders because the company’s shares had traded well above BHP’s $130 bid price since the commencement of BHP’s offer and PotashCorp shareholders therefore had the ability to sell their shares in the open market for significantly more than the BHP offer; and

· PotashCorp’s board had the right to conclude, in the exercise of its fiduciary duties, that BHP’s bid should be rejected, this right must be accompanied by the means for the board to enforce that right through the adoption and retention of a rights plan, and there was no principled basis for regulatory oversight to override the corporate fiduciary duty regime in the particular circumstances of the case.

Alternative Transactions

Soon after the announcement of BHP’s tender offer, PotashCorp began exploring its strategic alternatives.  In about two and a half months, PotashCorp had discussions with many strategic, financial and state-sponsored potential bidders or investors from around the world and considered a spectrum of potential value-enhancing transactions.

The Securities Litigation

On September 22, PotashCorp, represented by Jones Day, filed suit for preliminary and permanent injunctive relief against BHP in the United States District Court for the Northern District of Illinois.  PotashCorp’s suit alleged that:

· Because BHP feared rejection of the tender offer by its own shareholders, BHP made false statements to drive down the price of PotashCorp stock to avoid a BHP shareholder vote on the offer.  U.K. listing rules that require that a bidder submit a transaction to its shareholders for approval if the value of the consideration offered in the transaction equals or exceeds 25% of the bidder’s market capitalization;

· BHP engaged in a strategy designed to drive down the price of PotashCorp stock and the perceived future value of PotashCorp by announcing its plans to enter the potash industry through the development of a massive greenfield potash mine called the “Jansen Project” when, PotashCorp alleged, BHP was still assessing the viability of that project and might have cancelled the project;

· BHP made contrary statements about both its intention to operate the Jansen Project “flat out” and flood the market with potash and its plans to participate in an industry organization named Canpotex that markets potash for Canadian producers, including PotashCorp; and

· BHP’s statements concerning PotashCorp and its plans to enter the potash industry were designed to confuse and coerce PotashCorp shareholders into tendering their shares to BHP.

Given the very short time available to address such alleged misstatements and omissions, the litigation progressed with breathtaking speed.  Through several intense weeks, the Jones Day litigation team reviewed over half a million documents in preparation for 13 depositions in 14 days in Canada, the United Kingdom and the United States.   Jones Day attorneys took the depositions of BHP’s CEO and many of its senior managers.   Using the considerable evidence unearthed by Jones Day in discovery, PotashCorp filed an amended complaint, alleging that the information revealed in discovery supported many of PotashCorp’s initial allegations.  For example, although BHP publicly stated that it was planning to build an 8 million per annum ton mine, BHP’s then-current plans proposed a much smaller initial effort and that even that modest plan had yet to receive approval to proceed.  Indeed, PotashCorp alleged that BHP had concluded that the proposed Jansen greenfield development was too expensive and that conclusion had led BHP to pursue a “buy” strategy.  Further, at trial, PotashCorp introduced evidence that it believed demonstrated that BHP had changed its position on its anticipated involvement in Canpotex in an attempt to secure U.S. antitrust approval, stating that it would sell potash on its own, not through Canpotex, while telling the Canadian government, which draws significant tax revenue from Canpotex, that BHP was prepared to work with Canpotex if its tender offer was successful.

On November 4 and 9, the court heard the parties’ arguments with respect to PotashCorp’s motion for an injunction.  No decision was ever entered, however, because BHP abandoned its tender offer before the court could make a ruling.

Public Policy Issues

Under the Investment Canada Act, acquisitions of Canadian companies by foreign persons may be consummated only if the Minister of Industry determines that they will result in a “net benefit” to Canada.  The bid for PotashCorp was the catalyst for heated policy debates about whether Canada’s strategic natural resources and the companies that control them need to be protected by provincial and federal governments from unsolicited, foreign takeovers.  In this sense, the tender offer tested the limits of the free-trade and free-market principles that have facilitated many foreign takeovers of Canadian companies in recent decades. 

BHP’s offer gave PotashCorp center stage to reaffirm its long-standing commitment to Canada and Saskatchewan.  In mid-October, PotashCorp announced a seven-point Pledge to Saskatchewan that it would follow, and that PotashCorp would require any supported bidder to follow.  The Pledge included an affirmation that PotashCorp would maintain its corporate headquarters in Saskatchewan, relocate certain executives to Saskatoon, commit to future participation in and the profit-maximization strategies employed by Canpotex, develop a strong strategy for engaging aboriginal communities, manifest a commitment to Saskatchewan through philanthropic giving and support for community programs, commit to a local spending target of at least 60% of certain purchasing, and continue to invest $7 billion in long-term capital expansions.

There was significant popular opposition in Saskatchewan and throughout Canada to permitting one of Canada’s most significant natural resources to be controlled by a foreign entity.  On October 20, in a widely broadcast speech, Saskatchewan Premier Brad Wall powerfully made the case that BHP’s hostile tender offer would not provide a net benefit to Canada under the Investment Canada Act saying:

· There was a risk of significant job losses by other Canadian potash manufacturers as a result BHP’s plans to run its Jansen mine “flat out” and its threatened departure from Canpotex;
 
· Saskatchewan could lose up to CAN $6 billion in tax revenues if BHP operated PotashCorp mines at full capacity; and

· Potash is a strategic resource and the sale of PotashCorp to BHP threatened to jeopardize Canadian food and energy security and Saskatchewan’s international standing.
Further, Premier Wall observed that foreign bidders, including BHP, had a record of breaking the promises they had made to the Canadian government to induce the net benefit finding under the Investment Canada Act.

After Premier Wall’s speech, several provincial premiers announced their opposition to the BHP bid.  The drama reached a climax on November 3 when, despite intensive lobbying by BHP, the Canadian Minister of Industry blocked BHP’s bid on the basis that the transaction would not likely provide a net benefit to Canada.

In the last 25 years, the Canadian government has reviewed more than 1,700 transactions under the Investment Canada Act, but has blocked only one other acquisition.  The Canadian government is currently reviewing its foreign investment laws.

Because PotashCorp has significant sales into the U.S. and because of its substantial U.S. nitrogen and phosphate businesses, the BHP offer was also subject to review by the Committee on Foreign Investment in the United States (“CFIUS”), a multi-departmental committee that exercises the President’s authority to enjoin acquisitions of certain U.S. entities by foreign acquirers.  Jones Day represented PotashCorp before CFIUS.  Jones Day also provided antitrust advice on the transaction.

Jones Day Team

The Jones Day team was comprised of individuals from Jones Day offices on three continents and numerous legal practices.  The Firm’s team was led by Bob Profusek (New York – M&A) and Philip Stamatakos (Chicago – M&A), Dan Reidy (Chicago – CCI) and Pat Villareal (Dallas – Securities Litigation).  The transactional team included  Bob Avery, Patrick Belville and Adam Schaeffer (Chicago – M&A), Chris Hewitt (Cleveland – M&A), Chris Ahern (Sydney – M&A), Ward Winslow and Andrew Farwig (Chicago – Capital Markets), Vica Irani (London – Capital Markets), Noel Francisco (Washington, D.C. – Government Regulation), Mike Shah and Nick DeLuca (New York – Employee Benefits), and Victor Gatti (New York – Tax).  The litigation team included Lee Ann Russo, Jason Winchester, Irene Fiorentinos, Paula Quist and Morgan Hirst (Chicago – Trial Practice), Tom Jackson and Mike Davitt (Dallas – Securities Litigation), Scott Fletcher (Houston – Securities Litigation), Meir Feder (New York – Issues and Appeals), Mike Sennett and Pam Taylor (Chicago – Antitrust).

For additional information about this matter, please contact: Robert A. Profusek, Philip S. Stamatakos, Patricia J. Villareal