Potash Corp.: Stop the Protection Racket for Mergers

If Bill Doyle truly believes that he can sell shareholders on the future of Potash Corp. of Saskatchewan Inc. (POT) as an independent company, he has only a few days left to prove it.

The Potash Corp. battle is reaching a stage where, chances are, the Potash Corp. chief executive officer soon won’t be allowed to stump for the stand-alone option. It’s a situation that raises questions about the takeover process in Canada.

This is not the usual complaint about how hostile takeovers move too quickly under Canadian takeover rules because defences like poison pills are very short term in nature, or how the government is too laissez-faire in approving the sales of large and important Canadian companies. It’s a question of whether target boards too easily enter into friendly agreements that prevent them from looking at other options, such as staying independent.

Mr. Doyle has tried to keep his options open as he urges shareholders of the fertilizer company he runs not to tender to the $130-a-share (U.S.) hostile takeover bid from BHP Billiton Ltd. (BHP).

He has declared that there will almost certainly be another suitor for Potash Corp. But if there isn’t, he has also stated that he believes that as a stand-alone company, Potash will “blow right through” the $240 a share it once fetched in market trading.

Throughout the campaign against BHP, the focus at Potash Corp. has been on a white knight. But with no bidder emerging and time getting intensely short, Mr. Doyle has to seriously consider shifting his game to the latter plan.

Next week, the federal government is due to give its ruling on the BHP bid. If it okays the takeover, BHP will quickly move to challenge the poison pill protecting Potash Corp. from a hostile takeover. If history is a guide, the pill will fall.

That will put the Potash Corp. board under huge pressure to at last come up with an option to “maximize shareholder value,” as is their fiduciary duty. A few more dollars is usually enough to win over a board in those straits.

Any white knight bid will almost certainly be friendly and supported by the board of Potash Corp. There’s also a decent chance that the BHP offer will become friendly, in the absence of a white knight, if BHP tosses enough cash on the table.

In either case, once Potash Corp. signs a support agreement to back a bid, you won’t hear any more talk from Mr. Doyle or anyone else at the company about what Potash Corp. is worth as a standalone entity. Mr. Doyle and everybody else will be contractually obligated to say nice things only about the bid that the Potash Corp. board has supported, and likely there will be a clause prohibiting any further attempts to do anything but close the deal to which the board has agreed to, on pain of a huge monetary penalty.

That’s because the practice in takeovers is to build in increasing amounts deal “protection,” a process that’s driven by bidders to create a situation that makes it tough for anybody to top their offers. Everything from large break fees to “no-shop” clauses that bar targets from trying to find a higher bidder is suddenly on the table, and often the board of the target acquiesces.

It’s no surprise. The target often has little leverage. There’s a sweating board of directors facing a low-ball hostile offer with few options. So often, the white knight gets what it wants in return for a slightly higher bid.

What’s more, Canadian boards that do sign a support agreement are usually barred from changing their recommendation unless there is a “superior transaction” on the table. The definition of a superior transaction is generally dependent on a higher price. That means coming up with a plan to stand alone pretty much can’t comply.

Canada could look to the U.K. for inspiration. Already, the U.K. bars break fees bigger than 1 per cent of the equity value of an offer. In other markets like Canada, they can often be 4 per cent or more.

U.K. takeover rules are about to get even tougher, to outright “prohibit deal protection measures and inducement fees other than in certain limited cases,” according to a statement last week from the country’s acquisition regulator.

Such rules give an out to pressured boards facing impatient white knights and their demands for no-shop clauses and huge break fees – leaving them able to say “we’d love to help, we’re just not allowed to do so.”

To be sure, the U.K. ban as it now stands is not designed to apply in cases where a company has been the subject of an auction, as Potash Corp. has been, but there’s a good case that a fast auction in the two- or three-month window afforded by a hostile bid is inadequate to find a buyer for such a large and complex company.

If regulators are going to keep the heat on target companies in Canada by killing poison pills, they might consider U.K.-style rules on protection to ease the pressure to accept an alternative bid, no matter how restrictive, as long as it comes with a few dollars more.

Shareholders would still get to choose whether to sell their company, but management would be able to give them a wider range of options to choose from, including a serious look at standing alone.