Potash Corp. said Wednesday it filed a lawsuit against BHP Billiton that seeks to block the mining giant’s $39 billion hostile bid for the Canadian fertilizer producer.
The lawsuit filed in a U.S. District Court alleges that BHP misrepresented and failed to inform investors about material facts, and it accuses BHP of engaging in fraudulent, deceptive and manipulative behavior related to its offer.
A BHP spokesman declined to comment on the Potash Corp lawsuit.
Potash Corp claims that the Anglo-Australian miner sought to drive down the Canadian company’s perceived value by strategically timing announcements about BHP’s plans to become direct competitor in the potash business. That way, the suit argues, BHP could eventually make a bid for Potash Corp that was low enough to avoid triggering a BHP shareholder vote.
Before bidding for Potash Corp last month, BHP was focused on developing its Jansen potash project in Saskatchewan. The project, which is slated to begin production around 2015, is expected to be the world’s single largest potash mine once it completes a multi-year ramp-up process.
Under British law a shareholder vote is required if a company attempts a takeover that exceeds 25 percent of its own market valuation.
At $39 billion, or $130 a share, BHP’s current offer allows it to avoid a vote that would give its own shareholders an opportunity to scupper a deal.
STALLING TACTIC?
Such litigation is a standard tactic that takeover targets use mostly as a stalling tactic, legal experts say, and rarely do suits of this kind alter the outcome of a battle.
“Litigation is standard, but it accomplishes only modest goals of giving the target a window into the bidder and some delay, some smoke,” said John Coffee, a professor at Columbia Law School in New York. “It is very unlikely to result in a permanent injunction that ends the contest.”
Even so, lawyers say the litigation process gives a target company the opportunity to pursue a discovery process that could lead to disclosure violations coming to light.
“Litigation is designed to slow things down and that usually helps the target company in formulating and executing its strategy in defense of a takeover. It looks like a pretty typical move,” said Gordon Smith, a professor at Brigham Young University Law School in Provo, Utah.
Potash Corp.’s U.S.-listed shares were down 72 cents at $146.80 on Wednesday, but are still trading well above BHP’s $130 offer, suggesting investors anticipate a higher bid.
Many observers expect a competing bid to involve a Chinese entity such as Sinochem, the giant, state-owned chemicals group that has hired two investment banks to advise it on options.
China is believed to be worried about a BHP takeover of Potash Corp because it needs low-cost fertilizer to feed its growing population. Expectations of surging demand has fueled BHP’s strategy of adding the No.1 supplier to its extensive mining assets.
COERCIVE OFFER?
The suit filed in the U.S. District Court for the Northern District of Illinois, also alleges that BHP has sought to increase its chances of acquiring Potash Corp on the cheap by making its offer in an unusually coercive form.
Potash Corp’s lawsuit states that BHP atypically has not conditioned its tender offer on obtaining sufficient shares to enable it to carry out a full merger of the two companies.
BHP would have the choice of ending its offer when just over 50 percent of Potash Corp.’s shareholders tender shares, the suit says. Under Canadian law, a company needs to secure at least 66.67 percent shareholder support in order enable it to eventually win full control.
That would leave the remaining shareholders in the lurch – owning shares in an enterprise controlled by BHP with no clear way to exit their investments, Potash Corp. says.
Saskatoon, Saskatchewan-based Potash Corp. argues that the current structure of the BHP offer results is pressuring its shareholders into tendering shares toward the BHP offer.
The case is Potash Corp. v. BHP Billiton in the U.S. District Court for the Northern District of Illinois Eastern Division, No. 1:10-cv-06024.
