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Potash waits 1000 metres below surface at the Rocanville Potash Corp mine before being loaded up the shaft and carried to surface in Saskatchewan September 30, 2010. (David Stobbe/Reuters/David Stobbe/Reuters)
Potash waits 1000 metres below surface at the Rocanville Potash Corp mine before being loaded up the shaft and carried to surface in Saskatchewan September 30, 2010. (David Stobbe/Reuters/David Stobbe/Reuters)

The pros and cons of a BHP takeover of Potash Corp. Add to ...

Prime Minister Stephen Harper faces one of the most challenging decisions of his nearly five years in office over whether his government will approve BHP Billiton Ltd.'s hostile takeover bid for Potash Corp. of Saskatchewan.

Aligned against the deal are not only Saskatchewan Party Premier Brad Wall, a small-c conservative ally, but also four of Mr. Wall's predecessors, three other premiers and the federal opposition parties. But rejecting the takeover would run contrary to Mr. Harper's professed support for liberalized trade and investment rules, and his desire to attract foreign investment to Canada. Here are the upsides and downsides of allowing BHP to proceed.

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PROS

BHP is insisting it is offering a "shock and awe" package of benefits that would easily outweigh any negatives associated with the takeover, and hence should satisfy Investment Canada's "net benefit" test. It is ready to agree to an independent monitoring agency that would be able to review its performance and impose penalties if it breaks promises.

Under the Investment Canada process, BHP is committing to repatriate Potash Corp.'s executive offices to Saskatoon from Chicago, where they were moved under chief executive Bill Doyle, an American. The multinational mining giant would make Saskatchewan the head office for its potash operations, and vows to give the division a large amount of autonomy.

BHP has promised to structure the deal to minimize revenue loss to Saskatchewan that would occur if it wrote off investment in its new Jansen potash mine against current Potash Corp. earnings. The company said the province would benefit from greater investment in potash development in Saskatchewan.

Mr. Harper could claim leadership in maintaining liberalized global investment amid fears that the economic slowdown has ignited a new era of protectionism. Canada has long seen inbound direct foreign investment as a source of growth and jobs, while attempting to maintain open market access for Canadian corporations abroad.

Potash Corp. is hardly the Canadian corporate champion its supporters have claimed, as the Prime Minister himself pointed out. With more than half its shareholders and its key executives based outside the country, the acquisition of Potash Corp. is deemed to be "Canadian" under federal legislation only because two-thirds of the members of its board of directors are Canadian.

CONS

Canadians can't rely on BHP's promises under Investment Canada rules to protect the national interest over the long-term. Foreign corporations routinely make commitments to the federal government during take-over negotiations that are either broken outright, dropped as a result of loopholes that allow for changing market conditions, or expire. The development of Saskatchewan's potash resource is a long-time endeavour that can't be protected with short-term promises to Ottawa.

Potash is a crucial resource because it is a key component for fertilizers needed by emerging markets to feed their more affluent populations. With 53 per cent of world reserves, Canada maintains a strategic advantage that would be lost if it allowed an Australian multinational to control the lion's share of the resource.

Mr. Harper is a strong defender of provinces' jurisdiction over their resources, and Mr. Wall has adamantly rejected the idea of allowing BHP Billiton to take control of the development of a key commodity. Mr. Wall has said he sees no way that BHP could sweeten the deal to provide a net benefit to province or the country as required under the Investment Canada Act.

Canada is seen as a "boy scout" in the global marketplace - willing to cede control of key industries to countries that pursue a far more pragmatic, interventionist approach. After the loss of companies like Inco, Falconbridge and Alcan to foreign multinationals, Ottawa needs to assert Canada's national interest in having domestic corporate head offices.

While the process is supposed to be free of politics, Mr. Harper presides over a minority government, holding 13 of 14 seats in Saskatchewan. With clear and emotional opposition to the deal in Saskatchewan, the Prime Minister could be risking a populist backlash in the next election that could threaten his hold on power.

Determining 'net benefit'

The Investment Canada Act was introduced by prime minister Brian Mulroney to replace the more restrictive Foreign Investment Review Agency, which was seen as a serious impediment to the influx of global capital into the country. Under the act, the government must approve a foreign acquisition that is judged to be a "net benefit" to the country, although the precise calculation of the benefits and costs is specific to each deal, and remains confidential.

No foreign takeover had been rejected under the Investment Canada Act until 2008, when, citing national security concerns, the Harper government turned down a proposed acquisition of aerospace company MacDonald Detwiller & Associates by U.S.-based Alliant Technology.

While there is no clear definition of net benefit, federal guidelines say the government will take into account factors including the effect of the takeover on employment, technology development, productivity, competition, and national policies. More than an arithmetical calculation, the government can determine that a deal is not in the strategic interest of the country.

To bolster its net benefit case, a company may provide "undertakings" to enhance the deal's impact for Canadians. Undertakings may cover, for example, commitments regarding the number of employees in Canada, spending on research and development; providing support for local communities, and committing to a level of capital investment in the Canadian business. Typically, undertakings have been secret, but BHP has promised to make public its commitments and have an independent body monitor them.

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