What has Potash taught us? Not much, yet

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Tony Clement is the federal cabinet's most prolific user of Twitter, and he has even deployed the popular micro-blogging site to make policy statements. But on one very important issue, you won't be able to get much insight into the Industry Minister's thinking from his Twitter feed - or anywhere else, for that matter.

The minister's landmark decision to block Australian mining giant BHP Billiton Ltd.'s takeover of Potash Corp. of Saskatchewan Inc. last fall was arguably the year's biggest deal story. Mr. Clement found that the deal would not be a "net benefit" to the country, then promised he would bring some "clarity" to that rather nebulous provision in the Investment Canada Act, the law that governs how Ottawa reviews and handles foreign purchases of large Canadian assets.

Four months later, deal makers are still waiting.

Mr. Clement has said the law actually kept him from spelling out his detailed reasons for rejecting BHP's $38.6-billion (U.S.) hostile bid for Potash Corp. (The mining colossus dropped its takeover in the face of the surprise interim decision to turn it down.) A parliamentary committee has launched hearings on the act. Meanwhile, Industry Canada bureaucrats are also reviewing its provisions, with an eye to making the process more transparent.

So some sort of change, or at least a glimpse into the black box of the legislation's "net benefit" test, is clearly coming - but could still be months away, observers say.

In the meantime, questions about Canada's commitment to the free flow of foreign investment across its borders, at least in politically sensitive transactions, are being raised around the world. And even before the parliamentary committee had its first meeting in February, another high-profile test for Mr. Clement emerged: the controversial proposed merger between the owners of the London and Toronto stock exchanges.

"The longer the uncertainty continues, no doubt, the greater the risk it will deter investment," said Calvin Goldman, a competition lawyer at Blake Cassels & Graydon LLP who acted for BHP on the ill-fated deal.

He would not discuss the rejection in detail, but said the government must clarify its rules - rules he nonetheless maintains still have a "good track record."

Those clarifications should include guidance on whether provinces - in BHP's case, it was Saskatchewan - hold a "de facto veto power" over controversial deals. There is also the question of just what constitutes a "strategic asset," a phrase tossed around about Potash Corp. but which does not appear in the legislation.

Mr. Goldman also said that despite the climate of uncertainty, the government is right to hold consultations and take its time before making any changes to the act.

Oliver Borgers, lawyer and expert on the Investment Canada Act with McCarthy Tétrault LLP in Toronto, said it was unclear whether Potash had actually cost Canada any foreign investment - yet. The TMX deal is now the litmus test for foreign investors, he added, who up until recently took little notice of Ottawa's power to block deals because that power was rarely used.

"I think it's too early to tell to what extent the BHP-Potash rejection will chill foreign investment into Canada," said Mr. Borgers, who acted for Rio Tinto PLC in its $38.1-billion 2007 purchase of Alcan, Canada's biggest-ever foreign takeover. "I do think the outcome of the TSX-LSE review will be relevant to the perception of Canada's receptiveness to foreign investment."

Not everyone is sounding alarms. For one thing, many point out, foreign investment clearly continues to flow into Canada, even from BHP, which is developing its promised Jansen potash mine.

Lawyer Nicholas Dietrich, with Gowling Lafleur Henderson LLP - the firm that represented the government of Saskatchewan in the battle against BHP - said the decision merely shows that new rules now apply.

"Foreign investment review is no longer the rubber stamp that it was seen to be before BHP," Mr. Dietrich said, stressing that he was not speaking for his client, the Saskatchewan government. "There is a new sheriff in town."

This is not a bad thing, he argues. While some have what he called a "come and take whatever you like" policy, Mr. Dietrich says some key companies like Potash Corp. - perhaps Research In Motion Ltd. - could also be deemed off-limits to foreign takeovers for legitimate reasons, without scaring away other foreign investment.

"Has Canada closed the door? Not at all," he said.

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HOW NOT TO PULL A BHP

They blew it.

If there is one lesson for foreign investors in the BHP-Potash debacle, it is that the Australian mining giant and its advisers bungled the sensitive job of lobbying governments to back the deal.

It's a message that potential foreign bidders for other Canadian assets have received loud and clear, many say: In big mergers and acquisitions, the increasingly delicate job of "government relations" needs to be front-and-centre, and not an afterthought.

"Now, you're going to find that the [government relations]guys are going to be driving the bus a little bit more," says Wes Hall, chief executive officer of Kingsdale Shareholder Services Inc. "And they're going to focus a lot more attention and resources on those guys."

Many observers say BHP completely underestimated the influence of local politics on the deal. CEO Marius Kloppers failed to meet with Saskatchewan Premier Brad Wall until four weeks after the bid was unveiled. And the company was not prepared for the backlash that its plan to dismantle Canpotex, the potash cartel, would create, as it threatened the province's revenues.

Bidders now need to make sure governments, and the public, clearly understand their deals and their benefits in the early going, experts say, rather than reacting to critics as they emerge.

One prominent lawyer who did not want to be identified said it wasn't clear whether even the best government relations strategy could have rescued BHP's bid: "We'll never know for sure if a good GR strategy would have worked. It's hard to tell. I think they just flubbed it."