Analysis: Saskatchewan’s BHP tax plan may face legal hurdles

By Euan Rocha

TORONTO (BestGrowthStock) – The Canadian province of Saskatchewan could face stiff resistance if it attempts to impose a resource transfer tax on BHP Billiton (BHP.AX: ) should the Anglo-Australian miner succeed in acquiring Potash Corp (POT.TO: ).

The province that Potash Corp calls home would have to frame any special tax carefully, or run the risk that courts will strike it down, some analysts and lawyers say.

If a transfer tax did pass legal muster, it would likely irk Potash Corp’s own shareholders, as it would reduce BHP’s ability to sweeten its bid and shave billions off the final value of a deal.

The world’s top potash company has flatly rejected BHP’s current bid of $39 billion, but many expect a sweetened offer to emerge, if the bid wins a nod from federal regulators.

Saskatchewan though is firmly opposed to a takeover and Premier Brad Wall, the province’s top elected official, has said he may demand BHP pay up to C$6 billion to compensate for potential losses in royalties and taxes.

John Turner, a lawyer specializing in mining M&A at Fasken Martineau in Toronto, said Canadian provinces have the right to tax resources such as potash, a potassium-based crop nutrient that is abundant in Saskatchewan.

“Whether they can tax a transfer is an open question,” said Turner. “Whether it would survive a constitutional challenge … would really depend on the detail of what (Wall) is actually proposing.”

A resource transfer tax may prove to be the last arrow in Saskatchewan’s quiver to stop BHP’s $130-a-share offer for Potash Corp, which was a state-owned “crown corporation” until 1989. The province fears a takeover would result in job losses, sap government revenue and weaken its control over a strategic resource.

To be sure Saskatchewan is not the first Canadian province to consider such a tax move. In 2007, Ontario introduced a special diamond mining tax as De Beers Canada Inc was building the province’s first diamond mine. It eventually scaled back its proposal after talks with the company.

BHP and its peers were recently hit with a new tax on coal and iron ore mines in Australia. The world’s top miner is actively lobbying to dull the impact of that move and was quick to express its disfavor with Saskatchewan’s tax proposal.

“I think having a single tax, on a single company, on a single deal, is somewhat strange and it is unnecessary,” said Andrew Mackenzie, the head of BHP’s non-ferrous division.

SHAREHOLDERS LOSE

“It’s just a punitive measure, and I can’t understand, why they’d want to tax BHP for making an acquisition,” said Barry Schwartz of Baskin Financial, which owns 35,000 shares in Potash Corp.

Schwartz contends that if BHP succeeds in acquiring Potash Corp, the province will be better served by working closely with BHP to ensure that both the province and the company’s local employees benefit.

“It’s a publicly traded company and we have allowed it to be a publicly traded company. So then you have to assume that there is going to be a risk of a takeover,” he said. “It’s kind of late in the game to say wait a minute, this cannot happen.”

Some point out that the tax proposal, if implemented, will only serve to harm Potash Corp’s own shareholders.

“I don’t see how the province can go ahead and do this,” said Soleil Securities analyst Mark Gulley.

“Let’s assume Saskatchewan wins a $1 billion concession on the front end. That’s $3 a share, no big deal, but that’s just $3 a share less that BHP can pay the shareholders,” said Gulley. “Any time there’s leakage of money to Saskatchewan that’s less money that can go to shareholders.”

HURDLES REMAIN

Questions surrounding the proposed transfer tax would become moot if the federal government blocks the takeover bid in a ruling expected by November 3.

Even if the bid clears that hurdle, it is far from a done deal. Potash Corp launched a lawsuit against BHP to block its offer and adopted an anti-takeover defense to stymie BHP.

But after all of that, BHP may still have to negotiate its way out of a stalemate with the province or mount a legal challenge to a transfer tax.

That means Saskatchewan will need to be careful, said Darryl Levitt, a lawyer with Macleod Dixon in Toronto.

“If you single a particular mining company, even if a law doesn’t stipulate a particular mining company, but it can be read that it is designed for one company, it has the propensity to be constitutionally challenged,” he said.

(Reporting by Euan Rocha; Editing by Frank McGurty)

Analysis: Saskatchewan’s BHP tax plan may face legal hurdles