I have been playing a MP game with a few friends stomping some AI. We have decided instead of starting out on the same team, to join a PA as we find each other. The problem we are having is that only 2 of us can join a PA with the third not having an option in diplomacy. Is the PA mechanic limited to only 2 players if not set at the beginning of the game?

I think it is, to prevent a world bloc of super powers. It does that in sp games too(for me at least)