New guidance from Ontario Capital Markets Tribunal on cease trading poison pills

The Ontario Capital Markets Tribunal (the Tribunal) recently issued its long-awaited decision in Riot Platforms, Inc. v Bitfarms Ltd. (the Decision) and cease traded a shareholder rights plan (known as a “poison pill”) that contained a trigger below 20%. 

The customary trigger for Canadian rights plans is 20%, which is also the threshold trigger for Canada’s formal take-over bid regime, after reaching which an offer must be made to all shareholders of the class subject to the bid unless an exemption is available. 

The applicant for the cease trade order, Riot Platforms Inc., which at the time of the hearing was a 14.9% shareholder of Bitfarms Ltd., approached Bitfarms in April 2024 to discuss a possible combination of the two companies. Bitfarms rejected the approach and in response, adopted in June 2024 a tactical shareholder rights plan (the Rights Plan) that had a trigger of 15%. Riot Platforms applied to the Tribunal to cease trade the Rights Plan by exercise of its public interest jurisdiction contained in section 127(1) of the Securities Act (Ontario) (the Act). Riot Platforms did not argue that the Rights Plan contravened Ontario securities laws. The Tribunal granted the cease trade order on July 24, 2024, relying upon section 127 of the Act.

The Rights Plan

The Rights Plan provided that any acquisition resulting in ownership of more than 15% of Bitfarms’ common shares made between June 20 and September 10, 2024, other than in compliance with the “Permitted Bid” provisions of Bitfarms’ plan, which would require an offer to be made to all of the holders of common shares, would trigger a so-called “flip-in event.” 

Once triggered, shareholders of Bitfarms, other than Riot Platforms, could purchase additional shares at a 50% discount from the market price, with the result that Riot Platforms’ equity stake in Bitfarms would be substantially diluted. Bitfarms stated the reason for adopting the Rights Plan was that Riot Platforms’ continued accumulation of shares above a 15% level would likely inhibit a strategic review process that had been commenced by a special committee of its board of directors and prevent the company from maximizing shareholder value through an alternative transaction. 

As noted, the 20% trigger contained in virtually all Canadian shareholder rights plans corresponds to the 20% ownership threshold under the Canadian take-over bid regime contained in National Instrument 62-104 – Take-over Bids and Issuer Bids. As a result, the Rights Plan effectively prevented Riot Platforms from accumulating up to 19.9% of Bitfarms’ outstanding common shares before having to launch a formal take-over bid, as permitted by the take-over bid regime. 

The Decision

Public interest 

The Decision defines the standard that the Tribunal will hold to in exercising its public interest jurisdiction under section 127(1) of the Act when considering cease trading a rights plan that does not contravene the provisions of Canadian securities laws. The Tribunal held that it would cease trade a rights plan where: 

• the plan undermines, in a real and substantial way, the animating principles underlying the take-over bid regime; and
• there is a public dimension to the effect of the plan, such that it is in the public interest to intervene. 

The Tribunal canvassed prior decisions that suggested the impugned conduct must be abusive. It ultimately concluded that the appropriate standard was the conduct could be less than abusive but needed to be more than just unfair. 

The Tribunal held the appropriate standard was conduct that ultimately undermined the animating principles of the take-over bid regime. The take-over bid regime is intended to provide for an orderly and transparent process for change-of-control transactions. To allow a rights plan with a lower threshold than the take-over bid regime would undermine the predictability and certainty of the regime and would weaken confidence in the capital markets. The Tribunal acknowledged the potential for a rights plan with a less than a 20% trigger to withstand regulatory scrutiny, but only under “exceptional circumstances.” 

The animating principles of the take-over bid regime

Section 1.1 of the Act defines the purposes of the Act as investor protection, fostering fair and competitive markets, fostering capital formation, and contributing to financial market stability. The Tribunal found that the appropriate animating principles to be considered in the context of cease trading rights plans were also those underlying Ontario’s take-over bid regime. The animating principles of the take-over bid regime are intended to protect the interests of target shareholders by ensuring they are treated equally and receive the necessary time and information to consider the offer being made.

The Tribunal also noted the regime includes several elements beyond the provisions dealing with the definition and conduct of a take-over bid, including the possibility of accessing exemptions to the formal take-over bid rules and insider reporting and early warning disclosure requirements. In determining what is in the “public interest,” the Tribunal will therefore assess rights plans against the “animating principles” of Ontario’s take-over bid regime, which governs not just activity at the 20% threshold, but also other share accumulations. 

Public aspect

In addition to undermining the animating principles of the take-over bid regulation, the Tribunal stated the conduct in question must have a public aspect. The applicant must satisfy the Tribunal that the adoption of the rights plan in question had a harmful effect on investors generally, on the capital markets or would have an effect on future transactions. 

Exceptional circumstances

The Tribunal concluded that Bitfarms had not established there were exceptional circumstances that would justify a departure from the 20% threshold. The Tribunal noted acquirors are entitled to rapidly and strategically acquire stock in accordance with securities laws. It further stated no evidence was put forward suggesting Bitfarms’ strategic review would lead to a transaction within a reasonable time or Riot Platforms’ accumulation of a stake in excess of 14.9% would hinder it. 

Takeaways

To challenge a tactical shareholder rights plan, an applicant must now show that the rights plan undermines, in a real and substantial way, and with public effect, an animating principle underlying Ontario’s take-over bid regime. 

Although the Decision does not foreclose the possibility that a shareholder rights plan could be allowed to remain in effect with a threshold of less than 20%, this could only occur in “exceptional circumstances.”