Ontario Tribunal Refines Public Interest Test in Cease Trade Decision on Shareholder Rights Plans

December 13, 2024

Written By Osie Ukwuoma, Jeff Kerbel, Kris Hanc and Asif Zalfackruddin

On November 19, 2024, the Ontario Capital Markets Tribunal (Tribunal) released its reasons for its July 2024 decision granting an application by Riot Platforms, Inc. (Riot) to cease trade a shareholder rights plan (Plan) adopted by Bitfarms Ltd. (Bitfarms). This decision is significant as it refined the test for the granting of an order “in the public interest” under section 127 of the Securities Act (Ontario) (the Act), at least as it applied to shareholder rights plans. The decision also demonstrated the unwillingness of the Tribunal to allow a shareholder rights plan to have a trigger below 20 percent.

Background

Riot is a Bitcoin mining and digital infrastructure company, and the largest shareholder of Bitfarms, a Bitcoin mining company and reporting issuer in Ontario.

Throughout 2023 and early 2024, Riot made several unsuccessful business combination attempts with Bitfarms. In conjunction with those attempts, it accumulated slightly below 15 percent of the common shares of Bitfarms. In June 2024, Bitfarms introduced the Plan, which would be triggered if any shareholder acquired more than 15 percent of Bitfarms’s outstanding shares. Under the Plan, shareholders, other than the those triggering the Plan, would be entitled to purchase additional shares at a 50 percent discount to the market price of the shares, thereby diluting the holdings of the triggering shareholder. At the time the Plan was adopted, Riot was the only shareholder of Bitfarms near the 15 percent threshold.

Typically, in Canada the triggering threshold under a shareholder rights plan or “poison pill” is 20 percent, which is also the trigger for an acquisition to be a take-over bid under Ontario securities law. As a result, a purchaser can normally acquire up to 19.9 percent of a class of an issuer’s securities without bringing into play the take-over bid rules. The typical 20 percent threshold in a shareholder rights plan is consistent with this as the primary purpose of a shareholder rights plan is to prevent creeping acquisitions using take-over bid exemptions under Ontario securities law.

Riot applied for the Plan to be cease traded under section 127 of the Act. Riot did not allege that the Plan violated Ontario securities law but contended it would be in the public interest to cease trade the Plan because the Plan’s 15 percent trigger deviated significantly from the takeover bid regime's established 20 percent threshold.

Bitfarms argued that the 15 percent threshold was necessary in its circumstances, as at 15 percent, Riot would be available to effectively veto business combinations by Bitfarms with any other party.

The public interest test under the Act is not defined and as a result is broad, but it has been upheld by the courts as being applicable to conduct that does not violate the legislation. It adds an additional layer to analyzing securities transactions, as in addition to determining whether a transaction is onside securities legislation, a practitioner must often assess how the regulators will view the transaction from a public interest lens.

Over the many years that the power has been used by the Tribunal, there have been a number of different tests put forth by the adjudicative body for a transaction contravening the public interest: ranging from abuse to unfairness, to a transaction being “inconsistent with the animating principles” or being a “breach of…the animating principles underlying” securities law. All of which has made it difficult for practitioners to opine on transactions to the extent the practitioner thinks the transaction may call into play the public interest.

The Decision

The Tribunal outlined a two-pronged test to determine whether it would be in the public interest to grant a cease trade order of a shareholder rights plan, where such plan does not contravene Ontario securities law. The Tribunal indicated that it needs to consider whether:

1. such plan undermines, in a real and substantial way, one or more clearly discernible animating principles underlying Ontario securities law; and
2. the respondent does not demonstrate exceptional circumstances that would otherwise allow the plan to continue.

After applying the two-pronged test here, the Tribunal found that the Plan did undermine, in a real and substantial way, the animating principles underlying the take-over bid regime. The 15 percent trigger was a marked departure from the take-over bid regime’s 20 percent threshold, undermining market predictability, and Bitfarms failed to demonstrate exceptional circumstances justifying this deviation. The Tribunal further concluded that, if the Plan were allowed to continue, it would have diminished the predictability and certainty of the take-over bid regime while also weakening the public’s confidence in the capital markets.

The Tribunal emphasized that the test it adopted applied to the specific facts at hand - namely a rights plan that did not contravene securities legislation—and not to other transactions.

Arriving at the Current Test

The Tribunal acknowledged inconsistencies in how the test for granting cease trade orders absent a contravention of Ontario securities law has been applied. The Tribunal clarified its approach by examining its “public interest” jurisdiction and outlining: (1) the prerequisites for an order under section 127(1) of the Act (including that a contravention of Ontario securities law is not necessary); (2) the development of the animating principles and how they serve as a benchmark for assessing conduct where a violation of the specific provisions of the Act is absent; (3) why earlier standards for invoking the public interest jurisdiction were flawed; and (4) the necessity of the impugned conduct to have a public impact.

Animating Principles

The Tribunal explained that the concept of “animating principles“ builds on the earlier concept of a “basic philosophy and rationale“ underlying Ontario securities law. The Tribunal clarified that animating principles can be found in, but are not limited to, the purposes of the Act outlined in section 1.1 of the Act, the fundamental principles set out in section 2.1 of the Act, and any other relevant provisions outlined elsewhere in Ontario securities law or Tribunal decisions that identify the policy underpinnings of parts of Ontario securities law.¹

After outlining the development of the animating principles, the Tribunal considered the extent to which the impugned conduct would have to be inconsistent with those principles to justify the application of section 127(1), even in the absence of a violation of Ontario securities law.

The Impugned Conduct

In the present case, the Tribunal resolved the inconsistency and unpredictability of past decisions by narrowing the test to somewhere between unfair and abusive: the impugned conduct must “undermine“ the animating principles in a real (i.e., well-grounded, reasonably likely, and not illusory) and substantial (i.e., serious and non-trivial) way. The abusive standard was rejected as too high, as it implied intentionality, which, while relevant, is not a precondition. Similarly, the fairness standard was found to be too low, with some of the variable language from past cases reflecting this inadequacy.

Despite this refinement, the Tribunal clarified that evidence of conduct that “undermines“ the animating principles is not sufficient on its own to grant a cease trade order under the public interest power. An applicant must also satisfy the Tribunal that it is in the public interest to make the requested order by establishing that:

1. the impugned conduct has a harmful effect on investors generally, on the capital markets as a whole, or on the pool of actual and potential investors in a public issuer; or
2. the impugned conduct, if condoned, would likely have a negative effect in future transactions.

The Bright-Line Rule: The 20 percent Threshold

The Tribunal confirmed the take-over bid regime's applicability to activity at the 20 percent threshold, emphasizing its goals of predictability, transparency, and fair treatment of shareholders. It disagreed with Bitfarms' argument that its analysis should prioritize the broader purpose of shareholder rights plans, including directors’ duties to act in shareholders’ best interests, finding instead that the regime adequately encapsulated this purpose. The Tribunal also noted that failing to cease trade the Plan would lead to litigation, inconsistent case-by-case decision-making, and hinder market efficiency. The 20 percent threshold serves as a bright-line rule that ensures certainty and predictability for market participants.

Exceptional Circumstances

The Tribunal examined circumstances that might justify departing from the 20 percent threshold. The Tribunal concluded that overriding the threshold requires proving exceptional circumstances, which should carry a heavy burden due to the need for predictability in the take-over bid regime.

Key Takeaways

This decision provides a framework for the application of the public interest power emphasizing that the statute-imposed test of “public interest” must always be flexible with the goal of fostering certainty and predictability but that the Tribunal would not place inviolable limits on the “public interest” test.

• Absent contravention of Ontario securities law, in order to grant a “public interest” order, the Tribunal will consider in the context of adjudicating upon a shareholder rights plan whether the applicant has shown that the impugned conduct:
  • undermines one or more animating principles in a real (i.e., well-grounded, reasonably likely, and not illusory) and substantial (i.e., serious and non-trivial) way, with public effect, and
  • there are no exceptional circumstances that would nonetheless justify allowing the impugned conduct to continue.
• The Tribunal clarified that while a finding of abuse may strengthen an applicant’s case, it is no longer a necessary condition for Tribunal intervention on cease trader orders.
• While the test adopted by the Tribunal was limited to shareholder rights plans, we suspect the Tribunal will apply it to other transactions with necessary modifications.
• While we welcome a consistent test, the public interest test by virtue of its broad wording and lack of definition remains very much a “I know it when I see it” test.
• The Tribunal reaffirmed the take-over bid regime's 20 percent threshold as essential for predictability, transparency, and fair treatment of shareholders. It emphasized that this threshold should only be overridden in exceptional circumstances, ensuring market efficiency and consistency. In light of this decision, and past ones where an issuer attempted to introduce a rights plan with a trigger below 20 percent, there will be extremely limited circumstances in which a lower threshold will be permitted.

Settlement

As a postscript to this matter, on September 23, 2024, Bitfarms and Riot entered into a settlement agreement, which provided Riot with a nominee to the board of Bitfarms and certain share purchase rights in exchange for Riot agreeing to withdraw a shareholder meeting requisition and accept customary standstill provisions. Riot also agreed to vote in favour of the Bitfarms shareholder rights plan with a 20 percent trigger

The authors are grateful for the assistance of Morgan Sutherland, student-at-law, in connection with the preparation of this article.

Authors