New Guidance for Evaluating Poison Pills in Ontario

Eight years after the Canadian Securities Administrators (CSA) adopted fundamental amendments to Canada’s take-over bid regime in May 2016, regulators and other market participants continue to grapple with the permissible uses of shareholder rights plans or “poison pills” in Canada.

In Riot Platforms Inc. v Bitfarms Ltd., the Ontario Capital Markets Tribunal (the “Tribunal”) struck down a tactical shareholder rights plan that adopted a 15% trigger and, in doing so, provided a general framework for determining when a shareholder rights plan will be struck down as contrary to the “public interest”. Riot follows a recent order of the Alberta Securities Commission (ASC) in Re Greenfire Resources Ltd., which cease traded a tactical shareholder rights plan that adopted a traditional 20% trigger but was targeted at a specific exempt take-over bid transaction. While the ASC has yet to release its reasons in Greenfire, these decisions, taken together, suggest that under the modernized take-over bid regime, it will be challenging for issuers to maintain a tactical pill absent exceptional circumstances.

Key Takeaways

• Test for Cease Trading a Shareholder Rights Plan: The Tribunal determined it is in the public interest to cease trade a shareholder rights plan that does not otherwise contravene Ontario securities law:

• only if the applicant demonstrates the plan undermined, in a real and substantial way, and with public effect, one or more clearly discernible principles underlying Ontario securities law; and

• the respondent does not demonstrate exceptional circumstances that would nonetheless justify allowing the plan to continue.

• Limited Role of Shareholder Rights Plans Moving Forward: Since the 2016 amendments, the primary purpose of shareholder rights plans has been to prevent “creeping” acquisitions of control through exempt take-over bids (i.e., acquisitions above 20% ownership that are not made to all shareholders). In this context, the Tribunal in Riot clarified it will be reluctant to permit a rights plan that departs from the bid regime’s core components unless exceptional circumstances are present.

Background and Key Facts

• Riot Platforms, Inc. (“Riot”) was the largest shareholder of Bitfarms Ltd. (“Bitfarms”), owning almost 15% of Bitfarms’ outstanding shares in May 2024.
• In 2023 and early 2024, Riot made several unsuccessful proposals to Bitfarms to discuss a possible business combination of the two companies.
• In June 2024, Bitfarms adopted a shareholder rights plan (the “Rights Plan”) with a “trigger” at 15%, meaning that once any person acquired more than 15% of Bitfarms’ outstanding shares, shareholders (other than the shareholder that triggered the Rights Plan) would be permitted to purchase additional shares at half price.
• Riot applied under s. 127(1) of the Securities Act (the “Act”) for an order cease-trading the Rights Plan, arguing the 15% trigger was significantly below the take-over bid regime’s default 20% threshold, beyond which a person accumulating stock must make a take-over bid unless an exemption applies.

Re-Examining the Tribunal’s s. 127(1) ‘Public Interest’ Jurisdiction

Section 127 of the Act empowers the Ontario Securities Commission (“OSC”) to make a wide range of remedial orders where it is in the ‘public interest’ to do so. In Riot, the Tribunal engaged in a broad re-examination of the OSC’s jurisdiction under section 127(1), reviewing and synthesizing decades of case law. In doing so, the Tribunal held that, absent a contravention of Ontario Securities law, an order under section 127(1) of the Act is warranted to cease trade a shareholder rights plan if:

1. the plan undermines, in a real and substantial way, one or more clearly discernable animating principles underlying applicable provisions of Ontario securities law; and
   
2. the plan’s existence causes an effect that has a public dimension, such that it is in the public interest for the Tribunal to intervene.

 If a rights plan meets the above test, the Tribunal will then consider if the respondent demonstrates exceptional circumstances that would nonetheless justify allowing the plan to continue.

Animating Principles

In all proceedings concerning section 127(1), the Tribunal must refer to and consider the relevant animating principles of Ontario securities law that give context to the public interest, including:

• the purposes of the Act, as set out in section 1.1, which include to:

• protect investors from unfair, improper or fraudulent practices;

• foster fair, efficient and competitive capital markets and confidence in capital markets;

• foster capital formation; and

• contribute to the stability of the financial system and the reduction of systemic risk;

• the fundamental principles the OSC should apply in pursuing the Act’s purposes, as set out in section 2.1, which include balancing the importance to each of the Act’s purposes; and

• other fundamental principles that underlie particular provisions of Ontario securities law (such as the take-over bid regime) that are relevant to the particular proceeding.

  In Riot, the Tribunal acknowledged that prior decisions have applied different standards when considering how much or in what way the impugned conduct would have to be inconsistent with the relevant animating principles to justify intervention under section 127(1) without a contravention of Ontario securities law.

Consequently, in the context of a shareholder rights plan, the Tribunal established that the applicant must show the conduct undermines one or more clearly discernible animating principles in a real (i.e., well-grounded, reasonably likely, and not illusory) and substantial (i.e., serious and non-trivial) way. In establishing this standard, the Tribunal rejected previous formulations, including thresholds relating to “engaging,” “abusing,” and “fairness” as they relate to the animating principles.

Public Aspect

In addition to demonstrating that a shareholder rights plan undermines a clearly discernible animating principle, to justify a section 127(1) order without a contravention of Ontario securities law, the applicant must also demonstrate that a “public” aspect is present. The applicant must establish that:

• the impugned conduct has harmful effects on general investors, the capital markets, or a pool of actual and potential investors in a public issuer; or

• the impugned conduct, if allowed to continue, would likely have a negative impact on future transactions.

Assessing the 15% Trigger in the Rights Plan and Considering Exceptional Circumstances

The Tribunal ultimately held:

• a 15% trigger would undermine, in a real and substantial way, the animating principles underlying the take-over bid regime, absent exceptional circumstances sufficient to overcome that presumption;

• the Tribunal’s endorsement of Bitfarms’ 15% trigger would have a public dimension, such that it is in the public interest to cease trade the Rights Plan; and

• Bitfarms had not proven exceptional circumstances sufficient to meet that burden.

15% Trigger Undermined Animating Principles With Public Effect

The Tribunal determined that the animating principles underlying the take-over bid regime in National Instrument 62-104 – Take-Over Bids and Issuer Bids (“NI 62-104”) is the appropriate framework for evaluating a shareholder rights plan (even in situations where there is no live take-over bid) and that the Rights Plan’s 15% trigger was a significant departure from the 20% threshold of the take-over bid regime. In particular, the Tribunal agreed with the submissions of Riot and the OSC that the 20% threshold in NI 62-104 enables participants in the capital markets to predict, with reasonable certainty, whether a rights plan would be upheld, helping to promote the efficiency of, and participants’ confidence in, the market.

Relying on prior decisions that emphasized the importance of adhering to the established features of the take-over bid regime, the Tribunal noted that if an issuer were to prevent a market participant from continuing to accumulate shares freely up to the 20% threshold, it would represent a significant departure from long-established market expectations and could negatively affect the capital markets.

No Exceptional Circumstances Present

In its reasons, the Tribunal expressly reserved for the possibility that exceptional circumstances may justify a shareholder rights plan trigger below 20%. In analyzing when a lower trigger might be tolerable, the Tribunal concluded that an issuer defending a shareholder rights plan that deviates from the core principles of the take-over bid regime “should have a high burden” and the Tribunal should be “reluctant to permit such a plan to continue unless exceptional circumstances are present.”

The Tribunal rejected all of Bitfarms’ purported exceptional circumstances, including the following:

• Issuer facing an “Aggressive” or “Strategic” Buyer: The Tribunal found these factors did not constitute exceptional circumstances. Buyers should be permitted to accumulate shares quickly below the 20% threshold if they comply with securities laws.
• Blocking Position at 14%: The Tribunal dismissed the claim that Riot had accumulated a “blocking position,” noting there was no concrete shareholder vote issue to analyze and that shareholder behaviour dynamics were not relevant. However, the Tribunal did not rule out the possibility that a blocking position might justify a lower trigger in a future case with compelling evidence.
• Non-Participation in Strategic Review: The Tribunal rejected the argument that Riot’s decision not to participate in Bitfarms’ strategic alternative review process, and its public allegations about Bitfarms’ governance, were exceptional circumstances. Buyers have the right to decide whether to engage in a target’s auction or strategic review and to comment on governance practices. The Tribunal noted that the strategic review process had been ongoing for a period roughly equivalent to the 105-day minimum deposit period under the take-over bid regime, providing ample time for Bitfarms to investigate alternatives if a bid were to emerge.
• Engaging with Other Bidders: The Tribunal found no merit to the claim that the special committee’s engagement with other potential bidders was an exceptional circumstance, noting that strategic reviews by boards are common events. The Tribunal emphasized that the nature, status, and context of the review are the key factors.
• Unusual Market Conduct: The Tribunal rejected the argument that the market had not ordinarily seen such stock accumulation and conduct. While Riot had accumulated a toehold share position in Bitfarms, the Tribunal referred to the Jaguar decision, where a 14.6% toehold position was not sufficient to establish the presence of any “exceptional circumstance.”

The Tribunal noted that, among other things, the Rights Plan was not approved by shareholders. It will be interesting to see how the Tribunal would consider a non-traditional shareholder rights plan that gets approved by shareholders (recognizing the challenge of overcoming likely proxy advisor opposition in any such vote).

Concluding Remarks

Issuers should take careful consideration when adopting a tactical shareholder rights plan and be able to clearly identify its reasons for doing so. Riot emphasizes the importance of preserving the inherent predictability and certainty of the take-over bid regime and the high burden to be imposed on an issuer defending a rights plan that deviates from the animating principles of the take-over bid regime, barring exceptional circumstances.

For further information regarding this update or shareholder rights plans, please contact any member of our Capital Markets Group.

The authors would like to thank Matthew Stackhouse, Articling Student-At-Law, for his assistance in writing this Update.