Revisiting the poison pill: Ontario’s Capital Markets Tribunal terminates a shareholder rights plan containing a 15% trigger

On July 24, 2024, Ontario’s Capital Markets Tribunal (the Tribunal) issued an order effectively terminating a shareholder rights plan (the Rights Plan) adopted by Bitfarms Ltd (Bitfarms). The Rights Plan restricted any person from acquiring more than 15% of Bitfarms instead of the customary 20% trigger. This is the first time the Tribunal has considered a shareholder rights plan (also known as a “poison pill”) with a trigger below 20% since the 2016 amendments to the Canadian take-over bid regime.

The order was sought by Riot Platforms Inc. (Riot), a 14.9% shareholder of Bitfarms who had made an unsolicited proposal to acquire Bitfarms (which was rejected) and had announced its intention to requisition a special meeting of Bitfarms’ shareholders to make changes to its board. Riot argued that by incorporating the 15% trigger, below the 20% threshold pursuant to which it would be required to make a formal take-over bid under Canadian securities laws, the Rights Plan undermined the reliability and predictability of the Canadian bid regime and was abusive and contrary to the public interest. Bitfarms maintained that the 15% “temporary” trigger was a legitimate and necessary step taken to preserve the integrity of the strategic review process it had undertaken to identify and evaluate potential transactions (including one advanced by Riot in its unsolicited proposal), as it viewed ownership of 15% or more of the common shares sufficient to establish negative control (i.e., the ability to block alternative transactions).

What you need to know   

• Ontario’s Capital Markets Tribunal cease traded a shareholder rights plan containing a 15% trigger instead of the customary 20%.
• The decision represents the first time a Canadian capital markets tribunal has considered a shareholder rights plan with a trigger below 20% since the 2016 amendments to the Canadian take-over bid regime.
• Absent exceptional circumstances, target boards will find it difficult to justify implementing rights plans that depart from customary terms and established market practice. Stay tuned for a further update following publication of the Tribunal’s reasons to see if there remains any scope for a shareholder rights plan to incorporate a sub-20% trigger.

Background

Bitfarms is a Canadian-based company that develops, owns and operates vertically integrated Bitcoin mining farms. Riot is a Nevada-based Bitcoin mining and digital infrastructure company that operates the world’s largest Bitcoin mining sites in Texas. In early 2023, Riot approached Bitfarms to explore a potential transaction between the two firms.

Following a series of discussions, Riot submitted its first non-binding proposal (the Proposal) to Bitfarms in April 2024 to acquire Bitfarms at a 20% premium. Unbeknownst to Riot, Bitfarms had received two other unsolicited proposals at that time and had formed a special committee of independent directors (the Bitfarms Special Committee) to assess all three proposals. The Bitfarms Special Committee ultimately rejected Riot’s initial Proposal but was willing to continue discussions with Riot if it would enter into a non-disclosure agreement. As a result of disagreement on the inclusion of a three-year standstill provision in the proposed non-disclosure agreement, an agreement was never signed and discussions between Bitfarms and Riot did not continue.

Riot’s concerns with board composition and Bitfarms’ Strategic Review

On May 28, 2024, Riot issued a press release announcing that it had made the Proposal to Bitfarms and, for the first time, publicly raised concerns about Bitfarms’ corporate governance practices, including what Riot viewed as the entrenchment of two of the firm’s founders on the board of directors. Riot also raised concerns about the independence of another director and the current CEO vacancy at Bitfarms. To afford shareholders an opportunity to bring change to Bitfarms’ board of directors, Riot announced that it intended to requisition a special meeting of Bitfarms’ shareholders (the Requestioned Meeting) in light of its concerns with Bitfarms’ corporate governance practices.

On May 29, 2024, Bitfarms announced that it had previously formed the Bitfarms Special Committee to consider Riot’s proposal and, because it had received other unsolicited expressions of interest, to conduct a thorough review of strategic alternatives (the Strategic Review).

The 15% Rights Plan

On June 10, 2024, Bitfarms approved the adoption of the Rights Plan for the stated purpose of preserving the integrity of its Strategic Review. The Rights Plan effectively prohibited any person from acquiring more than 15% of Bitfarms between June 20, 2024 and September 10, 2024, unless pursuant to a “Permitted Bid” (i.e., a formal take-over bid in compliance with the Canadian take-over bid regime). The 15% trigger increased to 20% after September 10, 2024.

The parties’ positions

Bitfarms argued that the temporary 15% trigger in the Rights Plan was necessary to ensure its board of directors had adequate time and opportunity to identify and negotiate alternative transactions as contemplated by the Strategic Review. Doing so would, in Bitfarms’ submission, allow it to appropriately source a potential transaction that would deliver the best value to its shareholders. It asserted that Riot could effectively undermine this process by attempting to amass a “blocking position”, which Bitfarms viewed as constituting 15% or more of its shares. According to Bitfarms, this could dissuade alternative suitors from exploring their own potential transactions with Bitfarms since it would represent negative control (i.e., the ability to block alternative transactions if put to a shareholder vote).

Conversely, Riot characterized the Rights Plan as abusive and tactical in nature and argued that the 15% trigger was “in direct conflict with established legal and governance standards, including those published by leading proxy advisory firms”. Riot contended that the Rights Plan was merely masquerading as a safeguard for the Strategic Review when it was, in reality, an attempt to prevent Riot from acquiring any additional shares and voting those shares at the Requisitioned Meeting in furtherance of its proposed corporate governance changes.

Application to the Capital Markets Tribunal

On June 24, 2024, Riot applied to the Tribunal for an order to effectively terminate the Rights Plan in accordance with the Tribunal’s public interest jurisdiction.

Pursuant to section 127 of the Ontario Securities Act (the Act), the Tribunal has the ability to intervene in Ontario capital markets in the public interest where conduct is abusive of shareholders or otherwise inconsistent with the principles of securities legislation.

In ascertaining what may or may not be in the public interest, the Tribunal is guided by the animating purposes set out in section 1.1 of the Act:

1. to provide protection to investors from unfair, improper or fraudulent practices;
2. to foster fair, efficient and competitive capital markets and confidence in capital markets;
3. to foster capital formation; and
4. to contribute to the stability of the financial system and the reduction of systemic risk.

In its submissions to the Tribunal, Riot asserted that National Policy 62-202: Take-Over Bids – Defensive Tactics calls on the Tribunal to consider the “protection of the bona fide interests of shareholders” and to ensure that there is “an open and even-handed environment” in which shareholders may make fully informed decisions in exercising its jurisdiction to intervene.

Riot submitted that the Rights Plan should be cease traded as contrary to the public interest in the following ways:

1. The Rights Plan inappropriately infringed on shareholder democracy by preventing Riot from exercising its fundamental right as a market participant to purchase up to 19.9% of the outstanding Bitfarms shares in order to participate more fully as a shareholder in the corporate governance of the company.
2. The Rights Plan subverted a deliberately calibrated bid regime that has delivered consistency and predictability to market participants, particularly since the amendments made in 2016 that mandate a 105-day deposit period, a condition that 50% or more of shares held by disinterested parties be tendered to any bid and a 10-day extension following satisfaction of that condition, while maintaining the 20% ownership threshold that triggers the requirement to make a formal take-over bid.
3. The Rights Plans harms all Bitfarms shareholders by preventing Riot from acquiring more Bitfarms shares, and potentially discouraging other buyers who may wish to acquire positions in excess of 15%, which will constrain the liquidity of existing Bitfarms shareholders who may wish to exit their investments in Bitfarms and are seeking a willing buyer.
4. The Rights Plan would set a damaging precedent which would put the Tribunal back in the business of evaluating the propriety of rights plans on a case-by-case basis.

In its responding submissions, Bitfarms acknowledged that a 20% trigger was the norm and in accordance with Canada’s take-over bid regime. However, it argued there was no absolute right to purchase 19.9% and that neither the Ontario legislature nor the Ontario Securities Commission (the OSC) had gone so far as to say that rights plans with triggers below 20% were prohibited.

Bitfarms further contended that the standard for intervening in the public interest was an extremely high bar that should be exercised with restraint, particularly in circumstances where it would conflict with a board of directors’ exercise of its fiduciary duty. Bitfarms maintained that the facts of the case supported the conclusion that Bitfarms adopted the Rights Plan in order to protect the integrity of its Strategic Review, to preserve shareholder choice and to maximize shareholder value.

The OSC’s position on the matter

In its submissions to the Tribunal, OSC Staff (Staff) agreed with Riot and argued that the rights plan was contrary to the public interest and should be cease traded. Staff submitted that the 20% threshold contained in Canadian securities laws established a “bright line” test that promotes efficiency and predictability by informing the reasonable expectations of market participants. In the absence of any exceptional circumstances to justify departing from the established regime, Staff submitted that Bitfarms’ Rights Plan was abusive, engaged the animating principles of Ontario securities law, and should be cease traded in accordance with the OSC’s public interest mandate.

The Commission’s decision

On July 24, 2024, following a two-day hearing, the Tribunal released an order cease trading with immediate effect all securities issued or that may be issued under the Rights Plan, effectively terminating the Rights Plan. The reasons for the decision have not yet been released, and we will provide a further update once the Tribunal publishes its reasons.