Ontario’s Capital Markets Tribunal Re-Frames the Public Interest Standard in Riot Platforms, Inc. v Bitfarms Ltd. and Ontario Securities Commission

Ontario’s Capital Markets Tribunal Re-Frames the Public Interest Standard in Riot Platforms, Inc. v Bitfarms Ltd. and Ontario Securities Commission

The exercise of the public interest power of the Ontario Capital Markets Tribunal (the “Tribunal”) under section 127 of the Ontario Securities Act (the “Act”) to sanction persons even if they have not breached the Act, regulations thereunder, or securities law policies is the subject of controversy and debate.[1] As with any government regulator given such power, the question of how the Tribunal should exercise it when the legislation is vague (“public interest” is not defined in the Act) must be confronted.

The “abuse” and “animating principles” standards have both been applied by the Tribunal and have arguably produced uneven results. Unsurprisingly, this created uncertainty for investors and market participants.

In Riot Platforms, Inc. v Bitfarms Ltd. and Ontario Securities Commission,[2] the Tribunal recognized this uncertainty and set itself a lofty goal – to synthesize and refine previous decisions[3] and create a new standard for the Tribunal’s exercise of the use of the public interest power. The Tribunal, however, specifically limited this new standard to the circumstance before it – an application to cease trade a shareholder rights plan that is not alleged to contravene Ontario securities law.

A. Background to the Dispute

Riot Platforms Inc. (“Riot”) is a leading bitcoin mining and digital infrastructure company. Riot is the largest shareholder of Bitfarms Ltd. (“Bitfarms”), an Ontario reporting issuer that is also in the bitcoin mining business. After unsuccessfully seeking to negotiate an acquisition of Bitfarms, Riot began accumulating Bitfarms’ shares. In order to preserve the status quo in anticipation of a possible future transaction with a third party requiring a two-thirds majority shareholder vote, Bitfarms adopted a shareholder rights plan (the “Plan”) or “poison pill”. The Plan would be triggered when any person acquired 15% or more of Bitfarms’ outstanding shares during the first 3 months after implementation – and thereafter the trigger would increase to 20%. The effect of the trigger was that all Bitfarms shareholders, except the triggering shareholder, would be entitled to purchase additional shares of Bitfarms at half price. At the time of the Plan’s adoption, Riot was the largest Bitfarms shareholder. Riot owned almost 15% of Bitfarms’ shares by the time of the hearing.[4]

After Bitfarms’ adoption of the Plan, Riot applied under section 127 of the Act for a cease trade order with respect to the Plan. Riot argued that it would be in the public interest to cease trade the Plan because the 15% trigger was below the take-over bid regime threshold of 20%,[5] requiring a triggering party to commence a formal take-over bid.

B. The Tribunal’s Decision

The Tribunal granted a cease trade order, finding that the 15% trigger in the Plan undermined the animating principles of the take-over bid regime in a real and substantial way.[6] In reaching its decision, the Tribunal redefined the applicable public interest standard in cases where a cease trade order is sought for a rights plan when there is no allegation of a breach of securities law, and held that it would be in the public interest to grant an order:

1. only if the applicant demonstrates that the plan undermines, in a real and substantial way, and with public effect, one or more clearly discernible animating principles underlying Ontario securities law; and
2. the respondent does not demonstrate exceptional circumstances that would nonetheless justify allowing the plan to continue.[7]

The Tribunal’s reasoning regarding the first part of the new standard can be broken down into what are the animating principles underlying Ontario securities law, the difference between abuse and unfair behaviour towards those animating principles, and what is considered to be in the public interest for the Tribunal to intervene. The second part of the test appears to be based on a ‘knowing it when you see it’ approach with respect to exceptional circumstances that could save a disputed shareholder rights plan.

1. Animating Principles

In Bitfarms, the Tribunal found the broadest collection of animating principles that underlie Ontario securities law. These animating principles can be found in:

1. section 1.1 of the Act;[8]
2. elsewhere in Ontario securities law or in Tribunal decisions that identify policy regarding Ontario securities law;[9] and,
3. the principles found in section 2.1 of the Act[10] – which are directed towards the Commission.[11]

Specifically for Bitfarms and its Plan, the Tribunal determined that the “fundamental characteristics of the take-over bid regime” were animating principles that “serve as the baseline for assessing impugned conduct.”[12]

Finding what animating principles the Tribunal could work with was just step one. Next, the Tribunal had to determine, absent an alleged contravention of securities law, “by how much or in what way would the impugned conduct have to be inconsistent with” those animating principles to justify intervention under the public interest power.[13]

2. Abusive vs. Unfair

The Tribunal grappled as to when it should use its public interest power. In other words, where between unfair and abusive conduct should the Tribunal intervene and use its power?

The Tribunal rejected the Commission’s submission that the impugned conduct merely had to “engage” the animating principles to warrant its intervention under section 127. This bar was too low.[14] On the opposite end, the Tribunal affirmed that “abusive” conduct is also not the standard as that would raise the bar too high and prevent the Tribunal’s intervention when it was needed, even if the conduct at issue was not abusive.[15]

The Tribunal similarly rejected unfairness as too low a bar because it is simply an aspirational goal of the Act and is not intended to figure into the public interest test.[16] In addition, the Tribunal rejected inconsistency with the animating principles as the threshold because it would catch conduct that is minor.[17]

In the Tribunal’s determination, the correct threshold would be somewhere in the middle of the sliding scale between unfair and abusive conduct. The Tribunal adopted the threshold as conduct that “undermines” the animating principles as explained in GrowthWorks Canadian Fund Ltd. (Re).[18] Therefore, the burden for the applicant is to show that the “…conduct undermines one or more clearly discernable animating principles on a real (i.e., well-grounded, reasonably likely, and not illusory) and substantial (i.e., serious and non-trivial) way”.[19]

The Tribunal re-wrote the standard for its intervention for two reasons:[20]

1. One must be able to discern and specify the animating principles that the impugned conduct undermines for predictability’s sake and to prevent the Tribunal from rewriting securities law through its interventions.
2. The conduct must be real and substantial due to the fact that the Tribunal can intervene when there is no contravention of securities law. Essentially, the Tribunal attempts to put a self-imposed boundary on its public interest power.

3. Public Aspect

The Tribunal briefly addressed the public aspect of its exercise of the public interest power in Bitfarms. The Tribunal held that the applicant must satisfy the Tribunal that it is in the public interest to issue a section 127 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.[21]

4. A shareholder rights plan below 20% is still evaluated against the take-over bid regime

Recall that the Plan had a temporary trigger of 15%. The Tribunal found that such a trigger undermined, in a real and substantial way, the animating principles of the take-over bid regime, and there were no exceptional circumstances to overcome that presumption. The Tribunal further held that if it endorsed Bitfarms’ 15% trigger this would engage the public dimension, such that it is in the public interest for the Plan to be cease traded.[22]

The Tribunal stated that despite the fact that there was no live take-over bid by Riot for Bitfarms, it agreed with Riot and the Commission that the take-over bid regime was the appropriate context in which the Tribunal should assess the Plan. The Tribunal reasoned that because the entirety of the take-over bid regime “contains elements that govern” share accumulations above and below 20%, the Plan should be considered against that background instead of being guided primarily by the duties of target directors.[23] Indeed, the Tribunal held that shareholder choice is, in fact, a principle already present within the take-over bid regime.[24]

5. Exceptional Circumstances

The Tribunal, emphasizing the importance of and predictability provided by the 20% trigger within the take-over bid regime to investors and market participants, recognized that it did not want to box itself into a corner stating: “there must always remain the possibility that the Tribunal would choose not to cease trade a plan even though the plan’s trigger is below 20%.”[25]

The Tribunal affirmed and adopted the holdings in three decisions where a shareholder rights plan that departed from the bid regime’s core components was considered: Northern Financial Corporation v Jaguar Nickel Inc,[26] Aurora Cannabis Inc (Re),[27] and ESW Capital, LLC.[28]

In Jaguar, Québec’s Bureau found that the issuer failed to show that there was any exceptional circumstance enough to override the presumption against the 20% threshold.[29] The Tribunal in Aurora found that it would take “a rare case” for a tactical plan to be allowed to interfere with take-over rules.[30] In ESW Capital, the Tribunal reiterated the importance of predictability in take-over bid situations and found no exceptional circumstances to justify an exemption from the minimum tender bid requirement.[31]

In concluding, the Tribunal made clear that an issuer defending a rights plan:

…that departs from the bid regime’s core components should have a high burden, in light of the well-established nature of the take-over bid regime’s fundamental principles of predictability, transparency, and fair treatment of target shareholders. The Tribunal should be reluctant to permit such a plan to continue unless exceptional circumstances are present.[32]

6. Bitfarms did not demonstrate exceptional circumstances to justify a departure from the 20% benchmark of the take-over bid regime

In Bitfarms, the Tribunal had two competing expert reports in front of it regarding the blocking position that Riot was alleged to have in Bitfarms shareholding. In short, Bitfarms presented evidence that it was seeking to prevent Riot from holding a blocking position with respect to a potential sale transaction with a third party. Riot’s own expert disagreed with the assumptions, methodologies and conclusions made in Bitfarms’ expert evidence in respect of what constituted a blocking position.[33] The Tribunal held that this evidence did not help determine whether exceptional circumstances existed in this case. However, it left open the possibility that “compelling evidence” of a blocking position might be appropriate “to allow a plan with a trigger of less than 20% to remain in place.”[34]

The Tribunal also found that a strategic review process is not, in and of itself, an extraordinary event which would allow the Plan to continue. In doing so, it noted that an issuer seeking to extend the duration of a shareholder rights plan must show exceptional circumstances, especially in cases where there is no live or pending bid; the plan has not been endorsed by shareholders; and the strategic review process on which the issuer relies has been underway for an extended period.[35]

The Tribunal in the present case was heavily persuaded against the continuation of the Plan due to the last factor – the length of the strategic review process. The Tribunal found the review process had been ongoing for as long as the 105-day minimum deposit period under the take-over bid regime and that, if a bid were to emerge, Bitfarms would have had at least 105 more days to investigate alternatives.[36] There was no persuasive and particular evidence from Bitfarms that there was an ongoing and active auction process that would justify the Plan being extended to allow for any such auction to continue.[37]

C. Guidance for Stakeholders

There are two key takeaways from the Tribunal’s decision in Bitfarms.

First, the Tribunal has finally set a single coherent standard for the exercise of its public interest power, albeit stated to be limited to shareholder rights plan cases. However, we would not be surprised if this standard is adopted – with minor changes as the circumstances warrant – for all non-enforcement section 127 cases, where there has been no breach of Ontario securities laws.

Second, although it is clear that the Tribunal does not want to assess the legality of every tactical shareholder rights plan that is put into place, it has clearly set out a path for upholding a rights plan with a trigger below 20% even if those circumstances would be “exceptional”. In the future, an issuer may well be able to withstand an application to cease trade a rights plan with a trigger below 20% if the issuer can prove that the rights plan served to enhance shareholder value by showing:

• “compelling evidence of a blocking position”, and
• an ongoing and active auction process where there is a reasonable possibility that the process will lead to a transaction within a reasonable time.

[1] Paul D. Davis, “The Exercise of The Public Interest Power by the OSC – A New Standard is Needed”, dated September 4, 2014. For a more detailed paper please see “Justifiable Expectations Standard: The Basis for the Exercise of the Public Interest Power of the Ontario Securities Commission” by Paul D. Davis, August 22, 2014. Paul D. Davis, “Ten Years Later: The Justifiable Expectations Standard and the Evolution of Public Interest Powers in Canada”, dated October 11, 2024. For the detailed paper please see “Ten Years Later: The Justifiable Expectations Standard and the Evolution of Public Interest Powers in Canada” by Paul D. Davis, September 30, 2024.
[2] 2024 ONCMT 27 [Bitfarms]. McMillan LLP was counsel for the intervenor, the Special Committee of the Board of Directors of Bitfarms Ltd., the only party who made submissions on behalf of Bitfarms at the hearing.
[3] Bitfarms at para 16.
[4] Bitfarms submitted to the Tribunal that 14% was a blocking position (Bitfarms at paras 107-108) but the Tribunal did not find such argument compelling (Bitfarms at para 110).
[5] NI 62-104.
[6] Bitfarms at para 6.
[7] Bitfarms at para 5.
[8] Securities Act, R.S.O., 1990, c S.5, section 1.1; Bitfarms at para 38. These include: to provide protection to investors from unfair, improper or fraudulent practices; to foster fair, efficient and competitive capital markets and confidence in capital markets; to foster capital formation; and to contribute to the stability of the financial system and the reduction of systemic risk.
[9] Bitfarms at para 40.
[10] Securities Act, section 2.1.
[11] Bitfarms at para 41.
[12] Bitfarms at para 40.
[13] Bitfarms at para 42.
[14] Bitfarms at para 52.
[15] Bitfarms at paras 53-54.
[16] Bitfarms at para 56.
[17] Bitfarms at para 57.
[18] 2011 ONSEC 17 at para 59.
[19] Bitfarms at para 59.
[20] Bitfarms at paras 60-61.
[21] Bitfarms at para 62.
[22] Bitfarms at para 69.
[23] Bitfarms at para 74.
[24] Bitfarms at para 75-77.
[25] Bitfarms at para 91.
[26] 2007 QCBDRVM 15 (CanLII) [Jaguar].
[27] 2018 ONSEC 10 [Aurora].
[28] 2021 ONSEC 7 [ESW].
[29] Bitfarms at para 96.
[30] Bitfarms at para 98; Aurora at para 152.
[31] Bitfarms at para 99.
[32] Bitfarms at para 100.
[33] Bitfarms at paras 107-109.
[34] Bitfarms at para 111.
[35] Bitfarms at para 117.
[36] Bitfarms at para 118.
[37] Bitfarms at paras 119-123.

by Paul Davis, Sandra Zhao, Madeline Klimek, and Tolu Ogidi (Student-at-Law)

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2024