The Ontario Capital Markets Tribunal (CMT) has released reasons for its July 2024 decision to cease-trade the shareholder rights plan adopted by Bitfarms Ltd. (Bitfarms).
Background
Bitfarms is a TSX-listed owner and operator of Bitcoin mining data facilities. It adopted a shareholder rights plan in June 2024 in response to the acquisition of 14.9% of Bitfarms’ shares by Riot Platforms Inc. (Riot), a NASDAQ-listed Bitcoin mining company. Riot had previously made an acquisition proposal that Bitfarms rejected, following which Riot announced its intention to requisition a special meeting of shareholders to replace Bitfarms’ board.
The Bitfarms rights plan provided for the dilution of the shares of any party that acquired more than 15% of Bitfarms’ shares between June 20, 2024 and September 10, 2024. After September 2024, the threshold increased to 20%. Bitfarms asserted that the rights plan was necessary to enable it to undertake a strategic alternatives process.
The CMT granted Riot’s application to cease-trade the Bitfarms rights plan on July 24, 2024, with reasons to follow.
Reasons
In its reasons dated November 19, 2024, the CMT first sought to clarify the applicable standard for exercising its public interest jurisdiction in respect of a rights plan that is not alleged to contravene securities legislation. The CMT determined that the often-referenced “clearly abusive” threshold is too high a bar, but that mere inconsistency with the “animating principles” behind securities legislation does not provide sufficient certainty and predictability to market participants.
The CMT held that the applicant’s burden when challenging a rights plan that does not contravene securities legislation “is to show that the conduct undermines one or more of the clearly discernible animating principles in a real and substantial way” and with public effect, in that it will be harmful to investors generally, the capital markets as a whole or in future transactions. The CMT held that the respondent may demonstrate exceptional circumstances that justify the continuation of a rights plan.
The CMT further clarified that in considering whether to cease-trade a rights plan, the takeover bid regime is the proper context rather than the duties of the target directors. The CMT determined that features of the takeover bid regime, such as the 20% shareholdings threshold, serve as benchmarks that accord with the policy underlying the regime, increase certainty and predictability, and contribute to the efficiency of capital markets.
Turning to the case before it, the CMT found that the 15% threshold in Bitfarms’ rights plan was a significant departure from market expectations, gave the issuer undue power to influence share accumulation outside the takeover bid context and failed to treat all shareholders equally. The CMT concluded that the 15% threshold undermined, in a real and substantial way, and with public effect, animating principles that underlie the takeover bid regime.
The CMT found that there were no exceptional circumstances to justify the continuation of the plan. It noted that this high burden is appropriate for a rights plan that departs from the core components of the takeover bid regime, particularly where there is no takeover bid, the plan has not been approved by shareholders and there is insufficient evidence that a strategic review process will lead to a transaction within a reasonable time.
Takeaways
- A rights plan that does not contravene securities legislation must be shown to undermine one or more of the clearly discernible “animating principles” of securities legislation in a real and substantial way, and with public effect.
- The principles underlying the takeover bid regime, including the 20% shareholdings threshold, form the proper context for considering whether to cease-trade a rights plan even when the rights plan is not adopted in the face of a takeover bid.
- A rights plan that departs from the 20% shareholdings threshold under the takeover bid regime requires exceptional circumstances.
- The Alberta Securities Commission recently cease-traded another rights plan that was not adopted in the face of a takeover bid or approved by shareholders. See our Blakes Bulletin on Re Greenfire Resources.
