Canadian poison pills in the spotlight: Bitfarms and Greenfire

Recent cases before Ontario’s Capital Markets Tribunal (the Ontario Tribunal) and the Alberta Securities Commission (the ASC) provide guidance on when it may be appropriate for an issuer to adopt a shareholder rights plan without shareholder approval in the face of a shareholder acquiring a significant ownership position. The decisions identify the tolerance (or lack thereof) of securities regulators for a target board’s use of defensive measures to insulate itself from activists or change control initiatives, even in pursuit of what the board views as the best interests of the target. 

On November 19, 2024, the Ontario Tribunal released reasons for its decision to effectively terminate a shareholder rights plan (the Bitfarms Plan) adopted by Bitfarms Ltd. (Bitfarms). The Bitfarms Plan restricted any person from acquiring more than 15% of Bitfarms shares without making a formal take-over bid and was adopted in circumstances involving an ongoing strategic review process and an attempt to prevent Riot Platforms, Inc. (Riot)—a 14.9% shareholder—from acquiring what Bitfarms viewed as negative control (the practical ability to block matters requiring two-thirds shareholder approval), which would limit or undermine the target’s ability to procure value-enhancing transactions.

On November 6, 2024, the ASC issued a cease trade order effectively terminating a shareholder rights plan (the Greenfire Rights Plan) adopted by Greenfire Resources Ltd. (Greenfire). The Greenfire Rights Plan was implemented by Greenfire immediately following an announcement by Waterous Energy Fund Management Corp. (Waterous) that it had entered into agreements to acquire 43.3% of the issued and outstanding common shares of Greenfire. Greenfire purported to implement the Greenfire Rights Plan to protect the integrity of a strategic review process that it had undertaken to maximize value for all shareholders and alleged that Waterous was improperly engaging in a creeping takeover bid for negative control of Greenfire.

What you need to know

• Absent exceptional circumstances, it will be challenging for a target board to adopt a shareholder rights plan containing a sub-20% trigger. The Ontario Tribunal cease traded a shareholder rights plan with a 15% threshold adopted in the context of a strategic review process despite the issuer’s view that a 15% shareholding would establish a negative control blocking position.
• The “business judgment rule” will not necessarily insulate a target board from action by securities regulators where improper defensive tactics are taken to inhibit a change of control transaction. The ASC cease traded a shareholder rights plan adopted to prevent private agreement transactions to acquire a significant number of shares made in compliance with an exemption from the takeover bid rules from proceeding.
• A shareholder rights plan adopted after the fact for the purpose of preventing the legitimate use of an available exemption from the takeover bid rules is unlikely to survive regulatory scrutiny, absent extraordinary circumstances.

The Bitfarms decision

On November 19, 2024, the Ontario Tribunal issued its much-anticipated reasons in the matter of Riot Platforms, Inc. v Bitfarms Ltd. The reasons provide insight into the Ontario Tribunal’s July 2024 order which effectively terminated the Bitfarms Plan. For further background, readers can consult our bulletin on the order.

The Ontario Tribunal’s reasons explore and refine the standard to be applied in determining whether an order under section 127 of the Ontario Securities Act (the Act) is warranted in the context of transaction-related disputes. In the context of this case, where the applicant sought to cease trade a shareholder rights plan without establishing a contravention of securities laws, the Ontario Tribunal articulated that the relevant test was whether the applicant had demonstrated:

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

In deciding whether to cease trade the Bitfarms Plan, the Ontario Tribunal rejected the idea that, under securities law, it should be “primarily guided by directors’ duties”. It also rejected the idea that it “should view the introduction of the [Bitfarms Plan] in the context of the duties of target directors rather than in the context of the principles underlying the take-over bid regime”, including the important principle of “shareholder choice”.

A review of the historical policy underpinnings of the bid regime led the Ontario Tribunal to conclude that the regime’s primary purpose is to provide an orderly process for changes of control of publicly traded entities. The regime balances the interests of target shareholders, which include transparency, equality of treatment and time to consider offers being made to them, with predictability for market participants who are actively accumulating shares. In addition to imposing a 20% shareholding threshold at or above which a shareholder would be required to make a formal take-over bid, the bid regime includes several elements applicable to acquisitions of shares outside of the making of a formal bid, including bid exemptions and insider and early warning reporting requirements which provide early disclosure of a potential bid prior to reaching the 20% threshold. In the Ontario Tribunal’s view, these requirements represent a policy compromise between allowing accumulations up to the 20% threshold to take place in the ordinary course and disclosure to shareholders about share accumulations.  

In order to adopt a shareholder rights plan imposing a trigger below the 20% benchmark, the Ontario Tribunal held that the issuer would need to show that the departure was justified by exceptional circumstances. With respect to the facts at hand, while not going so far as to conclude that there couldn’t be other cases where a sub-20% shareholding might be considered a “blocking position” (effectively allowing a shareholder to block matters requiring two-thirds majority shareholder approval), the Ontario Tribunal was not convinced that a 15% trigger was necessary to prevent such an accumulation here, as there was no concrete issue before Bitfarms shareholders requiring their approval. The evidence submitted as to whether 15% constituted a blocking position was, in the Ontario Tribunal’s view, hypothetical and speculative, involving “inherently debatable” assumptions. In addition, the Ontario Tribunal was not persuaded that the strategic review process which Bitfarms had undertaken to explore potential alternative transactions constituted an exceptional circumstance. While noting that a strategic review was not in and of itself an extraordinary event, the Ontario Tribunal also pointed to the following factors: (i) there was no live or pending bid; (ii) the plan had not been approved by shareholders; and (iii) Bitfarms’ strategic review process had already been underway for an extended period of time.

In summary, the Ontario Tribunal found that the Bitfarms Plan undermined, in a real and substantial way, the animating principles underlying the takeover bid regime by departing from the 20% benchmark in the absence of exceptional circumstances. It concluded that without intervention, the Bitfarms Plan would diminish the predictability and certainty inherent in the Canadian takeover bid regime and would weaken public confidence in the capital markets. Thus, the Ontario Tribunal held that it was in the public interest to cease trade the Bitfarms Plan.

The Greenfire Resources Ltd. order

Greenfire is an intermediate Athabasca oil sands producer. Its common shares are listed on the TSX and the NYSE. Waterous is a Calgary-based private equity firm that invests in the Canadian oil and gas sector.

Greenfire had confidentially engaged an investment bank in July 2024 to assist in evaluating its strategic alternatives in view of Greenfire’s discounted valuation relative to pure play oil sands peers.

On September 16, 2024, Waterous announced that certain funds it managed had entered into agreements to acquire 43.3% of Greenfire’s common shares from three shareholders, two of which are companies controlled by two former Greenfire directors (who were directors of Greenfire at the time). The purchases were structured to comply with the private agreement exemption from the takeover bid rules.

Greenfire did not apply to the ASC for relief in connection with any non-compliance with that exemption. Instead, it adopted the Greenfire Rights Plan, which had the effect of preventing the Waterous share purchase. Greenfire justified the Greenfire Rights Plan on the basis that the Waterous share purchase would prematurely and adversely affect the successful conduct of the ongoing strategic process, as well as the potential completion of any value-maximizing transaction that might arise from that process.

Waterous brought an application before the ASC to cease trade the Greenfire Rights Plan. In response, Greenfire brought a cross-application to cease-trade the Waterous share purchase.

Waterous argued that the Greenfire Rights Plan was an improper defensive tactic designed to thwart legitimate private agreement purchases and should be cease traded as abusive and contrary to the public interest. In its arguments, Waterous cited several underlying reasons:

1. The Waterous agreements constituted a lawful use of the private agreement takeover bid exemption.
2. The retroactive use of a poison pill to interfere with negotiated private agreements would be detrimental to capital markets, as market participants require certainty in knowing that they can buy and sell securities in compliance with applicable securities laws without interference from the issuer.
3. To allow the Greenfire Rights Plan to stand would be to allow a target board to essentially retroactively pick and choose who can be shareholders of the company.

Waterous also submitted that Greenfire greatly overstated the role of the business judgement rule and that securities regulators can and should scrutinize the integrity of the target board process in adopting a shareholders rights plan. It was submitted that, in the absence of a pending takeover bid for all Greenfire shares, the Greenfire Rights Plan was intended to operate as a “just say no” defence by foreclosing the use of an otherwise legitimate bid exemption and should therefore not be a circumstance protected by the business judgement rule.

Greenfire’s main submissions were as follows:

1. In implementing the Greenfire Rights Plan, the board acted reasonably and a proper process was followed (including proper reliance on financial and legal advisors).
2. Allowing Waterous to acquire a “negative control” position would adversely affect Greenfire’s strategic review process designed to result in an offer for all shareholders.
3. The selling shareholders who were directors of Greenfire at the time acted inappropriately by failing to alert the full Greenfire board that they were negotiating a private sale transaction at a time when a strategic process was underway. Consequently, Greenfire and its full board did not have sufficient information to adopt the Greenfire Rights Plan earlier than it did.
4. Rights plans continue to serve the legitimate purpose of preventing creeping bids and change of control transactions as between a few large shareholders, which is what occurred here.

On November 6, 2024, the ASC issued a cease trade order effectively terminating the Greenfire Rights Plan and dismissed the cross-application of Greenfire to cease trade the Waterous private agreement purchases. Reasons for the decision have not yet been released.

Immediately following the ASC order, Greenfire adopted a revised rights plan (which grandfathered the Waterous interest in Greenfire) and applied to the Alberta Court for an injunction to prevent closing of the Waterous share purchases. No injunction was obtained and Waterous subsequently closed the share purchase transactions.

Shortly afterwards, Waterous—now the collective beneficial owner of approximately 43% of the issued and outstanding shares of Greenfire—requestioned a special meeting of Greenfire common shareholders for the purpose of seeking to replace all four members of Greenfire’s board.

Conclusion

Both the Greenfire and the Bitfarms cases illustrate the challenges a board can face in adopting a shareholder rights plan as a defensive tactic in the face of a shareholder acquiring a significant ownership position. Securities law and securities regulators will protect takeover bid principles under securities law irrespective of the views of target directors.