Due to a recent Ontario Energy Board ruling, any shareholder holding more than 20% of the shares of an electricity distributor in Ontario must now seek leave from the Board before it can increase its shareholdings in the distributor.
The ruling arose from an application by the Town of Essex (Essex) to acquire all of the outstanding shares of E.L.K. Energy Inc. (ELK). Essex already held 38% of the shares of ELK, which it had acquired as part of a previous amalgamation that was not subject to Board scrutiny. Prior to a hearing on the merits of the application, Essex requested the Board rule that the transaction did not require leave from the Board under subsection 86(2) of the Ontario Energy Board Act, 1998.
Subsection 86(2) requires leave before any person may acquire shares of an electricity distributor that, together with any shares already held by that person, will in the aggregate exceed 20% of the shares of the distributor. Essex argued that the provision only applied to transactions that put the purchaser "over the threshold" of a 20% shareholding. Board staff opposed the application and asserted that leave was required for any transaction that resulted in a person holding more than 20% of a distributor's shares, regardless of that person's shareholdings prior to the transaction.
The Board's three member panel split on the proper interpretation of subsection 86(2). The two-member majority, consisting of Vice-Chair Gordon Kaiser and Ken Quesnelle, sided with Board staff and adopted what they referred to as the "Major Shareholder" interpretation. In their view, requiring leave for all transactions that result in a person holding more than 20% of a distributor's shares is consistent with the plain wording of subsection 86(2) as well as the legislative intent and history of the provision. Drawing on the history of utility regulation in Ontario and the United States, the majority concluded that such transactions must be reviewed because they may expose the utility to greater financial risk (thereby increasing the cost of borrowing and leading to higher rates) or impose covenants that might impact a utility's operations. The two members determined that these concerns do not end when a shareholder crosses the initial 20% threshold and noted that further increases in person's shareholdings "only heightens concern" because those "with greater shareholdings are more likely to have the ability to control the financial structure of the utility."
The dissenting member, Paul Vlahos, criticized the majority's reasoning, stating that "[a] desire or inclination to exercise some form of regulatory oversight is not a proper guide in my view to the Board's consideration of its own jurisdiction." In his opinion, subsection 86(2) was properly interpreted to be consistent with the definition of "control person" in the Securities Act and only require a review at the 20% threshold. He rejected the argument that subsection 86(2) provided for continued oversight of a distributor's major shareholders, noting that a review under subsection 86(2) is at best sporadic and, once a shareholder has effective control of a distributor, it can impose restrictive covenants at any time. Rather, Mr. Vlahos' opined that the appropriate way to protect ratepayers from harm is through the Board's broad ratemaking authority, which is not fettered by restrictive covenants, shareholder directives or any other shareholder agreements.