Module 9: Securities Regulations and Bankruptcy and Insolvency Law Flashcards
What are the main ideas and steps in bankruptcy and insolvency? Can you name different types of bankruptcy proceedings and explain what happens legally when businesses face financial distress?
How are creditors sorted out in bankruptcy, and what determines who gets paid first? What happens when assets are distributed?
What rules do securities follow, including registration and disclosure? Also, why is insider trading and takeover bids important in the securities market?
What are the important parts of corporate governance? Explain the role of audit committees, mandatory certifications, corporate governance best practices, and what influences how corporations are run.
Corporate governance is the framework of rules and practices through which a corporation is controlled
Who is an insider?
- Directors, officers and employees of the issuer
- Directors, officers and employees of the issuer’s parent or subsidiary
- Anyone with 10% or more of voting rights in the issuer
- Certain persons in a special relationship to an inside
- The issuer itself
What rules do securities follow, including registration and disclosure?
- The issuance and trading of securities, aiming to encourage investors to make funds available for businesses.
- Ensures fair and efficient market operation by striking a balance between providing sufficient disclosure to investors and avoiding overburdening issuers.
Registration requirements mandate that securities market participants be registered before participating in the market, meeting standards of integrity, competence, and financial solvency.
Why is insider trading and takeover bids important in the securities market?
- Insiders, such as directors, officers, and certain stakeholders, must report their trades within 10 days to prevent trading based on undisclosed information. (which is illegal)
The importance lies in maintaining market integrity, preventing unfair advantages, and ensuring that trading is based on publicly available information. - Takeover bids involve an offer to acquire a substantial portion of outstanding voting securities of a target.
The regulation of takeover bids aims to ensure equal treatment of shareholders, impose disclosure requirements, and set minimum time periods for decision-making. This helps safeguard shareholder interests and maintains transparency during acquisition processes.
What are the important parts of corporate governance?
Corporate governance involves a framework of rules and practices controlling a corporation. Mandatory requirements include the independence, competence, function, and responsibilities of the audit committee, as well as mandatory certifications by the CEO and CFO. Voluntary best practices cover aspects such as board independence, position descriptions, nomination of directors, compensation boards, and regular assessments of the board and its committees. Corporate governance aims to establish accountability, transparency, and ethical practices within the organization.
What is the role of audit committees, mandatory certifications, corporate governance best practices, and what influences how corporations are run?
Audit Committees: These committees oversee financial decisions, financial reporting, and the relationship between auditors and the corporation. They ensure independence, financial literacy, and approval of non-audit services by auditors. The audit committee’s role is crucial in maintaining financial transparency and accountability.
Mandatory Certifications: CEOs and CFOs are required to provide certifications ensuring the fair representation of financial conditions and the absence of untrue statements. They are responsible for disclosure controls, internal controls, and reporting any fraud to auditors and the board. Mandatory certifications enhance the quality and reliability of financial disclosure.
Corporate Governance Best Practices: These practices include board independence, position descriptions, nomination committees, compensation committees, and regular assessments. These best practices aim to enhance board effectiveness, align CEO goals with board expectations, and ensure fair compensation practices, contributing to overall corporate governance.
Influences on How Corporations Are Run: Business practices, ethics, criminal law, effectiveness of accounting rules, independence of auditors, and shareholder engagement all influence corporate governance. These factors shape how boards organize themselves, make decisions, and uphold ethical standards, impacting the overall governance structure of corporations.
What are the fundamental concepts and processes involved in bankruptcy and insolvency?
Insolvent: The inability of a debtor to pay debts as they become due.
Bankrupt: A legal status that arises if a debtor commits an act of bankruptcy under the Bankruptcy and Insolvency Act (BIA), resulting in the loss of the legal capacity of the debtor to deal with its assets.
Legislation:
Bankruptcy and Insolvency Act (BIA):
Federal law allowing for uniformity across Canada.
Shifted focus from creditors to debtors over time.
Aims to release honest debtors from their debt, distribute debtor’s assets fairly among creditors, punish debtors attempting to defraud creditors, and promote the survival of businesses and employment.
Key Players:
Bankruptcy Court: Hears disputes, makes orders, and grants discharge for individual debtors.
Trustee in Bankruptcy: Represents creditors, takes control of assets for distribution, and makes initial determinations of creditors’ claims.
Superintendent of Bankruptcy: Regulates trustees and has wide powers to intervene in bankruptcy court proceedings.
Initiating Bankruptcy Proceedings:
Voluntary by Assignment of the Debtor: Most common form, filed by an insolvent debtor with the Official Receiver.
Involuntary by Application of a Creditor: Creditor must prove debtor’s insolvency and an act of bankruptcy.
Acts of Bankruptcy:
Various actions by the debtor, such as making a fraudulent gift, departing Canada with the intent to defeat creditors, or ceasing to meet liabilities generally.
Can you name different types of bankruptcy proceedings and explain what happens legally when businesses face financial distress?
Companies’ Creditor Arrangement Act (CCAA):
Main legislation for large entities with at least 5 million liabilities.
Allows flexibility in restructuring.
Initiated by the debtor, creditor, or trustee in bankruptcy.
Aims at maximizing returns for creditors, protecting stakeholder interests, and rehabilitating the debtor.
Other Legislation:
Personal Property Security Act (PPSA): Provincial legislation covering secured creditors in bankruptcy proceedings.
Industry-Specific Laws: Specific rules for banks, insurance companies, trust companies, farmers/fishers, and railways companies.
How are creditors sorted out in bankruptcy, and what determines who gets paid first?
Classes of Creditors (BIA):
Secured Creditors: Hold security interest in specific assets and stand outside the bankruptcy process.
Unsecured Creditors: Include preferred, ordinary unsecured, and postponed creditors.
Bankruptcy and Insolvency Act (BIA) - Distribution & Discharge:
Trustee in bankruptcy declares and distributes dividends to unsecured creditors.
Unsecured creditors rank equally for distribution, subject to exceptions outlined in the BIA.
Discharge of the bankrupt individual after the process, releasing them from most debts.
Impeaching Pre-Bankruptcy Transactions (BIA):
Certain transactions, such as void settlements and preferences, can be declared void by the bankruptcy court.
Composition and Proposals (BIA):
Alternative to bankruptcy, allowing restructuring with offers to creditors regarding outstanding debt.
Creditors vote on proposals, and if approved, it binds all creditors.
Companies’ Creditor Arrangement Act (CCAA) Outcomes:
Solvency restoration and termination of CCAA proceedings if successful.
Acceptance of debtor’s plan leads to the emergence of a restructured company.
Rejection of the plan results in bankruptcy under the BIA.
What happens when assets are distributed?
