Session 12 Flashcards
Security regulations, Bankruptcy and Insolvency Law
1
Q
Securities Regulations
A
Each province has laws on trading securities and regulating securities and regulating the securities market.
2
Q
SL
A
Securities Legislation
3
Q
Is there uniform SL across all of Canada?
A
There is no uniform national SL and no one national securities regulator.
4
Q
What was the “Cooperative Capital Market Regulatory System”, and was it successful?
A
An attempt to establish a pan-Canada securities regulator. It was not successful.
5
Q
Do the securities regulators across provinces try to promote uniformity?
A
Yes, they coordinate their activities and promote uniformity.
6
Q
National Instruments
A
Security regulations that are issued as national instruments can be adopted by provinces as binding regulations.
7
Q
Who regulates securities?
A
- Each province has a securities regulator to oversee the market and market participants.
- There is a pan-Canadian self-regulatory organization called CIRO.
8
Q
SRO
A
Self-Regulatory Organization
9
Q
True or false: Stocks are regulated the same as all other securities.
A
False: Stock excanges have their own standards to be met by listed businesses.
10
Q
What is the ideal purpose of SL?
A
To strike a balance between sufficient disclosure to investors and not overburden issuers.
11
Q
Why is SL a complex area of law?
A
Due to numerous stakeholders, provincial fragmentation and comprehensive subject matter.
12
Q
What does SL regulate and aim for?
A
- Issuance of securities
- Trading of securities
- Ensure fair and efficient market operation
13
Q
Issuance of Securities
A
Regulates how businesses can issue securities.
14
Q
Trading of Securities
A
Comprehensively regulates the marketplace and its participants.
15
Q
Ensure Fair and Efficient Market Operation
A
Aims at encouraging investers to make their money available for businesses.
16
Q
What is the scope of application of SL?
A
SL of a given jurisdiction applies to all businesses which sell or offer securities in the territory of that jurisdiction regardless where that business is incorperated.
17
Q
How are registration requirements regulated?
A
They are regulated through CIRO, as well as the respective SL in each province.
18
Q
Registration Requirements
A
- Securities market participants need to be registered before they can participate in the market.
- In order to register they need to meet certain standards of integrity, competence and financial solvency.
19
Q
Who are some of the main market participants?
A
- Underwriters
- Brokers
- Dealers
- Advisors
20
Q
Underwriters
A
Market intermediaries assisting businesses to sell their securities.
21
Q
Brokers
A
Do not buy/sell shares as principals but as an agent (acting for others).
22
Q
Dealers
A
Trade in securities for their own gain as principals.
23
Q
Advisors
A
Advise people regarding purchase and sale of securities.
24
Q
How is a security defined?
A
It is very broadly defined in SL.
25
What is a security?
- Is not limited to shares and bonds.
- Also includes futures, options, other derivatives, mutual fund units, and units in limited partnerships.
26
Prospectus
Before a business can sell securities, it must issue a prospectus to disclose details about the securities issued and its business.
27
What does the prospectus include?
Must provide full, true and plain disclosure of all material facts about the securities.
28
How must the prospectus be filed?
Prospectus must be files with the securities regulation in which securities are offered.
29
What must the prospectus identify?
Identity risks and include complete audited financial statements.
30
Who reviews the prospectus?
A regulator.
31
To whom must the prospectus be made available?
The purchaser of securities.
32
True or False: Just because securities are sold using a prospectus does not mean they will be listed on a stock exchange.
True
33
When does a company file for the stock exchange?
You must file for the stock exchange and complete requirements after having the prospectus approved by the regulator.
34
True or false: Experts involoved in the preparation of the prospectus are liable for misrepresentation in the prospectus.
True
35
List some of the typical exemptions from full prospectus requirements for offering securities:
- Purchaser who alone or together with their spouse own more than $5,000,000 in net assets.
- Purchasers who alone or together with their spouse own more than $1,000,000 in net financial assets/
- Purchasers who have a net income before tax of at least $200,000 this year and in the previous 2 years.
- Certain private issuers offering securities to its directors/officers and employees.
- Certain private issuers offering securities to close friends and relatives.
- Issuing of certain securities through crowdfunding.
36
To whom are prospectus exemptions most important?
Small to medium businesses.
37
What are some ongoing disclosure requirements?
- Reporting obligation of audited financial statements typically 90 days after the end of the fiscal year.
- Audited financial statement including the auditor's report.
- "Management's discussion and analysis of financial conditions and results" or MD&A.
- Annual Information Form (AIF)
- Interim (quarterly) unaudited financial reports.
38
What is the purpose of continuous disclosure?
Keep the market sufficiently up-to-date.
39
What is a "material change" in which the disclosure obligation arises?
- Need to file material change report and inform the markets (press release).
- Timing of the disclosure and whether a change is "material" is contentious.
- "Material" is what can reasonably be expected to have significant effect on market price.
40
True or false: There is never an obligation to file a material change request, therefore no legal consequences for not doing so.
False: There can be an obligation for this; if there is an obligation to file a material change request and you fail to do so, this can trigger personal liability of fiduciary.
41
What are some examples of "material changes"?
- Change in corporate structure.
- Change in share capital
- Change in business and operations
- Acquisitions and divestitures
- Change in credit arrangements
42
Can a change in the name of a company be a material change?
Yes under many circumstances a change in name is considered a material change, especially in the case of rebranding, acquisition or merger, or image changes.
43
Insider Trading
Trading based on insider information, this is illegal.
44
True or false: Disclosing insider information to others who may profit by trading with such information is prohibited.
True: this is illegal and insider trading.
45
What is insider information?
Any material undisclosed fact about the issuer.
46
What are the consequences for insider trading?
- Insider trading is a criminal offence punishable with up to 10 years imprisonment.
- Civil liability of inside traders to the issuer for any advantage received as a result of the illegal transaction.
- Securities regulators can suspend or terminate resignation of market participants guilty of insider trading.
47
What is insider information in basic terms?
Using any information not publicly available to make trades.
48
Who is an insider?
- The issuer itself
- 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 resons in a special relationship to an insider (spouse, partner, family, friends)
49
True or false: Insider trading can happen in any company, public or private.
False: Insider trading can only happen in publicly traded companies.
50
True or fale: Insiders can trade so long as it is on publicly available information.
True
51
True or false: It does not matter if there is a gain based on the insider trading that took place, it is still illegal.
True
52
Takeover Bid
Occurs if a bidder makes an offer to existing shareholders of a public corporation to acquire their shares on a "take-it-or-leave-it" basis.
53
What are the two types of takeover bids?
Friendly and hostile.
54
What are the main objectives of takeover bid regualtion?
- Ensure shareholders are treated equally.
- Impose disclosure requirements to shareholders.
- Set minimum time periods for shareholders to decide.
55
When has a takeover bid been made?
If an offer to acquire 20% or more of outstanding voting securities by the bidder to the target.
56
In a takeover who is the "target"?
The public corporation who is potentially being taken over.
57
What must bidders prepare if they wish to conduct a takeover?
A disclosure document called a "takeover bid circular".
58
Friendly Takeover
Management agrees with the takeover.
59
Hostile Takeover
Management does not agree with the takeover.
60
Is it easy to fire an officer?
Yes, it is easy to fire an officer from their role as an officer, but it is not easy to fire an officer as an employee.
61
If there is a takeover bid, what must the directors of the target do?
Send shareholders a "director's circular"
62
What is contained in a director's circular?
They must respond to the bid and recommend acceptance or rejection including reasoning.
63
What are some exemptions from takeover bid requirements?
- There are fewer than 50 security holders
- The target is not a reporting issuer
- There is no publi market for the securities
- Acquisition of securities from up to 5 SH only and certain price restrictions apply.
- "Normal course purchases" by SH already holding 20% or more of the target.
64
True or false: It is not a takeover if someone with over 20% buys more shares, which is a normal course purchase (under 5% of their shares).
True
65
Corporate Governance
The framework of rules and practices through which a corporation is controlled.
66
True or false: Under coporate governance rules all companies are treated the same.
False: There are different rules for public and private companies.
67
What are some differing rules?
- Corporate law rules such as SH rights, allocation of power between SH + Officers + Directors, and standards for officers and directors.
- Securities regulations.
68
What does Canadian corporate governance model include?
Some mandatory and some voluntary best practices.
69
What are some of the corporate governance rules based on securities law?
- Mandatory requirements regarding independence, competence, function and responsibilites of the audit committee.
- Mandatory certifications by CEO and CFO.
- Voluntary best practices.
70
What are spme voluntary best practices of securities law?
- Independence of board members and board chair.
- Independent board committees on compensation and board nominations.
- Assessment of the board, its committees and individual members.
71
What happens in voluntary best practices are not followed?
If you don't follow them you have to explain why and have systems in place to replicate the results.
72
Who participates in the audit?
- The auditor
- The audit committee (AC)
73
The Auditor
- Reviews the financial statements prepared by management to determine if they fairly represent the financial situation of the corporation.
- Are independent firms of accountants appointed by and accountable to SHs.
74
The Audit Committee
- Is a committee of the board of directors in charge of overseeing the financial decisions of the corporation and the way financial results are reported and managing the relationship between the auditor and the corporation.
- AC must have at least 3 members and written charter.
75
AC
The Audit Committee
76
True or false: Members can have no direct or indirect relationship with the issuer which could reasonably interfere with their independence.
True
77
What qualities must AC members possess?
- Have no direct or indirect relationship with the issuer which could interfere with their independence.
- Be independent of both the auditor and the management, meet the requirement of "financial literacy".
78
Can there be non-audit services between auditor and issuer?
All non-audit services of the auditor to the issuer must be approved by the AC.
79
What is the purpose of certifications?
To improve quality and reliability of disclosure.
80
Who is liable in case of misrepresentation?
CEO and CFO
81
What are some mandatory certifications?
- Fair presentation
- No misrepresentation
- Responsibility
- Design of disclosure controls and procedures
- Design of internal control procedures
82
Fair Presentation
Financial statements "fairly represent in all material aspects the financial conditions, performance and cash flow of the issuer."
83
No Misrepresentation
Having exercised reasonable diligence, financial statements and MD&A "do not contain any true statement of material fact or omit to state a fact required.
84
What are the 2 most important mandatory certifications?
- Fair Presentation
- No Misrepresentation
85
Responsibility
Officers are responsible for establishing disclosure controls and procedures controls and internal control over financial reporting.
86
Design of Disclosure Controls and Procedures
Procedures are designed to provide reasonable assurance that material information is known, and information require to be disclosed is timely reported.
87
Design of Internal Control Procedures
Internal control procedures are designed to provide reasonable assurances regarding the reliability of financial reports and financial statements preparation in accordance with accepted accounting standards.
88
Board Independence
- A corporate governance best practice.
- Majority of members should be independent with no relationship to the management or the corporation.
- Board chair should be independent.
89
Board Mandate
- A corporate governance best practice.
- Board should have a written mandate acknowledging its responsibility for: risk management, strategic plan, succession planning, approach to corporate governance, internal control & management information systems, and communications policy.
90
Are corporate governance best practices mandatory?
No, but if a company does not comply they have to explain why.
91
Should the CEO be the chairman of the board?
No, this is a huge red flag, they are supervising themselves.
92
What must the board develop?
- Position descriptions for the CEO, its chair, and its committee chairs.
- Goals CEO is responsible to meet.
93
How does the nomination of the board of directors work?
- Board to have nomination committe of entirely independent directors.
- Nomination committee to identify skills required of directors and assessing directors.
94
How is the compensation of the board of directors determined?
- Board to have compensation committee of entirely independent directors.
- Compensation committee to evaluate the CEO performance and determine their compensation.
95
Board Assessments
The board, its committees and each member should be regularily assessed.
96
How do business practices affect corporate governance?
Depends on how the board is organized and conducts themselves in practice beyond legal requirements.
97
How do business ethics affect corporate governance?
Ethics and values of officers and directors for corporated decision making.
98
How does criminal law affect corporate governance?
Where ethics fail, the effectiveness and enforcement of criminal law can deter fraud.
99
How does the effectiveness of accounting rules affect corporate governance?
Effectiveness of accounting rules in ensuring financial condition of the corporation is fairly represented in the financial statements.
100
How does the independence of auditors affect corporate governance?
If independence of auditors is compromised, risk of fraud by management increases; issue of management decisions over auditor firm receiveing lucratice consulting work.
101
How does the engagement of shareholders affect corporate governance?
Increasing degree and effectiveness of investor involvement improves governance.
102
Insolvent
The inability of a debtor to pay debts as they become due.
103
Bankrupt
A legal status which arises if debtor commits an act of bankruptcy under the BIA and court to declares bankruptcy resulting in loss of legal capacity of debtor to deal with assets.
104
What are some relevant legislation when it comes to bankruptcies and insolvencies?
- Company's creditor Arrangement Act (CCAA)
- Bankruptcy and Insolvency Act (BIA)
- Personal Property Security Act (PPSA)
- And Industry specific laws
105
CCAA
Covers insolvencies of large entities, and allows for flexibility.
106
BIA
Main legislation covering smaller insolvencies, stricter than CCAA.
107
PPSA
Provincial legislation, covers secured creditors in bankruptcy proceedings.
108
What are some industry specific laws to which apply bankruptcies and insolvencies?
Farmers, fishers and railway companies, as well as specific rules for banks insurance companies and Trust companies.
109
When was the first insolvency legislation introduced in Canada?
1869
110
Over time from who has the focus of bankruptcy and consultancy law shifted from to focus on whom?
From creditors to debtors.
111
What are the many purposes of bankruptcy legislation today:
- Release honest debtors from their debt
- Distribute debtors assets in a fair manner amongst creditors
- Punish debtors who try to defraud creditors
- Promote survival of businesses and employment
112
Who are the key players in bankruptcy proceedings?
- Superintendent of bankruptcy
- Official receivers
- Trustee in bankruptcy
- Bankruptcy Court
- And other key players such as inspectors, creditors and debtors
113
Superintendent of Bankruptcy
Appointed by the federal government, regulates trustees and bankruptcy, and has wide powers.
114
The Official Receivers
Represent the superintendent in each province, receive voluntary assignments and proposals, examine bankrupts, and monitors trustees performance.
115
Trustee in Bankruptcy
Represents creditors, take control of assets for distribution, makes the initial determination of the creditors claims, and is licensed by the superintendent.
116
Bankruptcy Court
Hears disputes in the bankruptcy process, makes interim orders, grants discharge for individual debtors, and hears motions on priorities and preferences.
117
Inspectors
Supervise the trustee, often are employees of largest creditors.
118
Creditors
Can appoint up to five inspectors and must prove their claims against the debtor.
119
Debtor
Makes assignment or is subject to bankruptcy order and transfers assets to trustee.
120
Voluntary Commencement of Bankruptcy by Assignment of the Debtor Under the BIA
This is the most common form initiating bankruptcy proceedings and it requires the debtor to be insolvent. this is filed by the debtor with an official receiver at the debtors location, then the official receiver appoints the trustee and the trustee takes possession of the debtors property.
121
If a company voluntarily commences bankruptcy proceedings can this be annulled by the bankruptcy court?
Yes, assignments can be annulled by the bankruptcy court if filing requirements are not met or the debtor abuse the process.
122
Involuntary Commencement of Bankruptcy by Application of a Creditor Under the BIA
The Creditor must prove that the debtor owes at least $1,000 and that the debtor committed an act of bankruptcy in the past 6 months. to do this the Creditor needs to gather evidence that the debtor has ceased to meet liabilities generally has defaulting to one creditor is typically not considered seizing to meet liabilities generally accepting special circumstances.
123
What are the two ways of commencing bankruptcy proceedings?
Voluntary and involuntary.
124
What are the acts of bankruptcy:
- Making a fraudulent gift delivery or transfer of property or any part of it.
- Making a transfer of property or any part of it which would be void under the BIA.
- Departing Canada with the attempt to defeat or delay creditors.
- Assigns removes or disposes of any of their property with the intent to defraud or delay their creditors.
- Giving notice to any creditors that they have suspended or is about to suspend the payment of debt.
- Exhibits to any meeting of creditors any statement of assets and liabilities that show the debtor is insolvent.
- Ceases to meet liabilities generally as they become due.
125
What is the most important Act of bankruptcy?
The debtor seizes to meet liabilities generally as they become due.
126
Under the BIA what are some of the consequences of bankruptcy?
- The bankrupt loses the capacity to deal with their property
- The trustee in bankruptcy is appointed to liquidate the property and distribute proceeds to creditors
- Automatic stay of proceedings on all claims against the bankrupt
127
What is an automatic stay of proceedings?
Tt means that no creditor can commence or continue any action or proceedings against the debtor.
128
What is the purpose of the stay of proceedings?
To ensure orderly and fair distributions of proceeds of liquidation to creditors and to maintain control over the distribution of assets. It also avoids multiple proceedings at the same time.
129
What are exemptions to the stay of proceedings?
- Applies to unsecured creditors only unless the court decides otherwise.
- Does not apply to the collection of amounts owing by the bankrupt and respect of income tax deductions
- Does not apply to Canada pension plan contributions
130
What are the classes of creditors?
Secured creditors, and unsecured creditors
131
Secured Creditors
Have a security interest in a specific asset of the debtor, assets with valid security claim do not vest in the trustee, and stand outside the bankruptcy process.
132
Unsecured Creditors
Includes preferred creditors, ordinary unsecured creditors, and postponed creditors.
133
Preferred Creditors
Creditors preferred by operation of law over other unsecured creditors. This includes creditors who are owed wages, taxes, rent, support payments and those carrying out the bankruptcy.
134
Ordinary Unsecured Creditors
The residual class of creditors who are paid out of the debtors assets remaining after all secured and preferred creditors are satisfied.
135
Postponed Creditors
Creditors not entitled to receive any proceeds of the liquidation until all other creditors have been satisfied.
136
A Dividend
A creditors share and proceeds from Liquidation of the debtors assets. this is not a corporate dividend, it just uses the same word.
137
True or False: Before any creditor can receive a dividend that creditor must prove its claim.
True
138
True or False: Even upon bankruptcy and discharge of said bankruptcy the bankruptcy debt is not released.
False: Upon discharge, most of the bankrupt debts are released, but some debts are not dischargeable.
139
What kind of debts are not dischargeable?
Student loans, child or spouse support care.
140
Void Settlement
Certain transactions can be declared void by the bankruptcy court, such as the transfer of debtors assets at an undervalue made within one year prior to bankruptcy.
141
Void Preferences
Only transfer of assets from debt or to a creditor within 3 months of bankruptcy where the sole purpose of the transfer was to prefer that creditor over other creditors.
142
That happens if it is a corporation that goes bankrupt and not a person?
They are not discharged, but instead dissolved.
143
What is a proposal under the BIA?
It is an alternative to bankruptcy where the debtor makes an offer to creditors regarding outstanding debt, this requires both the creditors and court approval and are typically filed by the debtor with the official receiver.
144
When there is a proposal is a trustee appointed?
A trustee is still appointed to monitor the process for creditors benefits.
145
What does the CCAA focus on?
Maximizing returns for creditors, protection of wider stakeholder interest, and debtor rehabilitation.
146
If a corporation enters CCAA restructuring proceedings what happens to the business and its assets?
Its assets do not vest in a trustee and business carries on.
147
What is the point of proceeding using the CCAA
To restructure the corporation rather than go bankrupt immediately.
148
Are CCAA proceedings available to all companies?
No, they are not available to smaller corporations, only available to large corporations.
149
What are the possible outcomes of CCAA?
- During this day of proceedings solvency is restored and CCAA proceedings determinate
- The debtors plan is accepted by creditors and a restructured company emerges
- Or the debtors plan is not accepted by creditors and the company goes into bankruptcy under BIA
150
True or false: If CCAA proceedings fail BIA kicks in immediately.
True, you are then bankrupt.
151
What are some special forms of insolvency?
Arrangements under the CBCA, farm debt mediation act, Canada transportation act, winding-up and restructuring act.
