What CSC1 Questions and Answers feature?

Atakeover bidis an offer made by an acquirer to purchase a significant portion of a company’s voting securities, typically to gain control. Canadian securities regulations require specific steps and conditions to be met during a formal takeover bid.

Key Requirement:

Once a formal bid is made and before the bid's expiry:

If the bid is successful and securities have been tendered,the acquirer must make payment for all the acquired shares as per the terms of the bid. This is a legal requirement under Canadian takeover rules, ensuring that tendering shareholders receive their compensation promptly.

Review of Other Options:

A. At least 20% of the target's outstanding preferred shares must be tendered to the bid.

Incorrect. There is no specific regulatory requirement for a percentage of preferred shares to be tendered in a takeover bid.

B. At least 25% of the target's outstanding voting shares must be tendered to the bid.

Incorrect. Canadian regulations do not require a minimum percentage of voting shares tendered for a bid to proceed. However, the acquirer may set conditions for the bid, such as acquiring a specific percentage of shares to gain control.

D. A press release must be issued by every investor acquiring 6% or more of the securities to the bid.

Incorrect. While certain thresholds (e.g., 10%) may trigger disclosure requirements under early warning rules, this does not apply universally to all participants in the bid or relate specifically to the takeover bid process.

Why C is Correct:

Canadian securities laws mandate that all tendered shares must be paid for once the bid's conditions are satisfied or waived, and the bid has expired. This ensures transparency and fairness to shareholders who tender their shares during the bid process.

References:

Canadian Securities Course (CSC), Volume 1, Chapter 9: Equity Transactions. Explanation of the takeover bid process and payment requirements​.

National Instrument 62-104: Takeover Bids and Issuer Bids. Requirements for payment and timing in a takeover bid.

The ranking of securities in terms of security is determined by the collateral backing each type of instrument and the priority of claims in the event of default. The correct order is as follows:

Equipment Trust Certificates: These are backed by specific physical assets, such as equipment or machinery. The certificate holders have a direct claim on these assets, making them the most secure.

First Mortgage Bonds: These are secured by the corporation's real estate assets. They represent a claim on the property, ensuring a high level of security, but less secure than equipment trust certificates as real estate may fluctuate in value or face delays in liquidation.

Commercial Paper: This is unsecured short-term debt issued by corporations. As it lacks collateral, it is the least secure of the three securities. Investors rely on the issuing corporation's creditworthiness and financial stability.

The distinction in security levels reflects the degree of collateralization and claim priority, ensuring investors are compensated for the relative risk levels​​.

Using Moody’s long-term rating scale,Caais assigned to obligations that are speculative and subject to very high credit risk. This rating indicates that the issuer is highly vulnerable to adverse conditions, though it has not yet defaulted.

C (Option A):Indicates obligations that are in default.

B (Option B):Reflects obligations with speculative elements and higher risk than investment-grade ratings.

Ba (Option C):Denotes speculative-grade credit but with lower risk compared to Caa.