"Due diligence out" is a phrase that describes a condition precedent which allows a party to not complete a transaction if its due diligence review has not been completed with satisfactory results before the closing date of the transaction.
In the context of a financing transaction, this provision, typically described in both the engagement letter and the definitive agreement between the issuer and the dealer, provides the dealer with the ability to walk away from the deal if its due diligence investigations of the issuer are not completed to its satisfaction.
Recently, the Canadian Securities Administrators made amendments to the prospectus marketing and pre-marketing regimes in Canada where they clarified that due diligence out clauses should not be used by underwriters in "bought deals" in a way so as to defeat the policy rationale of the bought deal exemption. They suggest that where underwriters are not willing or able to conduct sufficient due diligence in advance of proposing a bought deal to an issuer, the underwriters may want to consider proposing a fully marketed offering to the issuer, rather than a bought deal.
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