Underwriters have been long recognized as important gatekeepers
to capital markets. In order to responsibly sign a prospectus and
establish a statutory due diligence defence, underwriters must
conduct a reasonable investigation that provides reasonable grounds
for a belief that there has been no misrepresentation.
But what is a reasonable investigation? With this proposed
guidance, IIROC has re-confirmed its view that due diligence
practices should reflect the gatekeeper role of underwriters, which
includes protecting investors, fostering fair and efficient capital
markets and creating and maintaining confidence in capital
IIROC acknowledges that due diligence practices must necessarily
be customized to the circumstances – the issuer, the industry
and the type of security. Notwithstanding the need for flexibility,
the proposed guidance outlines key principles that should govern
the performance of due diligence, including:
Adoption of written policies and procedures that acknowledge
that what constitutes "reasonable" due diligence is
Effective oversight of all aspects of the underwriting
A due diligence plan tailored to the circumstances of the
offering that reflects a reasonable level of diligence;
Business due diligence by the investment dealer sufficient to
understand the key internal and external factors affecting the
Clarity as to the boundary between business due diligence and
legal due diligence, to ensure that only appropriate matters are
delegated to underwriters' counsel; and
Documentation of the due diligence process to demonstrate
compliance with policies and procedures, IIROC requirements and
applicable securities laws.
In requesting comments on the proposed guidelines by June 4,
2014, IIROC poses some specific questions on which it is seeking
guidance. They include:
Are there other considerations unique to specific types of
public offerings, such as "bought deals" or debt
offerings, or public offerings by issuers in specific types of
industries (e.g., mining, oil and gas, technology)?
Are there other circumstances that constitute "red
flags" indicating that heightened due diligence and/or
enhanced disclosure may be appropriate (for example, offerings by
emerging market issuers)?
IIROC has emphasized that it is not seeking to establish a
standard of what constitutes reasonable due diligence, create new
legal obligations or modify existing ones. It also makes clear that
the proposed guidance is not intended to create a "form over
substance" model that would detract from the exercise of
In our view, the proposed guidelines represent both risks and
opportunities for the investment dealer community. A potential risk
for dealers is that a written set of guidelines may form the first
line of inquiry for plaintiffs' lawyers in a misrepresentation
action. Any deviation from the key principles of the proposed
guidelines would have to be justified with reference to the
particular circumstances and the professional judgment of the
dealer. Another risk is the need to avoid inadvertent
non-compliance with the procedural aspects of the proposed
guidance, particularly with regard to documenting the
implementation of the due diligence plan for a particular
However, the proposed guidelines, which include appendices that
helpfully set out a "Summary of Common Practices and
Suggestions" and "Matters to be Considered in Preparing a
Due Diligence Plan", may have a number of beneficial effects.
Investment dealers will have a new framework for evaluating their
due diligence practices and best practices may become more
consistently defined. As IIROC suggests, this would serve broader
capital markets objectives.
The principal challenge is likely to be how the due diligence
practices in the proposed guidance are applied contextually. The
business, market and timing considerations of executing a public
offering are vastly different depending on the circumstances, which
range from an initial public offering to a "jump ball"
overnight offering. This challenge is recognized by IIROC in the
proposed guidelines and the specific questions they have posed.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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