The due diligence defence provides protection for individuals involved in the creation of a securities registration statement against fraud claims. This defence asserts that if they conducted sufficient investigation and did not discover any issues, they should not be held accountable for any misrepresentations in the statement. The defence is applicable to underwriters, officers, directors of the issuer, and experts who assisted in preparing the statement. The criteria for meeting the defence vary depending on whether the person is an expert or non-expert and whether the misrepresented section of the statement was prepared by an expert or not. Non-experts are required to reasonably investigate the non-expert areas of the statement and have no reason to believe the misrepresentation is false. Experts have a duty to investigate their specialized areas and must reasonably believe that the statement is accurate.
The due diligence defence is a legal defence used to counter claims of securities fraud under Section 11 of the Securities Act. It argues that parties involved in creating a registration statement should not be held responsible for misrepresentations if they conducted a thorough investigation. Section 11 holds issuers, underwriters, officers and directors of the issuer, and experts who assisted in preparing the registration statement liable for securities fraud if a misrepresentation is found. However, the due diligence defence is not available for issuers, as they are strictly liable. For other parties, the availability of the defence depends on their classification as experts or non-experts, as well as whether the misrepresented part of the registration statement was prepared by experts or not. While Section 11 does not explicitly define who is considered an expert or non-expert, it generally categorises top executive officers, underwriters, and outside directors of the issuer with a specific role in the offering as non-experts. On the other hand, experts are individuals who provided professional authority to a statement in the registration statement, such as auditors, lawyers, engineers, or appraisers. The standard that individuals must meet to successfully invoke the due diligence defence varies based on their expert status and the expertise status of the registration statement. For non-experts, the standard for non-expertised portions is to reasonably investigate those portions and have reasonable grounds to believe and actually believe the misrepresentation. For expertised portions, non-experts must have no reasonable grounds to believe the portion was untrue and not actually believe it was untrue. Experts, on the other hand, have a duty of reasonable investigation in their expertised portions and must have reasonable grounds to believe and actually believe the statement. They have no liability for non-expertised portions. For example, if an underwriter conducts a reasonable investigation of the non-expertised portion of the registration statement that includes financial projections and believes it to be true, but the financial projections turn out to be inaccurate, the underwriter can use the due diligence defence because they met the standard for non-experts’ investigation of non-expertised portions.
The Due Diligence Defense is a legal defence that can be used in cases where a defendant is accused of violating a law or regulation, but can prove that they took reasonable steps to prevent the violation from occurring.
The Due Diligence Defense can be used in a variety of cases, including environmental law violations, securities fraud, and workplace safety violations.
To prove the Due Diligence Defense, a defendant must show that they took reasonable steps to prevent the violation from occurring, such as conducting thorough investigations, implementing policies and procedures, and providing training to employees.
Yes, the Due Diligence Defense can be used in criminal cases, but it is typically more difficult to prove in criminal cases than in civil cases.
Yes, a company can use the Due Diligence Defense if an employee violates a law or regulation, but the company must show that it took reasonable steps to prevent the violation from occurring and that the employee acted outside of the company’s policies and procedures.
Yes, the Due Diligence Defense can still be used if a violation occurs despite the defendant’s efforts to prevent it, as long as the defendant can show that they took reasonable steps to prevent the violation and that the violation was unforeseeable.
No, the Due Diligence Defense cannot be used if the defendant was aware of the violation but did not take action to prevent it.
No, the Due Diligence Defense cannot be used if the defendant was negligent in their actions, as the defence requires that the defendant took reasonable steps to prevent the violation.
No, the Due Diligence Defense cannot be used if the defendant was not aware of the law or regulation they violated, as the defence requires that the defendant took reasonable steps to prevent the violation.
No, the Due Diligence Defense cannot be used if the defendant’s actions were intentional, as the defence requires that the defendant took reasonable steps to prevent the violation.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 27th April 2024.
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