Corporate Gatekeeper Liability in Canada

I. INTRODUCTION A series of significant reforms with respect to the legal treatment of corporate gatekeepers have taken place over the last five years in a number of countries around the world. This article serves as a taking-stock exercise of the current liability regime in Canada, supplemented by an examination of the options for dealing with corporate gatekeepers presented in other jurisdictions, most notably the United States and the United Kingdom. The two primary forms of liability in the Canadian system are civil through both common law and statutes, and administrative found in various regulatory regimes for the different types of gatekeepers. There is also the possibility of criminal or quasicriminal liability for many gatekeepers. This article suggests that the polycentric system in which there are multiple sources of liability for gatekeepers is effective in a Canadian context. While there is an international trend towards increased streamlined government regulation of gatekeepers, as demonstrated in the U.S. and U.K., it is not a system that should be adopted by Canada. Ultimately, though the Canadian system is imperfect, this article concludes that the current Canadian regime is best suited to provide gatekeepers with guidance and incentives to perform their gatekeeping function while facilitating the competitiveness of Canadian capital markets. The key challenges with the current model center on the legitimacy and independence of the sources of liability. For the purpose of this article, corporate gatekeepers are defined as third parties who can disrupt misconduct by withholding support. The categories of corporate considered in this article are directors, lawyers, auditors, underwriters, credit rating agencies (CRAs), financial analysts, and retail investment advisors (RIAs). In this article, liability includes civil, administrative, and criminal sanctions that can be imposed on gatekeepers who fail to withhold support. This includes rules that can be enforced by public regulators and also rules that can be enforced by private parties like investors. The sources of law reviewed are statute (corporate and securities), common law, self-regulatory organizations' (SROs) rules, and rules of professional conduct set by industry bodies. The focus of this article is on gatekeepers of public companies. Part II provides a theoretical framework of corporate through a survey of previous academic writing on the subject. For example, the works of Reinier Kraakman and John C. Coffee Jr. are considered in this section. Part III examines the sources of corporate liability at common law in Canada, including civil statutory and other regulatory regimes such as those put into place by provincial law societies. In Part IV, the author deals with each category of separately and suggests reforms to improve the Canadian system. A comparison with the United States and United Kingdom informs this analysis. Part V concludes. II. CORPORATE GATEKEEPER LIABILITY THEORY In the 1980s, Reinier Kraakman published two articles that expanded on the concept of gatekeeper liability, which he defined as liability imposed on private parties who are able to disrupt misconduct by withholding their support from wrongdoers.1 This support-which might include a specialized good, service, or form of certification that is essential for a wrongdoer to succeed-is the 'gate' that the keeps.2 True liability is designed to enlist the support of outside participants in the firm when controlling managers commit offences; the first requisite for liability is an outsider who can influence controlling managers to forgo offences.3 As outsiders to the firm, these professionals are less likely to risk their reputations over fraudulent or suspicious transactions. Kraakman identified outside directors, accountants, lawyers, and underwriters as potential targets for liability strategies: they each have access to information about firm misconduct, they already perform a private monitoring service on behalf of the capital markets, and they face incentives that differ from those of managers (that is, they are likely to have less to gain and more to lose from firm misconduct than inside managers). …

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