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Indiana Suit of National Importance



An Indianapolis law firm reports that the Indiana Supreme Court is currently considering a case that could greatly impact directors who sit on corporate boards.

In September 2006, an Indiana appeals court affirmed a trial court judgment assessing personal liability upon a Toronto resident, Ralph Lean, who served as an outside director of a Canadian company. Mr. Lean, at his very first board meeting, was asked to approve management�s proposal that the company acquire a private Indiana company by a stock-for-stock exchange; the acquisition closed three days after the board meeting. When their investment in the Canadian company soured, the Indiana shareholders alleged that the securities were �sold� by the Canadian company in violation of registration requirements of Indiana securities laws, and that the Canadian company had not disclosed certain information that was material in violation of disclosure requirements of the Indiana securities law. Mr. Lean contended that outside directors typically assume that management, legal counsel, and the due diligence process have taken care of any issues regarding securities compliance.

The intermediate appellate court would have none of this. It held that the Indiana statute (which is similar to many other states' statutes) permits an outside director to avoid personal liability for company violations of the registration and disclosure requirements of the Indiana securities law only if he or she can show that reasonable care was taken. By Mr. Lean�s own admission, a single question to other directors would have provided Lean with salient knowledge about the transaction -- so the appeals court saw negligence as a matter of law.

 

 


Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Katherine Lazarski
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.