AN OUTSIDE DIRECTOR'S IGNORANCE IS NOT BLISS UNDER STATE SECURITIES LAWS

Serving a Company, Private or Public, That Sells Securities May be Hazardous to Your Financial Health

On September 19, 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 the registration requirements of the Indiana securities law, and that the Canadian company had not disclosed certain information that was material in violation of disclosure requirements of the Indiana securities law. The trial court, granting summary judgment to the Indiana stockholders without holding a trial, held Mr. Lean personally liable for the corporation's violations, even though he had no participation in the transactions other than as an outside director, because he admitted that he did not inquire at the board meeting about Indiana securities law compliance. Learn more.