Lanza v. Drexel & Company: Rule 10b-5 and the Outside Director

In Lanza v. Drexel & Company, the United States Court of Appeals for the Second Circuit, over two vigorous dissents, held that a corporate director was not liable for negligence when he neither participated in stock transfer negotiations nor had knowledge of material misrepresentations and omissions made in those negotiations. The court rejected the proposition that rule 10b-5 imposed liability on nonparticipating directors for the negligent failure to communicate material adverse information to prospective purchasers. The analysis used in Lanza raises still further questions about the implications of rule 10b-5 and its relationship to section 11 of the 1933 Securities Act. Implicit in the court's opinion is the notion that rule 10b-5, in private suits, cannot be used to impose liability for negligent misrepresentations. This Note examines these questions and the policy considerations of a negligence standard in rule 10b-5.