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CALIFORNIA CORPORATE & SECURITIES LAW

California’s Ban On Loans To Directors And Officers

California banned loans to directors and officers decades before Congress thought of doing so as part of the Sarbanes-Oxley Act of 2002.  Current Corporations Code Section 315 prohibits corporations (defined in Section 162) from making loans of money or property to, or guaranteeing the obligations of, any director or officer of the corporation or its parent.  However, the ban does not apply:

  • If a majority of the shareholders “entitled to act thereon” approve the transaction or an employee benefit plan authorizing the loan or guarantee after disclosure of the right to include directors and officers under the plan (See Section 315(g) regarding the meaning of “entitled to act thereon”).
  • If the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 305) on the date of approval by the board and the corporation has a bylaw approved by the outstanding shares (see Section 152) authorizing the board alone to approve loans or guarantees to an officer, whether or not a director, or an employee benefit plan authorizing such loan or guaranty to an officer.  In this case, the board alone by a vote sufficient without counting the vote of any interested director(s) if the board determines that the loan or guarantee may reasonably be expected to benefit the corporation.
  • To a transaction, plan or agreement permitted by Section 408 of the Corporations Code.
  • To any depository institution (as defined in Section 202 of the Depository Institutions Management Interlocks Act (12 U.S.C. § 3201)).
  • Any loan or guaranty made by a corporation that makes loans or guarantees in the ordinary course of its business if statutes or regulations pertaining to the corporation expressly regulate the making by the corporation of loans to its officers or directors or guarantees of the obligations of officers or directors.

Section 315 also permits advances of money to a director or officer for any expenses reasonably anticipated to be incurred in the performance of his or her duties, provided that in the absence of the advance the director or officer would be entitled to reimbursement.  Finally, the ban does not extend to payments of insurance premiums on the life of the director or officer as long as repayment to the corporation of the amount paid is secured by the proceeds of the policy and its cash surrender value.

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