These Loans Can Be Problematical Even When The Borrower Isn't An Officer or Director

I spent most of last week discussing California Corporations Code Section 315.  As a reminder, that statute prohibits a corporation (Section 162) from making a loan of money or property to, or guaranteeing the obligation of, an officer or director without specified shareholder approval. Section 315, however, isn't concerned only with loans to officers and directors.  In fact, it proscribes one category of loans regardless of whether the borrower is an officer or a director

Under Section 315(c), a corporation may not make any loan of money or property to, or guarantee the obligation of, any person upon the security of shares of the corporation or of its parent if the corporation’s recourse in the event of default is limited to the security for the loan or guaranty, unless the loan or guaranty is adequately secured without considering these shares, or the loan or guaranty is approved by a majority of the shareholders entitled to act thereon.

Section 315(c) does not apply to any of the following:

  • Any transaction, plan, or agreement permitted under Section 408.
  • Any depository institution, as defined in Section 202 of the Depository Institutions Management Interlocks Act (12 U.S.C. Sec. 3201).
  • Any loan or guaranty made by a corporation that makes loans or guaranties 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 the undertaking of guaranties of the obligations of its officers or directors.

Cal. Corp. Code § 315(f).  However, the fact that the corporation has 100 or more shareholders and a shareholder approved bylaw authorizing the board to make loans is no excuse because the exception in Section 315(b) applies only to the ban on loans to officers and directors found in Section 315(a).