Can a corporation lend money to its directors and/or officers? | Incorporation Attorneys (2024)

A corporation can lend money to its shareholders if the loan is made on market terms. See Loans to Shareholders Must Be Made on Market Terms. But a corporation cannot loan money or property to, or guarantee the obligation of, any of the corporation’s, or its parent’s, directors or officers, unless the transaction is approved by a majority of the corporation’s shareholders entitled to act on the transaction. Cal. Corp. Code § 315(a). A director or officer who is also a shareholder but who is eligible to participate in the transaction in question is not entitled to act on it. There is an exception to the shareholder-approval requirement if a corporation has at least 100 shareholders and its bylaws authorize the directors to approve a loan or guaranty to an officer, whether or not she is also a director. In that case, the loan or guaranty may be approved by the board, excluding any interested directors, without the approval of the shareholders, if the board determines that the loan or guaranty may reasonably be expected to benefit the corporation. Cal. Corp. Code § 315(b). There is a disincentive for disinterested directors to rubber stamp loans or guaranties to their fellow directors in that directors who approve a transaction contrary to these requirements are jointly and severally liable to the corporation for the benefit of its creditors or shareholders, who may bring suit to enforce the directors’ liability. Cal. Corp. Code § 316(a)(1).