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Closely Held Business - Loans to Directors, Officers or Employees

By Scott I. Unger

New Jersey law permits loans to directors, officers or employees only if a benefit to the corporation can be reasonably expected. That section also requires the approval of the board of directors. Based upon the statutory language and the general duties of care and loyalty which applies to members of the board of directors they may only approve these loans if there is reasonably expected to be a benefit to the corporation.  The members of the board who are seeking the loan should be cognizant of potential conflicts of interest which could subject themselves to a breach of fiduciary duty or minority oppression claims.  If possible, they should abstain from voting on issues which directly effect them. 

There may be times when a majority shareholder enters into an unfavorable loan or lease agreement which negatively impacts the minority shareholder. New Jersey courts have established law for when such loans and lease agreements are biased against the minority shareholder and unenforceable.

Full post as published by New Jersey Law Blog on June 29, 2010 (boomark / email).