Does the Sarbanes-Oxley Act Bar Corporations from Advancing Defense Costs?
Another corporate governance change contained in the Sarbanes-Oxley Act is Section 402(a), which prohibits issuers from making “personal loans” to directors and officers. Although there is little legislative history concerning this provision, it probably was intended to address the $400 million loan made by WorldCom to its CEO, Bernard Ebbers. However, an unintended consequence of this provision is that an issuer may not be allowed to advance defense fees to its directors and officers, thereby compelling them to seek coverage under the A-Side of the D&O Policy. Section 402 (a) adds a new ยง 13(k) to the Securities Exchange Act of 1934, which makes it “unlawful” for an issuer, directly or indirectly, “to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or executive officer (or equivalent thereof) of that issuer.” The Act does not define “personal loan.” The only exemption in the Ac
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- Does the Sarbanes-Oxley Act Bar Corporations from Advancing Defense Costs?
