Can a company loan to a director or provide security for such a loan?

• A. Never allowed.
• B. Yes, freely.
• C. Not directly or indirectly without members' approval; loan must be less than 5% of net assets.
• D. Yes, if the director is also a shareholder.

Answer: (C)

This item tests how related-party lending to a director is governed. A director’s loan or providing security for such a loan creates a potential conflict of interest and could affect the company’s decisions or minority shareholders, so it isn’t something a company can do without oversight. The rules require the members (shareholders) to approve any loan to a director or any security given for that loan. In addition, there’s a quantitative safeguard: the amount involved should be limited to less than 5% of the company’s net assets. If the loan or the security would exceed that threshold, it typically isn’t permissible without a members’ approval. Even if the director is also a shareholder, the transaction still requires shareholders’ approval and the same limit applies.