What is required for loans to directors?

• A. They must be approved by a shareholder vote
• B. They may be approved by the board with a quorum that excludes the benefited directors
• C. They must be approved by the board without a shareholder vote
• D. They are prohibited.

Answer: (A)

Lending to a director creates a related-party transaction and raises self-dealing concerns. To protect the corporation and its shareholders, New York corporate law treats such loans as transactions that require broader oversight, specifically approval by the shareholders. This gives the ownership a voice in the decision and helps ensure the terms are fair and disclosed. A board alone cannot satisfy that protective requirement in this context, even if the directors who would benefit are excluded from the vote. Prohibition isn’t the rule here because when properly approved, a loan to a director is permitted; and allowing only board approval would undermine the safeguards against conflicts of interest. Hence, shareholder approval is required.