By Ronald O. Mueller, Brian J. Jane, Amy Goodman and Stanton P. Eigenbrodt
Originally published October 15, 2002
Since the passage of the Sarbanes-Oxley Act at the end of July, companies and their counsel have been considering the implications and possible scope of Section 402 of the Act, which generally prohibits public companies from extending credit in the form of a personal loan to any executive officer or director. Section 402 contains substantial ambiguities, is the subject of only limited legislative history and has not been the subject of any official guidance. In particular, the Act does not mandate the SEC to adopt rules implementing or clarifying Section 402 and it appears that the SEC will not in the near future provide guidance on many of the issues arising under Section 402.
On October 15, Gibson Dunn and twenty-four other law firms released a consensus outline which sets forth the law firms' views as to a number of activities that should be considered "permissible" under Section 402, in the absence of contrary official guidance. A copy of the consensus outline is attached (PDF). The consensus outline reflects the views of firms that have engaged in careful analysis as to what the better conclusion is on the applicability of Section 402 to the situations it addresses. No adverse inference is intended as to situations that are not addressed in the outline.
The outline lists some of the factors that were considered in support of each conclusion, although each firm that joined in issuing the outline does not necessarily concur in all aspects of these analyses or give all aspects of the analyses equal weight. In addition, the outline reflects that some factual situations are less certain than others. Because the outline is intended to set forth guiding principles and not to provide legal advice on any particular fact pattern, companies should continue to consult counsel as to the applicable analysis, risks and alternatives available for particular situations. It also is important to note that the consensus outline does not mean that any of the situations addressed is free from risk under 402, since the SEC could always provide guidance -- either through rulemaking, no-action interpretation or enforcement actions -- that takes a contrary position.
Finally, it should be noted that a number of the situations addressed in the consensus outline continue to involve sensitive policy issues. One such area is the issue of "cashless" option exercises. We believe that, when evaluated in light of the actual mechanics involved and the abuses that lead to Section 402, many cashless exercise arrangements should not be viewed as involving a prohibited extension of credit by either the company or the brokerage firm. These programs also should not be seen as inconsistent with the spirit of the Act, since they were often implemented (and at times even mandated) by companies for their executives and non-executives alike, not to provide credit, but to simplify or outsource option plan administration. Nevertheless, while we hope that the consensus outline will be a helpful reference for analysis of the issues that arise under Section 402, we also understand that some companies may wish to continue to evaluate whether alternative approaches are available for various arrangements to avoid Section 402 issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Copyright © 2002 Gibson, Dunn & Crutcher LLP
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