Australian, New Zealand, and other foreign listed companies with securities traded on US exchanges are now allowed to apply loan-based share plans

One of the peculiarities of the US Sarbanes-Oxley Act (SOX) is that it does not allow loan-based executive share plans for companies with securities traded in the US. This includes Australian and New Zealand (as well as other foreign) companies with ADRs traded on the NYSE.

Congress enacted SOX in response to corporate accounting scandals of the time, including Enron and WorldCom. Section 402 was included to combat a particular abuse in which senior officers used corporate funds to make outsized personal loans to themselves, usually on preferential terms. However, the Securities and Exchange Commission (SEC) staff have never provided interpretive guidance on it.

Since SOX came into effect, companies have been concerned that the SEC would take the position that any type of loan extended to executives in which the company had any involvement whatsoever, regardless of its nature, would be prohibited under Section 402.

However, on 4 March 2013 the SEC’s Division of Corporate Finance issued new guidance allowing public companies to provide equity-based financing to employees through a program involving loans without violating Sarbanes-Oxley.

There is a catch for Australian and NZ companies used to providing the loans directly. The guidance addresses how corporate directors and officers can participate in a new compensation program using loans only from a third-party source.

The new guidance on SOX 402 was provided in relation to a case in which an equity-based incentive compensation (EBIC) program contemplated that participating employees would receive company stock as incentive compensation, and transfer those shares to an independently managed Delaware statutory trust thereafter. The trust would then obtain term loans from an independent banking institution, using some or all of the shares transferred to the trust as collateral.


An issuer allowing its employees to participate in the EBIC program would not be extending or maintaining credit, or arranging for the extension of credit, in the form of a personal loan to employees subject to SOX 402. However, a company would need to perform certain administrative tasks in order to allow its employees to participate in the EBIC program, and would be prohibited from encouraging or discouraging employee participation, from directly or indirectly making or guaranteeing the loans and from providing any extension of credit or other financial support to the trust, its trustee, or trust beneficiaries (the employees).

See the SEC’s new guidance on this matter HERE

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