Corporate law is generally a function of state law. While the Federal Government has the power to trump state corporate law, it has historically refrained from intruding upon internal corporate affairs unless the issue rose to a level of national importance. In the rare instances where national corporate governance legislation has been enacted, Congress did so only after extensive hearings and debate. For over two hundred years, states had sole authority to determine whether corporations could make loans to their executives.
State views on the propriety of executive loans have evolved over time. Early state law strictly prohibited companies from lending money to officers and directors unless the company was in the business of making loans. Beginning in the 1930s, however, a majority of states enacted laws permitting loans to executives. Though some states imposed significant restrictions, the majority granted boards wide discretion to make loans, provided the loans benefited the company. . . .