Companies forgive huge loans to execs
NEW YORK » Corporate loans to executives may seem like relics, remnants of the go-go years when executives such as WorldCom Corp.'s Bernie Ebbers and Tyco International Ltd.'s Dennis Kozlowski treated corporate coffers as personal piggy banks.
But the loans haven't gone away. In fact, a handful of companies with shaky finances forgave millions of dollars in loans to their executives in recent years.
Corporate reform law Sarbanes-Oxley made new loans by a company to its executives illegal. But loans made before the law went into effect July 30, 2002, were allowed to stand. The existing loan agreements cannot be modified in a "material" way, even if the modification benefits the company.
Does forgiving a loan entirely count as a material modification? That "is and has been an open and debatable issue, one of the things lawyers scratch their heads about," said Bryn Vaaler, a partner in the corporate group of the Minneapolis office of the law firm Dorsey & Whitney LLP.
There's no case law to settle the matter, so companies continue to forgive loans to their executives. For instance:
» Silicon Graphics Inc., a technology company that has lost money for each of the past five years, in 2005 forgave $5.3 million owed by Warren C. Pratt, its chief operating officer and executive vice president. The amount the company forgave included the loan, income on imputed interest and company reimbursements of Pratt's taxes in connection to the loan, according to the company's proxy.
The loan was forgiven despite the fact that the company didn't have enough cash at the end of 2005 to support operations, so it had to find new lines of credit, according to a quarterly report. Its stock was delisted from the New York Stock Exchange in January when it failed to meet the exchange's minimum price requirement and now trades over-the-counter.
» Money-losing Wave Systems Corp., which makes digital distribution software, made a $250,000 loan in March 2001 to Gerard T. Feeney, its chief financial officer. The loan was originally due in March 2002, but was extended one year. In March 2003, the board's compensation committee approved a bonus in an amount equal to Feeney's debt and accrued interest. Feeney then repaid the loan.
"The factors used in granting this bonus were the amount of the loan, the ability to repay the loan and the impact that non-repayment of the loan would have on Mr. Feeney's abilities to fulfill his duties for the Company," according to Wave Systems' proxy.
Company spokesman David Collins said, "The company had two options, since he was unable to repay the loan immediately: To either demand his resignation and find a new CFO, or address the loan issue and enable him to serve the company."
He added, "Mr. Feeney's subsequent bonuses have been substantially reduced, taking into account the bonus he received to address the loan outstanding."