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Understanding the Role of Independent Directors in Corporate Governance

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Posted on by Kacy Flowers


What is an Independent Director?

Independent Directors serve on boards of special purpose entities (SPEs) or other business entities to safeguard assets. The primary responsibility of an Independent Director is to prevent otherwise solvent SPEs from seeking bankruptcy protection, particularly in instances when a parent entity becomes insolvent.

Additional duties involve other “Material Actions” as outlined in the governing document (e.g. LLC Agreement, Certificate of Incorporation, Bylaws). The most common “Material Actions” requiring Independent Director consent occur if the SPE intends to dissolve, liquidate, consolidate, merge or sell all of the assets of the entity, or if the company wishes to amend its governing document.

When and Why is an Independent Director Needed?

SPEs are commonly employed by lenders to protect their loan collateral from becoming subject to the risks of a voluntary bankruptcy. Part of the SPE structure involves appointing an Independent Director.

A lender will typically require the use of an Independent Director when the transaction or loan amount exceeds $15M and the deal falls into one of three transaction types: a property specific or large loan transaction, a pool transaction/securitization or a credit lease transaction.

How Does a Special Purpose Entity Work?

Also known as “bankruptcy remote” entities, SPEs have covenants and requirements in place, including the appointment of Independent Directors, that protect the underlying SPE’s assets. The SPE is also restricted in its ability to incur debt, dissolve or file for bankruptcy.

To maintain the bankruptcy remoteness, secured creditors look to the Independent Director as the objective vote to prevent otherwise solvent SPE’s from seeking bankruptcy protection if the parent entity become insolvent.

Special Purpose Entity is not the only term used for a bankruptcy remote entity. Depending on the jurisdiction they can also go by Special purpose Vehicle (SPV) or Financial Vehicle Corporation (FVC). Any of these types of entities are likely
to require an Independent Director as part of their covenants.

CLAS Information Services can help! Through our business partner network, CLAS provides Independent Director services for all your SPE needs. To learn more about our service offerings, contact CLAS today at 800.952.5696 or connect@clasinfo.com.Or, simply click on Contact CLAS below.

Contact CLAS

For informational purposes only; content does not constitute legal advice.
Adapted from a transcript of a 2016 interview with Vic Duva of CT Corporation.

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