Submitted by UCS on August 28, 2014

Independent Directors and Special Purpose Entities

Christine Inzana, one of our Client Service Representatives in New York City, answers some questions about Independent Directors and Special Purpose Entities.

What is a Special Purpose Entity?  In many large business transactions such as asset securitizations, joint ventures and commercial real estate transactions the lender may require the borrower to hold their assets in a bankruptcy remote single purpose/special purpose entity (“SPE”).  The lender wants to make sure that the company’s assets are protected from the parent company suddenly declaring bankruptcy.   These SPEs hold the assets and for additional protection appoint an independent director/manager.

What is an Independent Director?  The independent director has no ties or interest to the parent company.  Their voting powers can prevent the board or shareholders from making voluntary bankruptcy petitions thereby protecting the assets from bankruptcy.

It is important when appointing an independent director that they fully understand the complexities of both corporate governance as well as bankruptcy procedures.  In the highly competitive space of asset financing and commercial real estate lending, it is imperative that the independent director discharges their fiduciary duties with care and full understanding.  Any mistake or misconduct of the independent director can put the company and its board at risk for lawsuits and/or prolong the company’s reorganization should a bankruptcy occur.

How long is the Independent Director active in the entity?  The length of time an independent director is to remain active is really on a case by case basis.  Generally the independent director is appointed for the life of the SPE.  The SPE remains an active entity for as long as it is needed based upon the parameters of the transaction in which it was formed for.

How do I find an Independent Director for my entity? Lenders may turn to a service company to provide an independent director.   In most cases the service company is truly independent and has no direct ties to banks, law firms or rating agencies.

To learn more or to inquire if your project requires the formation of a Special Purpose Entity and/or an independent director, Please contact us or call 800-899-8648 to speak with a Client Service Representative.