Submitted by UCS on April 30, 2018

Independent Directors and Special Purpose Entities

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.  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.

In many cases lenders will 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.

If your next transaction requires the appointment of an independent director then please contact your United Corporate Service Customer Service representative and they will be happy to assist you.

Read more on Independent Directors from Wikipedia.

Read more on Special Purpose Entities from Wikipedia.

This material is intended for general information purposes only. It does not constitute legal advice. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific facts and situations. This material is based on the most current information at the time it was written. Since it is possible that the laws or other circumstances may have changed since publication, please contact an attorney to discuss any action you may be considering as a result of reading this publication.