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ComplianceMay 20, 2022

The role of independent directors and managers in large financing transactions

Lawyers who work on structured finance, credit, real estate, securitization, and other large financing transactions are often called upon to form special purpose vehicles that have one or more independent directors or managers on their boards.

This article will discuss the role of the independent director or manager in sophisticated financing transactions. It will also discuss what lawyers should look for when advising their clients on who they should choose as their independent director or manager.

Why lenders require special purpose vehicles

A special purpose vehicle (SPV) — which is also referred to as a special purpose entity (SPE) — in general, is a subsidiary entity (in most cases a corporation or LLC) that is formed for a specific, limited purpose.

In the case of large financing transactions, lenders require an SPV to be formed for the specific purpose of owning the assets that are securing the loan. This kind of SPV is also referred to as a “bankruptcy remote entity” because by removing the assets from the borrower and placing them in a separate entity, it protects the assets in case the borrower files for bankruptcy.

However, lenders will not only want protection from the borrower filing for the bankruptcy, they will want protection from the SPV filing for bankruptcy as well. That’s where the independent director or manager comes in.

Drafting bankruptcy protections in the governing document

An SPV cannot be made “bankruptcy proof” as it cannot be prohibited from asserting its right to file for bankruptcy.

However, the governing documents can contain certain provisions designed to reduce the likelihood that the SPV will become insolvent or will file a petition for bankruptcy. For example, the certificate of incorporation or bylaws of a corporate SPV or the operating agreement of an LLC SPV may include clauses restricting the SPV’s activities and prohibiting it from incurring debts.

The governing documents will also require a unanimous vote or consent of the SPV’s directors (if it is a corporation) or managers (if it is an LLC) to file for bankruptcy. A unanimous vote or consent will also often be required to approve certain other material actions that put the assets at risk, such as dissolution, merger, consolidation, sale of all assets, or amendments to the governing document. The governing document will also require the SPV to appoint at least one independent director or manager, whose vote or consent will therefore be required to file for bankruptcy or take one of the other enumerated actions.

Lenders require the appointment of an independent director or manager so that there will be someone with no interest in the SPV or borrower or its affiliates, who can evaluate the situation and make a conflict-free and independent decision when called on for his or her vote or consent.

Defining an independent director or manager

The governing document drafted by the lawyer will define the term “independent director” or “independent manager”. Although it can differ, in general, this will be an individual with no material interest in the SPV, borrower, or affiliated companies. The clause may say, for example, that this is an individual who for the last five years, and continuing throughout the person’s current appointment, has not been a director, shareholder, member, manager, partner, employee, customer, supplier, or had any other role (other than acting as the SVP’s independent director or manager) in which the individual would derive revenue from the SVP, borrower, or affiliated companies, and is not a family member or a person controlling or under the control of a person who had a role in, or derived revenue from the SPV, borrower, or affiliated companies.

The independent director or manager may also be required to have previous experience acting as an independent director or manager. In addition, the SPV may be required to employ the services of a corporate service provider that, among other compliance-related services, provides independent directors and managers.

The independent director or manager’s role

The governing document should also set forth the role of the independent director or manager. It should be clearly set forth that the independent director or manager’s authority is limited to voting or consenting to the filing of a bankruptcy petition and certain other material actions.

It should also be made clear that the independent director or manager is not a member of the management team and has no authority to participate in management or vote on any matter other than those specified in the governing document.

What to look for in an independent director or manager

Lawyers advising their clients regarding the appointment of an independent director or manager will often recommend using an individual employed by a corporate service provider. The corporate service provider should be able to provide individuals who are experienced, who understand their role and responsibilities, who will carefully review all aspects of the situation, and who are available to take a required action on short notice. The corporate service provider should also be able to provide an independent director or manager on short notice, and immediately replace an individual who can no longer act in that role.

The corporate service provider should also be prepared to bring in its own lawyer to advise its independent directors and managers before an important vote. The lawyer should make sure the independent director or manager has all material facts and understands his or her duties. This can be important should someone later challenge the vote.


Independent directors and managers play an important role in large financial transactions. However, it is important to choose the right person to take full advantage of this useful risk mitigation tool.

To learn more about CT Corporation’s Independent Director Services, visit us today or call (844) 701-2064.

Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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