Our experience has shown that some of our clients have a misunderstanding as to what the role of an "Independent Director" is in structured finance transactions. Understanding that role is important for businesses.
Many companies will create a special-purpose vehicle (SPV) for a financing transaction when they want to isolate assets from their own credit risk. This is done so that the company may obtain more favourable terms when financing those assets. SPVs are "bankruptcy remote", which means that they are unlikely to become the subject of a bankruptcy proceeding. This "bankruptcy remoteness" is generally achieved by limiting the SPV's activities and requiring that its board include one or more independent directors.
The role of an Independent Director
Under the U.S. Bankruptcy Code, an entity can be voluntarily voted into bankruptcy by its board of directors. This presents a problem in making the entity bankruptcy remote. It is not possible to strictly prohibit a company from filing a voluntary petition. However, the securitization industry (including the rating agencies) has become comfortable that this risk can be eliminated (or at least greatly reduced) by the appointment of an independent director, manager or managing member for the SPV (an "Independent Director") and the requirement that the filing of any voluntary bankruptcy petition be approved by the unanimous consent of all directors, managers or managing members of the SPV (including the Independent Director).
Rating agencies (and investors, in non-rated transactions) will generally expect "independence" to mean that the Independent Director:
- does not hold (directly or indirectly) any interest (legal or otherwise) in the SPV or its affiliates;
- is not a creditor, customer, supplier, employee or other person that derives income from the SPV or its affiliates; and
- is not a family member of any manager, creditor, customer, supplier, employee or other person that derives any revenues from the SPV or its affiliates, and is not a person or entity controlling or under common control of any such person.
What an Independent Director doesn't do
It is important to note that while an Independent Director serves on the board of the SPV, he or she is not part of the management team. The Independent Director's role is solely to vote on the matter of a voluntary bankruptcy of the SPV (and certain other matters related to bankruptcy remoteness), and the Independent Director is not involved in the active management of the company.
Management functions continue to be performed by the "non-independent" board members. From time to time, clients have approached us to have the Independent Director attend special meetings or act as a tie-breaking vote on board decisions. Because Independent Directors are hired solely for the limited purposes described above, they are not as familiar with the company's business and so will be reluctant to vote on such matters or to play any role in the conducting of the SPV's business.
Your choice of an Independent Director should take into account the following factors:
1. Experience and Reputation
The experience of the provider of the Independent Director and its employees is vital. Preferably the provider's Independent Directors have experience and are knowledgeable about structural finance. A full-service company, like TMF Group, has been supplying the markets with Independent Directors with the experience necessary to support your business' needs for over 35 years. A provider that has been offering Independent Director services for many years will understand their role and be available to help you with your financing needs.
2. Response time
If appointing an Independent Director is time-sensitive, the process can be completed within one business day. Independent Directors should always be available, even outside of normal business hours. The provider should also have a team of skilled attorneys and paralegals to respond quickly to your business' needs and requests in financing matters.
Our Capital Markets services providers in the United States and Canada offer a wide variety of specialized services in the structured finance and securitization markets. TMF Group is one of the largest independent providers of SPV Management, Agency and Trust services for capital markets transactions worldwide and our experts are available to help with all of your needs. Talk to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.