Beyond Bankruptcy: Other "Material Actions" an Independent Director Might Face

While the decision to file for bankruptcy is the most discussed "material action," for an independent director’s role, it also extends to several other critical governance events. These actions are considered "material" because they could fundamentally alter the SPE’s structure, financial health, or purpose, thereby impacting its bankruptcy remoteness and potentially impairing an lenders underlying value.

The independent director’s consent acts as a crucial safeguard, ensuring these significant decisions are made with the SPE's best interests in mind for the transaction and not for the sole benefit of the equity.

• Common Material Actions Requiring Approval

  
  

  The specific list varies by transaction, and usually driven by lender requirements, but most loan documents require independent director consent for actions such as:

  
  

• Amendments to organizational documents. 

  
  

  This is perhaps the most important protection after bankruptcy consent itself. Without it, a sponsor could simply rewrite the operating agreement to eliminate the independent director requirement, remove separateness covenants, or change the SPE's fundamental purpose. The consent requirement prevents the structure from being hollowed out from within.

• Dissolving, liquidating, or merging the entity. 

  
  

  These actions would effectively eliminate the SPE as a distinct legal entity, destroying the separation that bankruptcy remoteness depends on. A sponsor might be tempted to merge a struggling SPE into a healthier affiliate, but this could expose the lender to claims and liabilities that the SPE structure was designed to avoid.

  
  

• Selling or transferring substantially all assets. 

  
  

  Similar to dissolution, a bulk asset transfer could leave the lender with a claim against an empty shell while the collateral moves beyond reach. Consent requirements ensure the lender maintains its position relative to the actual assets.

  
  

• Changing the entity's principal business purpose. 

  
  

  The SPE exists for a specific reason, usually to own and operate a particular property or pool of assets. Expanding into unrelated businesses or fundamentally changing operations could introduce risks that weren't contemplated when the loan was underwritten. Even changing the SPE to have direct employees can radically change the risk profile of the entity.

The SPE Specialists Approach to Oversight

At SPE Specialists, our directors are prepared to evaluate the full range of material actions defined in the loan agreement, will review the operating agreements and ensure compliance with the loan documents. This comprehensive approach ensures that all the protections envisioned by a bankruptcy-remote structure remain intact throughout the life of the loan, not just at the brink of insolvency.