How Independent Directors Are Appointed and Why It Matters

When lenders require a bankruptcy-remote structure in a structured finance transaction, the inclusion of an independent director isn’t optional, it’s essential. But how exactly are these directors appointed? And what qualifies someone to take on this critical role?

We’re demystifying the appointment process and the standards that govern who can serve as an independent director.

Who Appoints the Independent Director?

The appointment process typically starts during the closing phase of a transaction, when lenders require an SPE to be formed with specific provisions baked into its organizational documents.

These documents, usually a modified Operating Agreement, will:

• Mandate the inclusion of at least one independent director

• Define their role and approval rights for material actions

• Require the director to be appointed from a recognized service provider (as determined in the loan agreement)

  
  

Borrowers, often working with their attorneys, are responsible for coordinating the appointment. In most cases, the chosen director must be approved by the lender or come from a pre-approved list of service providers maintained by lenders or rating agencies.

Why Independence Standards Are So Strict

Not just anyone qualifies. Independent directors must meet stringent eligibility criteria to ensure they are free from conflicts of interest. Generally, the directors that sign the operating agreement must:

• Have no personal ties to the borrower or its affiliates for a minimum period (usually 5 years)

• Not be a current or former employee, attorney, supplier, or creditor of the company

• Not share common ownership or control with disqualified individuals

• Be free from familial relationships that could create bias

  
  

These strict standards protect the integrity of the SPE and ensure the independent director is truly objective in evaluating material actions, especially bankruptcy filings.

Why Lenders and Rating Agencies Require Reputable Providers

Lenders want assurance that independent directors are:

• Professionally qualified

• Experienced with structured finance transactions

• Responsive and able to meet tight deadlines

  
  

That’s why they often require borrowers to use nationally recognized service providers. These firms vet, train, and support their directors to ensure they understand their fiduciary duties and the legal implications of their role.

How SPE Specialists Supports This Process

At SPE Specialists, we streamline the appointment process. We work directly with sponsors, attorneys, and lenders to:

• Provide experienced and vetted directors who meet all independence standards

• Ensure fast turnaround during tight closing windows

• Maintain clear documentation and governance aligned with lender expectations

  
  

Our deep familiarity with structured finance deals ensures that clients stay compliant while preserving the bankruptcy-remote status of their SPE.

Coming Next: Can a Contract Really Block Bankruptcy? What Courts Have to Say. We’ll explore what the legal system thinks of independent director provisions and why public policy still plays a role, even in the most carefully structured transactions.