"True Independence": What Does It Really Mean in Practice?

Loan agreements mandate that an independent director must be unaffiliated with the borrower, but what does "true independence" really look like? While rules like the five-year non-affiliation period provide a baseline (meaning the independent director has not been an employee, officer, partner, advisor, lender, equity holder, or paid service provider to the borrower or its affiliates during that look-back period), the concept goes much deeper and needs to have an absence of any present conflict of interest.

True independence is a state of objective, unbiased judgment. It means the independent director’s decision-making process cannot be influenced by any financial, personal, or business relationship that could compromise their loyalty to the SPE.

Red Flags That Compromise Independence

Beyond the basic requirements, courts and rating agencies will scrutinize the director’s background for subtle conflicts. Red flags include:

• Financial Dependence: Does the director derive a significant portion of their income from the lender or sponsor through other business dealings?

• Reciprocal Relationships: Does the director frequently serve on deals for the same sponsor or law firm, creating an expectation of future business?

• Lack of Expertise: Is the director a passive appointee without the required experience to question or push back on a sponsor’s request?

A director who is independent on paper but fails this practical test can jeopardize the entire bankruptcy-remote structure.

The SPE Specialists Standard

At SPE Specialists, our vetting process is rigorous and goes far beyond a simple checklist. We ensure our directors are not only free from direct conflicts but also possess the professional stature and industry experience to act with genuine autonomy. We maintain a diverse roster of professionals to avoid concentration with any single sponsor, lender, or law firm, ensuring that their judgment remains truly independent on every single deal.