What Independent Directors Actually Approve: Understanding “Material Actions”

In structured finance, the role of an independent director isn’t about daily oversight or executive leadership, it’s about control at critical moments. Their job and responsibilities center on protecting the bankruptcy-remote status of a Special Purpose Entity (“SPE”), especially when the stakes are highest.

Let's break down what those critical decisions, known as material actions, actually are, and why independent director approval is essential.

What Are Material Actions?

Material actions are legally significant decisions that could compromise the bankruptcy remoteness or financial stability of the SPE. These actions typically cannot be taken without the express written consent of an independent director.

Here are the most common examples:

1. Filing for voluntary bankruptcy or insolvency

2. Dissolving or liquidating the SPE

3. Merging with another entity

4. Selling all or substantially all assets

5. Amending core organizational documents (e.g., LLC Agreement, Articles of Incorporation)

6. Appointing a receiver or consenting to involuntary bankruptcy petitions

7. Incurring new debt beyond what’s already permitted

8. Engaging in business activities outside the SPE’s defined purpose

Why This Matters

The requirement for independent director consent creates a deliberate hurdle—a checkpoint that prevents the parent company or controlling party from making strategic moves that could jeopardize lender or investor interests.

This ensures:

1. Objective evaluation of decisions with legal or financial consequences

2. Preservation of the SPE’s bankruptcy-remote status

3. Protection of lender collateral and credit ratings

4. Reduced risk of asset consolidation in a parent bankruptcy

   
   

Without this layer of review, a parent company could file bankruptcy on behalf of the SPE to gain leverage in negotiations or shed liabilities. Independent directors stop that from happening unless it’s truly in the best interest of the entity.

The SPE Specialists Approach

At SPE Specialists, we work closely with sponsors, lenders, and counsel to ensure that independent directors understand the specific material actions that apply to each structure. Our directors are experienced in evaluating commercial real estate as lenders, owners, lawyers, brokers, and other roles. They are supported by an experienced team of legal and finance professionals who understand the nuances of bankruptcy remote structures.

The result? Peace of mind for all stakeholders.

Up Next: How Are Independent Directors Appointed and Who Can Serve? We’ll walk through how independent directors are selected, why lenders prefer nationally recognized service providers, and what qualifications matter most.