Corporation Service Company's Independent Director Services

When General Growth Properties, Inc. (GGP), one of the largest mall operators in the United States, filed for Chapter 11 bankruptcy protection in April 2009, the capital markets took notice. That was because included in the filing were approximately 160 separate entities that had been set up as bankruptcy remote, special purpose entities (SPEs). A bankruptcy remote SPE is designed to shield an affiliate from the bankruptcy of its corporate parent. One of the ways it does this is by requiring independent directors, who must approve any bankruptcy filing. If the General Growth Properties SPEs could file for bankruptcy en masse, then real estate financing through commercial mortgage-backed securities would be turned on its ear. Many pundits went so far as to suggest that all structured financing using SPEs could be called into question.

Immediately prior to the bankruptcy filings, Corporation Service Company (CSC), a leader in the field of providing independent directors to SPEs, had provided the independent directors to scores of the GGP entities. On the day of the filing, it was surprised to learn that it had been terminated weeks before the filings at more than 100 entities, but remained in place on dozens more, 17 of which were requesting independent director approval to file bankruptcy.

Seeking to comply with the law and its fiduciary duties in all respects, and recognizing the impact of GGP’s actions on the financial community, Corporation Service Company worked with outside counsel Sandy Mayerson, from the New York law office of Squire, Sanders & Dempsey L.L.P., to help ensure that everything had been, and would be, done properly. Of particular concern was whether CSC had been properly replaced by other independent directors prior to authorization of the bankruptcy filings. Meanwhile, another team commenced due diligence on the properties in which CSC remained an independent director and helped guide CSC through the proper exercise of its fiduciary duties in considering bankruptcy filings for 17 SPEs in a compressed time period.

Together, CSC, Squire Sanders, the debtors and their advisers developed a thorough and careful decision-making process that led to the Chapter 11 filings of 17 SPEs.

Not surprisingly, many lenders challenged the propriety of the SPE filings. Novel legal issues were raised concerning whether a solvent bankruptcy remote entity can or should be able to file bankruptcy.

On August 11, 2009, US Bankruptcy Judge Allan L. Gropper issued a 47-page opinion affirming the right of solvent SPEs to file for bankruptcy protection. The opinion praises the thorough process undertaken by the independent directors and GGP, and notes that the independent directors of a solvent entity must take into account the interests of the shareholder-parent, just as CSC did. The effects of the opinion on structured finance are yet to be seen. The opinion, however, makes one legal principle clear: a director must always exercise his or her fiduciary duties in the interests of the corporation and cannot serve to benefit a single constituency, such as a lender. CSC and its legal counsel understood this role, and were thus able to navigate through murky waters in a manner approved by the Bankruptcy Court.

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The opinion makes one legal principle clear: a director must always exercise his or her fiduciary duties in the interests of the corporation; a director cannot serve to benefit a single constituency.

This article originally appeared in the Summer 2009 edition of the Squire Sanders Bankruptcy & Restructuring Update. Copyright © 2009 Squire, Sanders & Dempsey L.L.P.