This post was updated on January 18, 2021.
What is a Springing Member?
A Springing Member is similar to an Independent Manager/Director. He or she sits independent of a company’s board of directors and is designated and ready to serve at a moment’s notice, most often in response to an event that may have a negative impact on the company. For example, if a board member dies, the springing member will “spring” into action and fill the deceased board member’s seat. The contract signed at the appointment of a Springing Member allows for the designated person to take on the role immediately so the company has at least one member. This ensures that the company continues to maintain even in the face of hardship.
What is the Difference between a Springing Member and an Independent Manager?
Although similar, the difference in the type of representation you need comes down to your company’s entity type. For example, Springing Members are typically utilized for Single Purpose Entities (SPEs) and Delaware Limited Liability Companies. These types of entities usually have one member handling all facets of the company. Should something happen to that sole member, the company does not automatically dissolve if they have a springing member. At this point, the Springing Member could hop in to ensure the entity is properly closed so as to not add financial burden to the sole owner’s family.
Why is a Springing Member Necessary?
A Springing Member most often becomes necessary when company owners borrow large sums of money, often amounting in millions of dollars. Lenders in transactions involving real estate investment companies and asset management companies often require a Springing Member to serve on the board to vote on material actions which would require a unanimous vote. For example, should the company file for bankruptcy, the Springing Member steps in to act as an independent Member, voting in such a way that would include the interests of the lender.
And as always, information within this post is intended for general information purposes only. Incserv and its employees cannot offer legal or financial advice. Please consult with your legal counsel for assistance in how this information may or may not affect you and your business prior to making any decisions. The above information (and any links or attachments) should be judged accordingly.