Independent Manager: What is it and When Does a Business Need One?
Posted by Josh Twilley
May 26, 2021
An independent manager (IM) is an individual that sits on a company’s board but has no other relationship or function with the company. Typically, they are appointed at the request of a third party (most often a lender) to ensure that the other managers are not operating in a way that might undermine the debt, or the lender’s rights.
What does an independent manager do?
Most importantly, an IM weighs in on major decisions and board votes that require unanimous approval. For example, imagine a company wants to file for bankruptcy to essentially “wipe the slate clean.” That company, though, also has a $10 million loan that is not fully paid off. The independent manager representing the interests of the lender would have a hard time signing off on a bankruptcy declaration. In fact, he or she wouldn’t and the vote would fail to earn unanimous approval.
Ultimately, the IM will follow the company’s operating agreement to the letter.
What types of companies usually need independent managers?
They are almost always LLCs that exist for the purpose of owning real estate. (Note: LLCs have independent managers. Corporations have independent directors.)
If a company requires a registered agent in addition to an IM, it’s usually simpler if both are secured through the same service provider.
Who qualifies to be an independent manager?
An independent manager is a named person that gets written into a company’s operating agreement. Here at Incserv, we typically provide our clients with an experienced senior team member to serve as an independent manager. There are no state or federal licensing requirements.
How long does an independent manager sit on a board?
Most often, an independent manager will sit on the company’s board for the term of the loan. Once the debt is fully repaid, the lender doesn’t really have any more material interest in the company and the independent manager’s services are no longer needed.
How does the process start?
The lender will request that the business find an independent manager. Most of the time, the business will contact their attorney’s paralegal who will provide a list of potential independent managers. The business will select an independent manager, generally based on a combination of experience, speed, existing relationship, and price, as well as agreement with the lender. The independent manager has to sign off on the fact that they have no material or financial relationship with the organization.
As always, none of the contents of this blog post should be taken as legal or financial advice. Always consult your attorney and advisors!