Trusts & Trustees

doi: 10.1093/tandt/ttr079pmid: N/A

Editorial Donner et retenir ne vaut? Reflections on the retention of founder's rights Johanna Niegel The Editorial focuses on the retention of founder's rights with a view to the maxim of ‘Donner et Retenir Ne Vaut’ which is closely linked to the sham trust argument. In a figurative sense both the Donner et Retenir Ne Vaut and sham arguments also apply to foundations. Bearing this in mind, the Editorial compares and contrasts founder's rights under the old Liechtenstein foundation law and the newly enacted Liechtenstein Foundation Law 2008. The reader is introduced to the ‘principle of separation’ as well as to the ‘doctrine of piercing the corporate veil’ which are examined in the light of recent Liechtenstein court cases. In a nutshell, founders also need to be aware of the extent of influence which they exert on their foundations as neither the legal personality of a foundation nor reserved powers legislation are able to protect a foundation from being challenged as the alter ego of its founder. General articles Foundations and trusts contrasted David Hayton The author takes the reader on an encompassing tour d'horizon with a view to the differences and similarities of trusts and foundations. Whereas trusts and foundations serve the same purposes, the article goes into the heart of the matter and carries out a detailed analyis of fundamental areas of law, which include legal personality and sham issues, rights of settlor and beneficiaries, powers of trustees and foundation councillors as well as rights of information of beneficiaries. The final conclusion reached is that there is little to choose between trusts and foundations since they are both such versatile and adaptable vehicles. Founder's powers in civil law and common law private foundations Paolo Panico Private foundations allow founders to retain an active role in the management and control of the structure to an extent that is seldom available to trust settlors. The corporate nature of private foundations does not necessarily undermine an active role of its founder. Nonetheless, a heavy-handed founder may trigger unwanted tax and estate planning consequences. This article reviews founder's powers in civil law private foundations (Austria, Liechtenstein, Panama) and in some selected common law jurisdictions (St Kitts, Bahamas, Anguilla, Seychelles, Jersey and Belize). Some concluding remarks are devoted to nominee founders and the ability to assign founder's rights. Stress-test: Liechtenstein between transparency and asset protection Prince Michael von und zu Liechtenstein Transparency is certainly good for people who are entitled to information, but not everybody is entitled to all information! Under the hypocritical pretext of transparency, the privacy of individuals and families is being progressively eroded. Data protection by the authorities no longer functions. Media receive any information they want. The desire for asset protection emanates from a simple reason and is historically documented: Assets are at risk! Because of the increasing political and economic uncertainty, the need for appropriate solutions will further increase in the future. Professionalization of foundation management—is it really more than hiring someone with a degree? Tobias Vahlpahl Foundation managers have to manoeuvre between economic rationality and ethical behaviour within the normative framework of their organization. Professionalization of their work is a somewhat amorph term since the introduction of the profession of a foundation manager still has to go a long way. What exactly could be understood by professionalization of this line of work? Is it ‘just’ the synthesis of the two types of rationality that exist or is it even a third type emerging as something genuine and new? What consequences would this have for the education of executives and the organizational development? Jurisdiction-specific articles Anguilla: the new order revisited Harry Wiggin The article briefly describes recent developments in the financial services industry in Anguilla, including the establishment of Anguilla Finance. Increasing concerns have been raised that traditional trusts are vulnerable to attack by disappointed or prospective beneficiaries, either on the grounds that the settlor has not effectively disposed of the trust assets or on the grounds that there are objectionable provisions, which should be modified by the court. These risks can be largely, if not entirely, surmounted by the use of an Anguilla Foundation, which is significantly less vulnerable to attack than a conventional trust. Austria: stress tests for Austrian Private Foundations Friedrich Schwank A prudent and well-advised founder will be aware that the private foundation they have set up may well come under attack and be challenged at some point in time. This article discusses from which directions a private foundation may come under fire, the impact of those possible threats and risks and what measures can be taken to protect the Austrian Private Foundation's integrity and survival. The Bahamas: the Bahamian foundation and the Executive Entity—an innovative approach to wealth structuring in The Bahamas Heather L Thompson and Colin A Jupp In this article, the authors explore the differences between a Bahamian Foundation and an Executive Entity and the advantages of using the latter. The Executive Entity will come into being when the Executive Entities Bill 2010 enters into force. Though similar to a Foundation in certain respects, the Executive Entity has unique features, which are certain to make the Executive Entity an attractive vehicle to high net worth individuals and families seeking to manage their wealth. Canada: recent legal developments affecting private foundations Robert B Hayhoe and Andrew Valentine In this article, the authors discuss two recent legal developments affecting private foundations in Canada. They describe amendments to the annual spending requirement, or ‘disbursement quota’, that will increase the financial flexibility with which private foundations operate and better enable them to engage in charitable micro-finance and programme-related investments. They also describe changes to the non-profit corporate law regime in Canada that will create challenges for founders of private foundations who seek to maintain control over the foundation, and discuss possible solutions to these challenges. Cyprus: foundation-like entities incorporated under different laws in Cyprus Demetra Pipinga In this article, the author analyses Cypriot law with a view to various entities that are comparable to foundations as they can fulfil similar purposes. The article also provides information on the basic characteristics of these foundation-like entities as well as further details relating to their supervision, registration, amendments to their objects and governance. It then goes on to examine the matters relating to the dissolution and liquidation of such ‘foundations’ as well as setbacks which exist in respect of these entities that should be considered prior to taking a final decision on which type to incorporate. Gibraltar: companies limited by guarantee—an alternative to the foundation Clotilde Briquet In this article, the author describes the Company Limited by Guarantee (CLG) as foreseen by the Gibraltar law and some of its similarities and differences with respect to foundations. The author discusses in detail the main features of a CLG, pointing out its use as a foundation under Gibraltar law and also familiarizes the reader with hybrid trust–CLG structuring possibilities and the use of a CLG under the EU Parent–Subsidiary participation exception. Isle of Man: the Isle of Man Foundations Bill 2010 Sam Leigh Previously under Manx law the term ‘foundation’ referred to a company limited by guarantee, but with the passing of the Foundations Bill 2010 which is expected in early summer 2011, the Isle of Man will have its own private foundation to be used for the administration and preservation of private wealth. The Manx Foundation will have some similarities to both companies and trustees and is aimed at promoting the Isle of Man to clients based in civil law jurisdictions. Italy: community foundation and trust Vincenzo Bancone The Italian community foundation has some weaknesses, which are still unsolved, such as the quest for more appropriate ways to ensure efficient and transparent donation gathering, the constant need to finance high-profile projects with the donated capital and the need for segregation of the initial capital fund reserved for the grant-matching mechanism from the promoters of the local initiative. In the opinion of the author a solution based on a conceptual application and combination of the trust as a legal institution with community foundations might not have the desired effect—bearing in mind, above all, the nature of the weaknesses outlined above. Jersey: foundations and the Family Office—reasons to use a foundation and a case study Josephine Howe and Sally Edwards Jersey Foundations are an alternative to traditional trust, corporate or partnership structures and provide separation of ownership and control of assets. They are very attractive to high net value individuals wishing to establish structures for wealth management or succession planning within the framework of their own Family Office. Family Offices are of particular interest because the richer the ultra high net worth families get, the more complex their affairs tend to be. This article contemplates how Jersey Foundations are capable of competing with classic Family Office structures and the broad functions they can provide for the benefit of such wealthy families. Labuan: Labuan foundations—the newest variety Mark Lea This is the first article, which introduces the reader to the core provisions of the newly enacted Labuan Foundations Act 2010. The author describes the history of this new Law comparing it to various other legal changes that took place in Asia over the past year. The reader is then introduced to the main provisions of the Act, always with a view to pointing out the similarities and/or differences of the Labuan provisions on Foundations with trust law in general. Of particular interest is a detailed discussion of special provisions that add value to the newly created Labuan Foundation. Liberia: Liberian foundations in a nutshell Hilary Spilkin In this article, the author summarizes the basic provisions of the Liberian Private Foundation Law of 2002. Liberia has borrowed from the civil law and incorporated this institution into their system of common law with the aim of diversifying their corporate service offerings and of keeping abreast with modern day legal systems. The procedure for forming a Liberian Private Foundation is simple and the Registry is managed and operated out of the LISCR, LLC offices in Virginia, United States. Liechtenstein: philanthropy and the use of a charitable foundation Francis von Seilern-Aspang Philanthropy is playing an ever-growing role, particularly in times of economic crisis and heavily indebted countries. The reasons for a charitable approach are as diverse as human beings themselves. If philanthropy was once generally considered as the collection of monies and simple donations or patronage contributions, today it is increasingly being seen as a comprehensive investment. Charitable foundations are a useful tool for exercising philanthropy because charitable foundations allow certain flexibility needed to meet the diversity of all possible charitable approaches. The concept of the charitable foundation is familiar and recognized on a global scale. Malta: building your SPV on solid foundations Anthony Cremona Although foundations have been recognized in Malta in various forms since Roman times, there is an exciting trend to use them in increasingly diverse ways for a variety of purposes. Each of these ways demonstrates the tremendous flexibility of this legal institute. One such example is their use in combination with special purpose vehicles (or SPVs), for instance in order to facilitate financial restructuring and debt securitization transactions. This article touches on the valuable position held by Maltese foundations and explores the functional role they can play in securitizations and other arrangements involving SPVs, before discussing the particular advantages of Malta as a jurisdiction. Malta: a foundation's DNA—cell structures as building blocks of a Maltese foundation Anthony Cremona Segregated cell structures have already found success in Malta in the insurance and investment sectors, but the advantages of such structures when used in conjunction with Maltese foundations are now increasingly being recognized. This article provides an overview of the introduction of segregated cells as a concept into Maltese law and outlines their utilization within organizations in the jurisdiction. The use of cells within foundations, and the many benefits of doing so, is then explored, before practical issues, including winding-up proceedings and taxation, are discussed. The Netherlands: the Dutch foundation—a vehicle for effective business solutions Charles Langereis and Oktay Düzgün The article focuses on the benefits of a Dutch foundation in the form of a Stichting administratiekantoor and the business solutions it offers in holding structures through the issuance of depository receipts that split the legal and the economic ownership rights to the assets that are held by the foundation. Apart from international structuring benefits, the envisaged holding structure reduces the tax rates under an applicable tax treaty and also makes use of the participation exemption offered by Dutch tax law. The Dutch Caribbean—a new episode for offshore investments Maike Bergervoet and Jeroen Starreveld The 10 October 2010 marks the date on which the Netherlands Antilles ceased to exist. Two new countries were born, Curacao and Sint Maarten. The three remaining islands, the BES islands, have become part of the Netherlands. The article discusses the new BES islands tax regime, which is characterized by simplicity and a shift from direct to indirect taxes. Real business is fostered, but anti-abuse measures were introduced for typical offshore activities. A BES corporation may benefit from the Dutch double tax treaties network. However, a distribution tax at a rate of 5 per cent also applies to Private Foundations. Nevis: a foundation for privacy—the ownership and management of a private trust company by a multiform foundation Jan Dash The author identifies the main problem with today's trust structures in the fact that the settlors often seek to involve themselves in the administration of the trust. As such action can prove to be destructive; jurisdictions have encouraged the development of private trust companies (PTCs). The article hence explores the main differences between common law trusts and civil law foundations and introduces the reader to the advantages of the use of PTCs, which are held by a Nevis multiform foundation in order to circumvent the common problem of settlor control. Panama: charities as a cornerstone to society Alvaro Aguilar-Alfu This article describes how charities are regulated in Panama. Charitable institutions that benefit the community are granted special tax benefits. For entities receiving these benefits, reporting is substantial, which involves complying with local regulations, as charities may be entrusted with public funds. Private foundations and trusts, however, serve as alternatives for charitable endeavours that do not require special tax assistance. Russia: investment funds and trust management in Russia—selected aspects Svetlana Chugunova In 1995, Russia launched a new investment vehicle to fuel post-Soviet economy and to provide new investment opportunities to individuals and corporations. Initially introduced by presidential decree, these investment funds have evolved into a broadly used and versatile investment tool, which is now regulated by various Federal Laws, several Codes, and a whole set of Bylaws. In this article, the author gives a brief introduction to the regulation of investment funds in Russia focusing on the most commonly used unit investment funds and draws a close connection between investment funds and trust management in the Russian legal system. Seychelles: Seychelles foundations Simon Mitchell In this article, the author analyses Seychelles foundations, including formation procedure, charter and object requirements as well as foundation property protection features. The author also examines the role, rights and obligations of the main foundation ‘players’, including the councillors, the founder, the registered agent and the beneficiaries. The article highlights Seychelles foundations as innovative and robust yet versatile entities. St Kitts: it looks like a company and works like a trust—a case study from St Kitts Richard Pease St Kitts was the first common law jurisdiction to introduce a law on private foundations. Especially founders from Islamic countries show an interest in the St Kitts Foundation. The main reason for this are the extreme flexibility as well as simplicity of the St Kitts Foundation, allowing it to look like a company but work like a trust. The St Kitts Foundation Act permits foundations to be structured in such a way that the essential control remains in the hands of the founder during his lifetime, but provides for continuity of family management and enjoyment of benefits after his death. Sweden: trusts and foreign foundations in Swedish tax law David Kleist Sweden does not have domestic trust regulation and is not a party to the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition. Furthermore, only a few cases on trusts and foreign foundations have been decided by the highest tax court in Sweden. The Swedish tax treatment of trusts and foreign foundations is therefore unclear, but is likely to be given more attention due to Sweden's recent conclusion of a number of tax information exchange agreements. Although there are many unclarities, some conclusions can be drawn on the basis of the cases and relevant legal provisions. Switzerland: the umbrella foundation—an outline Thomas Sprecher An umbrella foundation is a relatively young type of charitable foundation, which links a large number of non-independent foundations by combining the assets of various individuals and pooling them for portfolio management. Particularly for smaller pools of assets, the umbrella foundation constitutes an attractive option for the establishment of an independent foundation. It can operate a grant-making pooling arrangement in cooperation with existing grant-making foundations or government institutions. By pooling their assets, they keep portfolio management costs low and optimize returns. Thereby the charitable organization receives greater grant-making support, hence making the umbrella foundation a better way of doing good. © The Author (2011). Published by Oxford University Press. All rights reserved.

Niegel, Johanna

doi: 10.1093/tandt/ttr073pmid: N/A

Another year has flown by and I am proud to present the 7th issue of Private foundations: a world review. As always I must extend my sincerest gratitude to all the international authors for their continuing support of the journal as well as to Oxford University Press for understanding the importance of both private and charitable foundations and hence for continuing to publish this special issue. A very special thank you also goes to Mr Steve Meiklejohn, partner with Ogier, Jersey, for taking on the onerous task of peer reviewing. And certainly we also have to thank you as loyal readers of the Review whose continuing feedback and valuable comments help us to both broaden and improve our coverage. Private Foundations 2011, with a total of 27 contributions, is indeed the most all encompassing issue ever. The articles are grouped as usual in a general and jurisdiction-specific section and the contents cover a variety of topics both with a view to international private and charitable foundations. This year we also welcome a number of new authors, coming from Cyprus,1 Labuan,2 Liberia,3 the Seychelles4 and Sweden.5 Introduction Given the variety of subjects featured in Private Foundations 2011 I could not decide on the topic of this year’s editorial until a very late stage. Where was the leitmotiv, as Dr Vahlpahl6 would put it, of this year’s issue? It was then David Hayton’s argumentation in his article ‘Trusts and Foundations Contrasted’ that gave me the important clue. In the epilogue to his article David Hayton states,7 that both a settlor and a founder can, under appropriate trust or foundation law, retain an equally strong position without affecting the integrity of the trust or foundation structure. When reading this, I suddenly realized that the question of the reservation of founder’s rights had continuously been mentioned in one way or the other in many articles8 of this year’s issue. So the leitmotiv must hence be linked to the retention of rights by a founder and in how far he can influence the administration of his foundation by exercising these rights! I went back to the findings of the Jersey Court in the Rahman Case9 as well as to the contents of my editorial for Private Foundations 200910 that dealt with the issues of sham trusts and sham foundations. The sham trust argument, which would invalidate a trust as such, is closely linked to the maxim of ‘Donner et Retenir Ne Vaut’.11 In a figurative sense the principle of Donner et Retenir Ne Vaut and the sham argument also apply to foundations. This in respect to the question of how many rights a founder may retain and hence exercise, so as not to jeopardize the integrity of his foundation. One must not forget that the position a founder finds himself in is indeed a difficult one. In order that a foundation is validly established, a founder must in principle let go of his assets and transfer full and complete ownership of the assets to the foundation, which are then managed by the foundation’s organ, the foundation board. Since the function of the foundation board members is in most cases assumed by professional advisers with whom a founder is usually totally unrelated, it is understandable that a founder wishes to retain certain rights of control to ensure that the management of the foundation is performed according to his initial wishes. But how far can he go in this aspiration and where is the line to be drawn, which, when it is crossed, invalidates the concept of a foundation and makes the foundation become the alter ego of the founder? How is the position of the founder perceived by law and in court practice? Given the fact that Liechtenstein had already passed its foundation law as early as 1926 and had revised the law in 2008, which means more than 80 years later, made me research what the position of the founder with a view to the reservation of rights was back in 1926 and how the situation changed through the amendment of the law in 2008. And it is the outcome of this research which I want to share with you now in my editorial. The underlying issues Let us start with the basic principles that underlie the reservation of rights by a settlor which were formulated in 1991 with reference to a trust by the Royal Court of Jersey in Rahman v Chase Bank Trust Company (CI) Ltd. They are closely linked to the maxim of Donner et Retenir Ne Vaut, which as said has been largely repealed by Jersey statute. The threat of a striking down of a trust on the grounds of sham has however remained until today. The Donner et Retenir ne Vaut principle applies to gifts in general and was initially in Jersey also applied to the endowment of property to a trust. A literal translation of the rule means that to give and to hold back at the same time does not work. Making a gift means to let go of property and to gift and to transfer it (‘donner’) to another person without continuing rights or powers of the donor attached to it (‘retenir’; retained control). Does this rule—in a figurative sense—also apply to a foundation, which in most cases receives endowments in the form of a gift? If we translate this maxim to trusts and foundations with a view to the part of the Rahman argumentation which remains valid until today, the sham issue, it means that the transfer of the ownership to the assets must be completed, that the trustees, respectively the foundation, must be put in a position to gain unrestricted ownership to the assets. The reasoning in the Rahman decision centers around the necessity that a settlor, when creating a trust must first of all intend to create a trust and he must also constitute the trust by completing the transfer of the legal interest in the trust property to the trustees.12 If the settlor does not intend to create a trust and/or does not wholly transfer the property to the trustees, the trust lacks essential certainty and will not be completely constituted. Instead, the trust property will be deemed to remain vested in the settlor as ‘equity will not perfect an imperfect gift’.13 A gift is inter alia imperfect if a settlor reserves too many powers in the trust instrument and therefore control over the trust assets so that the trustees act as no more than a mere nominee of the settlor (‘formal sham’). Another possibility of excessive settlor control is that the trust according to the provisions of the trust instrument appears to be constituted as a valid trust but it is then administered without integrity by permitting the settlor to exercise encompassing control which gives rise to the trust being challenged as a ‘substantive sham’. Without going any further into the sham argument, one must not forget that the three certainties of intent, subject, and object also apply to foundations: A founder first of all must intend to create a foundation, then he must specify the assets of the foundation (subject) and also the beneficiaries (object).14 The wider the control of the founder, ie the more rights a founder reserves to himself, the greater the assumption of lack of will. And the greater the risk that a foundation be regarded as the alter ego of the founder and hence the assets be attributed to him. This may result in sometimes totally unexpected adverse tax consequences as tax authorities continue to tax the founder on the assets as if they were still his. In the following paragraphs we will examine the position of the founder under the 1926 Liechtenstein Foundation Law and under the 2008 Foundation Law. Have there been any changes in the 80 years that lie between these two laws with a view to founder’s rights? Does Liechtenstein foundation law contain reserved powers provisions that validate the influence of a founder?15 How have founder’s rights been treated by courts and subsequent legal practice? Brief history of the Liechtenstein Foundation Law Liechtenstein company law is contained in a single act, namely the Liechtenstein Law on Persons and Companies (Personen- und Gesellschaftsrecht, ‘PGR’), which was enacted on 20 January 1926 and has since been subject to various amendments. This Code is supplemented by the provisions of the Liechtenstein Law on Trust Enterprises, dated 10 April 1928 (‘TrUG’). The provisions on foundations are part of the company law and were originally contained in the section ‘Corporate Bodies’, part II, title 5, Articles 552–70 of the PGR which regulated the endowment of property for a specific purpose and as such the legal institution of foundations. On 26 June 2008 the Liechtenstein Parliament passed the new Foundation Law16 in conjunction with various other amendments to the PGR. The new Foundation Law then came into force as of 1 April 2009. The new Law was included into the PGR and hence enacted as Article 552 §§1–41 PGR. The old PGR provisions on foundations in Articles 553–70 PGR were simultaneously repealed. In the following section, the aspect of the founder’s rights will be discussed in detail by contrasting the reach of the old and the new provisions. Founder’s rights under the old Liechtenstein Foundation Law 1926 Definition of the term ‘founders rights’ It has already been pointed out already at the beginning of the discussion that neither the old nor the new Liechtenstein provisions define the term ‘founder’s rights’. It is therefore not a technical term, but this term is used with a view to any rights reserved by the founder in the foundation documents, but mainly with respect to the rights to revoke and/or rights to amend the foundation documents after the creation of the foundation. The following discussion will therefore focus on these two main rights and compare and contrast the old and the new legal provisions with a view to these two basic rights. Of particular interest herewith will be the correlation of the rights of the founder with similar rights which can be exercised by the executive bodies of a foundation. The discussion of the new provisions shall also include various other rights which the founder may reserve but this only with the intent to provide the reader with a feeling for the significance of the amendments which were made to Liechtenstein foundation law. Rights reserved to the founder under Article 559 para 4 PGR The central provision with respect to founder’s rights under the old law was contained in Article 559 para 4 PGR which expressly stipulated that the founder could at any time exercise a right of revocation or of amendment of the deed or the articles if he had expressly reserved such a right in the deed. Founder’s rights which were expressly reserved in the foundation deed according to this provision were intended to be personal rights of the founder which could not be transferred neither by legal disposition nor by inheritance and moreover not be delegated to the Foundation Board. They were also qualified as unlimited, which could be derived from the fact that para 4 of the said Article even permitted a far-reaching right to revoke the foundation. The law itself, however, was silent on the issue whether founder’s rights could be transferred or not, a fact which lead to various interpretations by Liechtenstein practitioners which will be discussed later. By providing for founder’s rights, the rigidity principle which was and still is inherent in Liechtenstein foundation law is broken, because the will of the founder as expressed in the foundation deed does not become rigid as it is still possible that the founder exerts influence and makes amendments to the foundation documents even after the set-up of the foundation. The founder, by including an express provision in the foundation deed, could hence reserve a right to revoke the foundation and an unlimited right to change the purpose of the foundation at the same time. Already at this point it has to be stressed that changing the purpose of the foundation according to Liechtenstein law does not only encompass the purpose of the foundation as such (private or charitable, etc.), but also the provisions on the beneficiaries and the beneficial entitlements. The beneficiaries are perceived as the ‘addressees’ of the foundation purpose in the sense that the purpose of the Liechtenstein foundation creates external effects.17 This is crucial to know as the old Liechtenstein provisions on foundations also contained rights of amendment which could be exercised by the foundation board or other organs, depending on the provisions made in the foundation deed. They shall be discussed in the following paragraphs. Development of quasi rights of a founder by subsequent Liechtenstein practice The first provision under which rights could be reserved to organs of the foundation was Article 565 para 1 PGR. According to this provision a body or even a third party could be authorized by an express provision in the deed or the articles to make an amendment with a view to the organization of a foundation. The second one, Article 566 para 2 PGR, permitted an amendment of the purpose of the foundation by a governing body of the foundation or a third party, if the purpose had become incapable of achievement, inadmissible or unreasonable, provided that an explicit provision had been included in the foundation deed or articles. These two provisions led to a very interesting development in Liechtenstein practice: The founder himself wanted to remain confidential and hence not expressly reserve any rights under Article 559 para 4 PGR. However, on the other hand he wanted to exert control on his foundation, in particular with a view to the use of the funds. In order that the founder could remain in the background but still exert influence on his foundation, no rights were explicitly reserved for him, but the foundation board (or any other organ like a protector or curator) was given the right to change the purpose—inclusive of the provisions on the beneficial entitlements!—according to Article 565 para 1 PGR, which was interpreted in the way that this provision was not only limited to organizational amendments. In addition, Liechtenstein practitioners argued that also the provision of Article 566 para 2 PGR had to be interpreted in the sense that it only contained an enumerative list of cases in which the purpose could be amended by the foundation board and therefore could also be applied to other cases, which were not explicitly contained in the list. In the outcome the foundation board was granted an unlimited right of amendment which was exercised upon application of the founder, who remained unnoticed in the background. This with the ultimate effect that the board henceforth exercised a ‘quasi right of a founder’.18 The statutes of the foundation were hence drafted in such a way that they only contained a very general description of the purpose of the foundation whose concretization, in particular with a view to the beneficial entitlements as part of this purpose, was to be made in separate by-laws. This provision was supplemented by the corresponding provision that the foundation board was authorized to amend the statutes at any time as well as to pass by-laws and to amend the same. The effect was that the deed and the statutes only contained a very brief description of the beneficiaries and that the beneficial entitlements were then fixed and amended at will at a later stage. In some cases even a mandate agreement was concluded between the economic founder and the foundation board or any proposed amendment was simply made subject to the approval by a protector who in fact was the economic founder or one of his advisors. As a result the reserved rights of the founder were divided into a material part that was attributed to the founder and a formal part that was attributed to the foundation board,19 whereby this division was not shown in the foundation documents. This adverse development in the Liechtenstein foundation practice could not be legally justified even by applying the most favourable interpretation to the foundation law. The creation of a foundation is a unilateral legal act which is set by the founder and the founder’s will becomes rigid and unchangeable after the set-up of the foundation. Giving the foundation board an unlimited right of amendment in fact culminated in authorizing the foundation board to form and hence change the will of the founder which was not at all in conformity with the underlying legal nature of the foundation. Another problem with founder’s rights under the old Liechtenstein provisions was the fact that Liechtenstein law also distinguished between the legal and the economic founder. It was the legal founder, ie the trustees, who set up the foundation and not the economic founder. This was also critical with a view to the above-mentioned fact that founder’s rights were generally neither to be transferred nor passed on to the heirs. It could have been easily circumvented by the economic founder transferring his contractual position out of the mandate agreement to his successor. And furthermore, since the trustees who acted as legal founders were in most cases legal persons, a perpetual succession of founder’s rights would have even been possible. In 2001, the Liechtenstein Supreme Court therefore clarified that founder’s rights are indeed personal rights and as such cannot be transferred.20 In an obiter dictum the Court held that the right to amend the statutes hence had to be exercised collectively by the economic and the legal founder. In 2003, the Supreme Court21 then expanded on this issue and held with respect to the provision contained in Article 566 para 2 PGR, that it is solely the economic founder who is responsible for the determination of the purpose of the foundation in a way that one must be put in a position to be able to deduce from the foundation documents how the foundation assets have to be used and how the circle of beneficiaries has—at least rudimentarily—been fixed. This ruling means nothing else that the essentialia negotii were to be fixed by the economic founder himself. If this were not the case the foundation board would be given carte blanche to make up the founder’s will itself and no longer limit itself to implementing and concretizing it. This approach was then confirmed by the Liechtenstein State Court,22 the Court of Appeal, although its application was denied due to reasons of protection of interests with a view to already existing foundations. It can be seen from the above developments that founder’s rights under Liechtenstein law had clearly become diluted over the 80 years of the existence of the law and that there was an urgent need to modernize and amend the old Liechtenstein provisions on foundations. This was then done by the Liechtenstein Foundation Law 2008, whose provisions shall be compared and contrasted in the following with a view to founder’s rights. Founder’s rights under the new Liechtenstein Foundation Law 2008 Aims of the reform The aim of the Liechtenstein legislator was to create a modern foundation law thereby placing particular emphasis on the founder’s responsibility, rights of the beneficiaries, foundation governance for both private and charitable foundations and a simplified process of establishment of foundations. It was among the top priorities of the Government to increase the degree of responsibility of the founder. The reform hence tackled and removed the existing legal uncertainties with regard to the formation of foundations by professional intermediaries, foundations with undefined purposes as well as improved the legal quality of the founder’s rights. A close examination of the new provisions makes it evident that various rulings of the Liechtenstein courts have been incorporated in the new Law. One of the main intentions of the Liechtenstein legislator in this respect was to put a halt to the unsustainable interpretation of the law that had been developed by Liechtenstein practitioners. From 2008 onwards a representative is still able to set up the foundation, inter alia to protect the privacy of the economic founder. This representation is an indirect one, but has the effect of direct representation insofar as all rights and obligations directly apply to the economic founder. The economic founder is at the same time also the legal founder. Furthermore it has been stipulated that the foundation deed from now on has to contain already at the stage of the formation of the foundation a designation of discernible beneficiaries, or beneficiaries who are identifiable on the basis of objective criteria, or of a category of beneficiaries.23 Strengthened position of the founder under the new Foundation Law As under the old provisions, the founder may reserve rights to influence the administration of the foundation. In conformity with the old law (Article 552 para 4) also the new Law legally protects the interests of the founder even in the absence of an express provision in the foundation declaration. The founder is regarded as a participant of the foundation and stands on the same level as the beneficiaries and the executive bodies of the foundation. He can exercise the same rights as these participants and is granted certain application rights. In addition, the founder can be a member of the executive bodies of the foundation and can take part in the administration of the foundation in the sense that he can exercise the function of a control organ and is granted a specific right of control in case that he reserves the power to revoke the foundation.24 However, it has to be stressed that these rights are complementary to internal foundation governance via the provision on information rights in §9.25 The rights of the founder which can be reserved under the new provisions are neither transferable nor can they be inherited. Moreover, rights can only be reserved if the founder is a natural person. In contrast to the original intention, Government and Parliament have decided to allow enforcement in reserved rights of the founder (right of revocation or power of amendment). This was done in order to put a stop to potential abuse of the foundation with a view to defrauding creditors. Now it is the founder, and only the founder, who is central in forming the foundation and drafting the foundation declaration, thereby replacing the previous practice of wide-ranging powers being granted to the foundation board according to Articles 565 and 566. In the future also protectors, collators, and curators will only be able to exercise their functions in accordance with the verifiable wishes of the founder. In addition it is no longer possible that amendments be readily made by the foundation board with a view to the beneficial entitlements either solely or in consultation with and the agreement of the first beneficiaries. Nevertheless, the special regulations for foundations which were established under the old law continue to be valid on the grounds of preserving trust under the constitution. With a view to the founder’s rights of revocation and amendment in particular the new Law contains the following provisions: Rights of the founder under the new Liechtenstein Foundation Law 2008 According to §30 of the new Liechtenstein Foundation Law the founder may in the foundation deed reserve to himself the right to revoke the foundation26 or to amend the declaration of establishment. These rights can neither be assigned nor bequeathed. If these rights are to be exercised by a direct representative, this shall require a special power of attorney. The founder’s position is more or less the same as the one he was granted by the old Article 559 para 4 PGR. In contrast to the old law, however, it is now explicitly stipulated that these rights can be neither assigned nor bequeathed. And also that a special power of attorney is needed in case that these rights should be exercised by a direct representative. If these rights are exercised by an indirect representative, eg a licensed trustee, the legal consequences shall directly apply to the founder. §30 however is not applicable to foundations, which were established before the new law entered into force. Rights of the foundation board (or other organs) the new Liechtenstein Foundation Law 2008 §§31 and 32 regulate the powers of amendment by the foundation board and other organs. They are of interest here as they also apply to foundations which have been established before the entry into force of the new law. And it is particularly in these provisions where one clearly sees the reinforced position that has been accorded to the founder under the new Law. This goes along with a weakened power of amendment to be exercised the foundation board. According to §31 an amendment of the purpose of the foundation by the foundation board or another executive body shall only be permitted if the purpose has become unachievable, impermissible, or irrational or if circumstances have changed to the extent that the purpose has acquired quite a different significance or effect, so that the foundation is estranged from the intention of the founder. Such amendment must comply with the implied will of the founder and the power of amendment must be expressly reserved to the foundation board or to another executive body of the foundation in the foundation deed. An amendment of other contents of the foundation deed or the supplementary foundation deed, such as in particular the organization of the foundation, may only then be exercised by the foundation board or another executive body if and insofar as the power of amendment is expressly reserved in the foundation deed to the foundation board or to another executive body of the foundation. The foundation board or any other executive body shall, safeguarding the purpose of the foundation, exercise the right to amend if there is a substantially justified reason to do so. If one looks at the supporting materials to §31 it becomes evident very easily that §31 contains an exhaustive list of cases in which the purpose of the foundation may be amended by the foundation board. But in addition this may only be done by taking into account the implied will of the founder. Any amendment by the board in its own discretion without reference to the implied will of the founder is not possible.27 If the implied will of the founder cannot be ascertained, the foundation must be liquidated. In addition to the above rights, the foundation board is granted a right to issue internal directives in the form of regulations if the right to do so has been reserved in the foundation deed. These regulations have the aim to concretize certain provisions in order to further implement the foundation deed or the supplementary foundation deed. Conclusion: Donner et Retenir Ne Vaut! A perceived advantage of foundations over trusts has always been seen in their flexibility, allowing more freedom to founders than trusts allow to settlors. The particular appeal of foundations often lies in the fact that they are legal persons and as such less exposed to a sham attack than trusts. But the choice of a private foundation solely out of such arguments may prove to be naive. Private foundations which are managed under the founder’s instructions will sooner or later be trapped in something similar to a substantive sham argument28 if the founder exerts a strong and continuing influence on the foundation. And this even in spite of any reserved powers legislation which might have been introduced. Just as reserved powers legislation will not validate a substantive sham trust, it will not validate a foundation which is subject to substantive control by the founder. And this also despite the fact that some jurisdictions like Jersey have explicitly excluded the application of the Donner et Retenir Ne Vaut rule to questions concerning the validity, effect or administration of a foundation and a transfer of property by or to a foundation or by or to an entity owned in whole or in part by a foundation.29 The sham argument remains. Although the sham concept as such does not apply to foundations, it does however not mean that a similar concept, which takes into account the special characteristics of a foundation, is not known in civil law. As David Hayton puts it in his article, a foundation cannot be a sham because once it has become a legal person it remains a legal person, fully owning its assets, until liquidated or otherwise struck off the register. Nevertheless, where a foundation is created as a device or façade to enable the creator to hide or dissipate his assets, the courts will pierce the veil of legal personality and treat the assets of the foundation or company as the creator’s assets.30 The sham discussion with a view to foundations hence takes into account the separate legal personality of the foundation and is therefore centered more on the ‘principle of separation’, which reflects the own legal existence of the foundation independent from its founder, organs, and beneficiaries, and on the ‘doctrine of piercing the corporate veil’. This corporate veil is pierced in cases of fictitious transactions, which leads to a negation of the separate personality of the legal person. The ultimate consequence under civil law is that the assets of the foundation are isolated and hence are attributed to its creator. The founder becomes the alter ego of his foundation. But this basically leads to a comparable outcome as in the case of a sham trust under common law, where the trust property is then held by the trustees upon a resulting trust for the settlor. Furthermore, when a foundation is treated as the alter ego of the founder, the founder is taxed on the foundation assets as if they were still his. The new Liechtenstein Foundation Law 2008 is still too young for new judgments with a view to the reservation founder’s rights. But Liechtenstein courts had already in the past and in spite of the reserved powers legislation that had been contained in Liechtenstein foundation law from 1926 onwards differentiated between foundations in which the founder divests himself of the assets and other foundations, where the founder still exerts rights similar to an owner with regard to the foundation’s assets. In the latter case, where the founder has reserved rights to himself, the courts more and more often tend to look behind the scenes in order to ensure that the law is applied in manner which takes into account the particular facts at hand. 31 This approach was affirmed by the Liechtenstein State Court, which held that the mere fact that a founder has reserved rights of intervention does not suffice to break the principle of separation which is typical for a legal person. But such reservation of rights would then give rise to a fictitious transaction that would pierce the principle of separation, if the founder had the intention to use the foundation assets for his own purposes instead of for the purposes of a foundation.32 This ruling supports the above argumentation that reserved powers legislation acknowledges the reservation of powers by a founder but does not validate a foundation that is administered without integrity. As early as 1990, the Liechtenstein Supreme Court for example permitted, under certain restrictive conditions, the piercing of the corporate veil of a legal entity in favour of the creditors of a legal entity to the factual organ standing behind the legal entity, ie the economic ‘backer’, if he exercises a dominant position, as well as a reverse piercing of the corporate veil in favour of the creditors of the factual organ to the legal entity.33 At the beginning of 1998 the Liechtenstein Supreme Court34 expressed the opinion that also a foundation may be considered equal with its organ or founder and hence its legal personality be negated, if according to the concrete facts of the case, its establishment can be considered an abuse of rights, in particular, if the legal personality is only evoked in order to hide unfair activities, or activities of the economic founder which cause damage to the assets of third parties. It is anticipated35 that the Liechtenstein Supreme Court will consider this criterion also in the future, in particular as the Liechtenstein Supreme Court clearly stated on 7 May 1998 that the breaking of the principle of separation is indicated if an economic founder via a right to instruct the foundation board may dispose of the foundation assets as if they were his own bank account.36 Concluding, also founders need to be aware of the extent of influence, which they exert on their foundations because the idea that is at the root of the maxim Donner et Retenir Ne Vaut does apply also to foundations. The actual menace however will vary from jurisdiction to jurisdiction. Especially common law jurisdictions nowadays favour the foundation as it represents a so-called orphan structure, meaning that it is an ownerless vehicle compared to a company. Due to the appealing concept of legal personality a common law foundation usually carries versatile features which sometimes resemble those of a company, for example by allowing it to trade. The founder may in most cases also influence the administration of his foundation to a certain degree. However, one must not forget that a foundation is basically nothing else than the civil law alternative to a common law trust and was initially conceived to fulfill estate planning purposes. Despite the enthusiasm about the legal personality of a foundation and the advantages that it offers, one must be aware that neither legal personality nor reserved powers legislation are able to protect the foundation from being challenged as the alter ego of the founder. This is a concluding caveat which is supported by the fact that both legislators and courts of the foundation jurisdictions of the first generation return to consider the basic purposes underlying the legal person of a foundation and tend to put a halt to an excessive exercise of founders rights which renders the foundation an alter ego of its founder. 1. Demetra Pipinga, ‘Cyprus: foundation-like entities incorporated under different laws in Cyprus’. 2. Mark Lea, ‘Labuan: Labuan foundations—the newest variety’. 3. Hilary Spilkin, ‘Liberia: Liberian foundations in a nutshell’. 4. Simon Mitchell, ‘Seychelles: Seychelles foundations’. 5. David Kleist, ‘Sweden: trusts and foreign foundations in Swedish tax law’. 6. Tobias Vahlpahl, ‘Professionalization of foundation management—is it really more than hiring someone with a degree?’. 7. The Honourable Mr Justice David Hayton, ‘Foundations and trusts contrasted’. 8. Paolo Panico, ‘Founder's powers in civil law and common law private foundations’; Harry Wiggin, ‘Anguilla: the new order revisited’; Friedrich Schwank, ‘Austria: stress tests for Austrian Private Foundations’; Heather L Thompson and Colin A Jupp, ‘The Bahamas: the Bahamian Foundation and the Executive Entity—an innovative approach to wealth structuring in The Bahamas’; Josephine Howe and Sally Edwards, ‘Jersey: foundations and the Family Office—reasons to use a foundation and a case study’; Mark Lea, ‘Labuan: Labuan foundations—the newest variety’; Jan Dash, ‘Nevis: a foundation for privacy—the ownership and management of a private trust company by a multiform foundation’; Simon Mitchell, ‘Seychelles: Seychelles foundations’. 9. Rahman v Chase Bank Trust Company (CI) Ltd. (1991) JLR 103. 10. Johanna Niegel, ‘Brave New World of Foundations’ (2009) 15 T&T, 260–67. 11. The Donner et Retenir Ne Vaut rule is no longer part of Jersey law insofar as it applies to trusts and foundations. 12. Cf Knight v Knight (1840), 3 Beav 148 with a view to the three certainties (intention, subject and object). 13. Milroy v Lord (1862), 4 De GF & J 264. 14. Arts 552 and 555 PGR (old Liechtenstein foundation law); §1 Liechtenstein Foundation Law 2008. 15. The answer of common law jurisdictions to the sham trust argument was to repeal the common law relating to formal shams arising from the fact that the settlor has reserved extensive powers in the trust deed. However, reserved powers legislation cannot validate a substantive sham, ie a valid trust per se, but which is administered without integrity! 16. Liechtenstein Law Gazette No. 220/2008, publication on 26 August 2008, entry into force on 1 April 2009. 17. Martin Schauer, Der Schutz der Stifterinteressen im neuen liechtensteinischen Stiftungsrecht, LJZ 2009, 42. 18. Marcus Rick, Die Stiftungsrechtsrevision und die Krux mit den ‘Quasi-Stifterrechten’ LJZ 2010, 89ff. 19. Ibid 91. 20. OGH 06.12.2001, 1 Cg 378/99-50, LES 2002, 41 (52). This judgment overturned an earlier judgment of the Supreme Court of 1 July 1996, LES 1998, 97, in which the Supreme Court had held that the rights of the founder in a foundation may be assigned, bequeathed or otherwise transferred (but not pledged or otherwise encumbered) in a way similar to the rights of the holder of the founder’s rights in an Anstalt (establishment). 21. OGH 17.07.2003, 1 Cg 2002.262–55. 22. StGH (State Court of the Principality of Liechtenstein), 18.11.2003, AZ 2003/65, LJZ 2004, 80. 23. The details about the beneficiaries can then be regulated in the supplementary foundation deed (by-laws). 24. The foundation board shall then adopt a resolution on dissolution as soon as it receives a request by the founder. 25. If the founder has reserved to himself the right to revoke the foundation and he himself is the ultimate beneficiary, the beneficiaries shall not be entitled to rights of information and disclosure. If in the declaration of establishment the founder has set up a controlling body for the foundation, the beneficiary may only demand disclosure of information concerning the purpose and organization of the foundation, and concerning his own rights vis-à-vis the foundation, and may verify the accuracy of this information by inspecting the foundation deed, the supplementary foundation deed and the regulations. The beneficiary shall not be entitled to the rights pursuant to §9 if the foundation is subject to the supervision of the foundation supervisory authority. 26. The Liechtenstein legislator has decided to keep the right of revocation in the law in spite of various discussions on the topic; Report of the Liechtenstein Government Nr. 85/2008, 8ff; Martin Schauer, Grundelemente des neuen liechtensteinischen Stiftungsrechts und die rechtsvergleichende Perspektive in Hochschule Liechtenstein, Das neue liechtensteinische Stiftungsrecht (2008), 26. 27. Report by the Government of the Principality of Liechtenstein of 15 June 2004, 8. 28. Paolo Panico, ‘As you Like It or Measure for Measure? Private Foundations as an Alternative to Trusts’ (2009) 15 T&T 273–78. 29. Article 33 Foundations (Jersey) Law 2009, L. 23/2009. 30. Also in a recent decision from the Isle of Man decision, Kakay v Frearson & Other of 20 June 2008, the High Court of Justice of the Isle of Man (CLA 2004/28 & CA 2004/8) held with a view to a Panamanian charitable foundation that it sees no reason why the principle of piercing a corporate veil should not be applied to a trust fund. 31. Harald Bösch, Liechtensteinisches Stiftungsrecht (2005), 716. 32. StGH (State Court of the Principality of Liechtenstein) 16.09.2002 (2002/17). 33. 1 Cg 2000.293-39, LES 2003, 128. 34. 2 C 133/95-70, LES 1998, 111. 35. Michael Schyle, Brennpunkte des liechtensteinischen Stiftungsrechts im Lichte insbesondere der neueren Rechtsprechung LJZ 2004, 182. 36. LES 1998, 332ff. © The Author (2011). Published by Oxford University Press. All rights reserved.

Hayton, David

doi: 10.1093/tandt/ttr049pmid: N/A

Abstract The author takes the reader on an encompassing tour d’horizon with a view to the differences and similarities of trusts and foundations. Whereas trusts and foundations serve the same purposes, the article goes into the heart of the matter and carries out a detailed analyis of fundamental areas of law which include legal personality and sham issues, rights of settlor and beneficiaries, powers of trustees and foundation councillors as well as rights of information of beneficiaries. The final conclusion reached is that there is little to choose between trusts and foundations since they are both such versatile and adaptable vehicles. Key points Trusts and foundations have one fundamental difference—legal personality. One of the consequences of a foundation being a legal entity is that legislation provides a skeleton structure with a few mandatory rules but, otherwise, leaves it to the founder to develop the constitutional structure. It is better not to be a trustee with unlimited personal liability but to be on the board of the foundation which itself enters into contracts. A settlor of a trust can play as extensive a role as a founder of a foundation. Both can reserve a power of revocation, appointment, or amendment. The heart of the matter While particular jurisdictions’ laws as to trusts and foundations obviously vary, the core concepts have one fundamental difference from which many differences flow. A foundation is a legal entity. Like a corporation, it is the full owner of its assets, though, unlike a corporation, it has no shareholders that own it and can liquidate it so as to realize the underlying value of their investment. A trust is not a legal entity. The property of the trust is the property of the trustees, though such property is not part of the trustees’ own estate or patrimony, but must be held as a segregated fund for the benefit of the beneficiaries or for the furtherance of lawfully permitted purposes. Originally, these purposes needed to be charitable or public purposes but many jurisdictions have enacted legislation so that non-charitable purpose trusts may be valid just as foundations may fulfill charitable or non-charitable purposes. Perpetuity periods, as extended by legislation, are vital for interests under trusts but irrelevant for foundations as full owners of their assets, though sometimes the duration of a foundation needs to be specified on its creation and may be limited by legislation. A foundation comes into existence by acquiring legal personality, normally upon being registered1 in a public register containing in a charter a minimum of skeleton details which are fleshed out in private and confidential regulations or by-laws. Sometimes, a foundation can come into being without needing to have any assets owned by it, though usually a minimum amount of capital is required. As a formal legal entity, there has to be express legislative provision dealing with appropriate names for a foundation, the liquidation and striking off of a foundation, and the restoring to the register of a foundation, mirroring the position for companies. There is no need of this for a trust. A trust for beneficiaries or purposes comes into existence as a private confidential arrangement when assets are vested in the trustee for ascertained or ascertainable beneficiaries or purposes and the trustee has agreed to this, rather than agreeing that this is a smokescreen for him to hold the trust fund to the order of the settlor. In this latter eventuality, there will be a sham trust for the ostensible beneficiaries or purposes, the real trust being for the settlor who has not parted with his beneficial interest in his property.2 By way of contrast, a foundation cannot be a sham: once a foundation has become a legal person by registration (or deposit of its founding document), it remains a legal person, fully owning its assets, until liquidated or otherwise struck off the register. Nevertheless, where a foundation or a company created ostensibly for purposes x, y, and z was actually created as a device or façade to enable the creator to hide or dissipate his assets, the courts will pierce the veil of legal personality and treat the assets of the foundation or company as the creator’s assets.3 Both trusts and foundations, however, may have assets to be taken into account as available financial resources of a spouse in divorce proceedings where the spouse, S, is capable of benefiting under the terms of the trust or foundation.4 The key question for the judge is whether making a particular award that will leave S with limited resources will lead to the trust or foundation being likely to provide financial assistance to S if so requested5: such award must amount to ‘judicious encouragement’ not ‘improper pressure’6 as by leaving him ‘in a state of starvation’.7 Trusts and foundations are also alike in that donative transfers to trustees or a foundation can be set aside by the court if intended to defraud or prejudice creditors,8 or if made within a specified period before the transferor became bankrupt,9 or if made with intent to defeat a claim for financial relief on divorce,10 or if made so as to defeat fixed or discretionary family protection rules for a donor’s family and dependants after his or her death.11 As a legal entity, a foundation can sue or be sued and own property in its own name and upon which execution may be levied by creditors. Because a trust is not a legal entity, it is the trustees who can sue or be sued and who own the trust property, though for the benefit of others (unless, unusually, happening to be one of the beneficiaries). Because trustees have to contract in their own name, there is the disadvantage that on new trustees being appointed the contracts have to be assigned or novated. Moreover, trustees are personally liable for any breach of contract to the extent of their own private estate or patrimony unless the other party is prepared contractually to restrict this liability (eg to the extent of the trust fund12) or unless special legislation13 is enacted to restrict the liability of trustees, eg if they made the other contracting party aware that the contract was being entered into with them as trustees and such party had no reason to believe the trustees were acting ultra vires. Trustees have a right to be indemnified out of the trust fund—in their hands or the hands of new trustees—unless the relevant liability was incurred in breach of trust or unless they happen to be indebted to the trust fund in respect of some other earlier or later breach of trust.14 Creditors have a right to be subrogated to a trustee’s right of indemnity but this will be of no help if, in particular, circumstances of which the creditor may well be ignorant, the trustee has no right of indemnity.15 Thus, persons dealing with trustees even for value should check whether or not the dealing is a breach of trust (though still running the risk of being prejudiced by some other earlier or later breach of trust making the trustees indebted to the trust). In contrast, those dealing with a foundation have no worries since the foundation can be sued, foundation legislation treating a foundation as having the fullest powers, thereby keeping confidential internal documentation as to powers and any formalities for their exercise. Clearly, a trust is not an appropriate vehicle in itself for carrying on trading activities involving contractual liabilities, tax liabilities, and possible delictual or tortious liabilities unless such activities are carried on by an underlying company owned by the trustees. As a legal entity, a foundation is better suited for carrying on trading activities as envisaged for example in The Bahamas, but some jurisdictions16 consider that the prejudicial risks for those intended to benefit under the foundation’s terms—and with very little opportunity to know what the foundation’s governing body is doing—are such that foundations should not be permitted to carry on trading activities as their primary purpose, though they can own an underlying company. A further consequence of a foundation being a legal person created, like a company, by registration in a particular jurisdiction is that it is immobile so that this property-holding structure cannot be relocated in another jurisdiction: instead, the property would need to be transferred from the ownership of the foundation into the ownership of a foundation (or of trustees) in the new jurisdiction. Special legislation,17 usually with reciprocal subsidiary legislation of other jurisdictions that have foundations, can, however, overcome this problem. Special legislation can also cope with merger of foundations.18 In contrast, a trust is an inherently mobile property-holding structure, the trustees being capable of moving from one jurisdiction to another if they are not corporate trustees. The trust instrument can also authorize the trust to continue as a trust but in a new jurisdiction, the old trustees transferring the trust property to newly appointed trustees in another jurisdiction to take over the operation of the trust and, indeed, changing the governing law of the trust to that of the new jurisdiction so long as not invalidating the initial trust.19 Alternatively, assets of a trust in one jurisdiction may, pursuant to a power in the trust instrument, be transferred to trustees of a trust in another jurisdiction, so as to augment the assets of that trust. A final consequence of a foundation being a statutory entity is that the relevant legislation provides a basic skeleton structure for the operation of a foundation with a few mandatory rules but, otherwise, leaves it to the creator of the foundation and his legal representatives to flesh out the constitutional structure, eg in inserting plenty of provisions, modelled on provisions in trust instruments, or trust legislation, to try comprehensively to cover eventualities that could arise in carrying out the wishes of the creator. There is an abundance of legislation creating foundations but virtually no case law on the interpretation and application of constitutional provisions and the nature of any obligations arising thereunder, especially so far as concerns the inevitable interstices within the legislation and the constitutional provisions, eg as to the nature of board members’ duties and the ambit of beneficiaries’ rights. In contrast, there is an abundance of case law, based on the English equitable origins of the trust, that is available to provide plenty of guidance to lawyers and judges concerned with the operation of trusts. Significantly, however, foundation legislation in jurisdictions, like The Bahamas, the Seychelles, and Jersey (though not Antigua), fearful of the potential ambit of equitable obligations, eg in creating fiduciary duties of undivided loyalty to beneficiaries, normally excludes the possibility for any such obligations to arise, while making clear that beneficiaries have no legal or equitable proprietary rights in the assets of the foundation that in itself is the full owner of those assets. The position of role-players The settlor or founder It seems to me that a settlor of a trust can play as extensive a role as a founder of foundation. Both can reserve a power of revocation20 or a general or special power of appointment or a power to amend their created structure. Both can reserve a power to direct the investment activities of the trustees21 or the foundation, while the trustees or the foundation carry out their distributive role to benefit beneficiaries, though the trustees will need to monitor the settlor’s activities so as to keep proper accounts and be in a position to remedy the position if the settlor uses, or tries to use, his power so as to move beyond the investment function to a distributive function. Both can reserve a power to replace the trustees or protectors of a trust or the Foundation’s Officers or Council or Board or protector committee as the case may be. Both can reserve powers of veto whether over management decisions or distributive decisions. A trust remains a valid trust where the settlor relies on specific provisions in the trust instrument to justify his interventions, however extensive, so long as the reality is not that the trustee, anyhow, agreed to do whatever the settlor wanted whenever he wanted so as actually to have agreed to hold the trust property to the order of the settlor in a sham trust. If, however, the provisions of the trust instrument go so far, as a matter of construction of the instrument as a whole, as to have the effect that the settlor remains full beneficial owner of the trust property in his lifetime, the trust will be a true bare trust for the settlor, eg for the period that the settlor with a power of revocation is alive, the beneficiaries of a trust (to accumulate income for beneficiaries alive at the end of the perpetuity period but with the trustees having power in their discretion to appoint income or capital to beneficiaries) have no rights in respect of anything done or omitted by the trustee on the settlor’s directions in respect of the trust property,22 or if the capital and income is held to the order of the settlor in his lifetime with remainder after his death to his grandchildren equally or otherwise as he may appoint by signed writing.23 The trustees and the managing board/council of a foundation Trustees automatically have a wide range of duties and powers except to the extent restricted, ousted or enlarged, or added to in the trust instrument. They may be relieved or indemnified for breach of trust by their beneficiaries to whom they are accountable or may be excused from liability by the court if they acted honestly and reasonably and ought fairly to be excused for the breach and for omitting to have earlier sought advice from the court. The managing board of a foundation has as many powers conferred on it as the regulations of the foundation provide expressly or by necessary implication and as many duties similarly imposed on it except to the extent, as usual, exempted from liability for a breach of the standard of care other than one resulting from wilful misconduct or dishonesty, and exempted from duties of a fiduciary nature to the beneficiaries of the foundation. The board members’ fundamental duty is to the foundation. They cannot, however, seek relief from any liability unless the foundation’s regulations provide for a supervisory or protector body to have power to grant such relief or a statutory provision in the foundations law permits relief to be granted by the court, as in The Bahamas. Trustees’ core duties to inform beneficiaries with entitlements and discretionary beneficiaries, who realistically are potential recipients of trust assets, that they are beneficiaries and to account to such beneficiaries for their trusteeship (via supplying information and accounts of transactions) mean that their conduct can effectively be monitored or ‘policed’, so that the courts can intervene where appropriate24 to make the trustees act properly and augment the trust fund in respect of any losses or unauthorized profits. Nevertheless, many cautious settlors insert into their trust instrument provisions for there to be a protector or a committee of protectors that has some powers of oversight, and of replacement, of trustees, often coupled with other powers of a negative or positive nature. Many foundation laws make it possible to prevent the beneficiaries from having any meaningful rights, thereby affording tremendous freedom to the board of the foundation to get on with its job as it sees fit. Thus, such laws permit the founder to set up a supervisory body to protect beneficiaries’ interests and ensure the board renders proper accounts.25 Exceptionally,26 it can be a mandatory requirement that the founder ensures that a corporate or individual person (acceptable to him) is made the guardian of the foundation to whom the board must account for its conduct. The supervisory body may be given power to sanction or authorize any action taken or to be taken by the board that would otherwise not be permitted. Usually, there will have to be a resident professional in the foundation’s jurisdiction to form the foundation and to receive communications addressed to the foundation. Exceptionally, as in Jersey and The Bahamas, there is a need to have as a board or council member or officer of the foundation, a local licensed trust company or other provider of financial and corporate services. This is to ensure that the foundation does not carry on in a way which might damage the reputation of local foundations and that there is a local company that can be held responsible for the foundation’s activities if going awry. The beneficiaries Beneficiaries of trusts, including objects of fiduciary powers that must be exercised (namely beneficiaries of discretionary trusts) and objects of fiduciary powers of appointment that may be exercised, have equitable proprietary interests in the trust fund that enable them, via the tracing process, to assert proprietary claims against trust property traced into the hands of persons other than bona fide purchasers of the legal title for value without notice of the trust or persons protected by special statutory provisions.27 Some jurisdictions have not permitted such ‘proprietary’ trusts to develop but have developed ‘obligational’ trusts where trusts are not part of the law of property but a special part of the law of obligations. The beneficiaries benefit from a preferred obligation in respect of their fiduciary patrimony held separate from the trustee’s private patrimony and binding the trustee’s creditors and heirs, but not transferees of such property. Beneficiaries under the constitution of a foundation have no proprietary interests whatsoever in the foundation’s assets that fully belong to the foundation itself, nor do they have any specially preferred obligation binding the foundation if it becomes insolvent or is liquidated. Thus, even if all the foundation’s beneficiaries are ascertained, of full capacity and of one mind they cannot wind up the foundation, unlike the case of the traditional proprietary trust.28 Moreover, the exclusively entitled beneficiaries of a foundation cannot be personally liable for a foundation’s liabilities, unlike the case of the traditional proprietary trust.29 Beneficiaries of trusts, including objects of fiduciary powers that must be exercised and objects of fiduciary powers that may be exercised, have extensive personal rights against the trustees. They are entitled to know that they are beneficiaries and they are entitled to see trust accounts with supporting documents and oral information. They can then require the trustees to augment the trust fund in respect of losses arising from breaches of trust and in respect of gains made by the trustees in breach of their duty to avoid conflicts between their duty and their self-interest.30 The irreducible core of the trust concept is a set of obligations owed to the beneficiaries by the trustees. As Millett LJ stated,31 “If the beneficiaries have no rights enforceable against the trustees there are no trusts.” In stark contrast, while a founder may confer extensive rights upon the beneficiaries of the foundation, he normally has plenty of opportunity to keep them in the dark with little opportunity to bring any legal proceedings to further their interests, especially where they are discretionary beneficiaries. Thus, in the case of a Bahamas’ foundation it can be arranged that such beneficiaries do not need to be informed that they are such and have no rights to information, having to hope that the licensed local trustee as an officer on the governing body will see that such body behaves itself. The position is similar for Jersey foundations, though there is also the hope that the guardian will act appropriately. Under Liechtenstein law, a founder who is the ultimate beneficiary with the right to revoke the foundation can exclude beneficiaries’ rights to information and curtail them if he has established a controlling body in the foundation declaration. Panamanian law permits the rights of beneficiaries to accounts to be excluded. Under the Seychelles Foundations Act 2009 section 61, the founder can exclude the rights of beneficiaries to see the charter, regulations, accounts, and minutes of meetings, whether or not there is a supervisory person appointed. Even if a beneficiary knows of his position under the foundation, section 64 permits the charter or regulations to provide in terrorem that a beneficiary shall forfeit any of his interest in the event that he challenges the establishment of the foundation, the transfer of assets to it, the charter or regulations, or any decision of a founder, a councillor or a supervisory person. Unlike the position for interests of beneficiaries under trusts,32 this apparently authorizes the ouster of the court’s jurisdiction and of the principle that fundamental to a legal right is the right to invoke the court’s protection of that right. It may be that this will make it possible to arrange that matters concerning the operation of the foundation could go to arbitration or mediation without the need to involve the beneficiaries or their representatives (eg if minors or unborn or otherwise unascertained). Epilogue Generally, one can say that a settlor and a founder can, under an appropriate trust law or foundation law, retain an equally strong position without affecting the integrity of the trust or foundation structure. The beneficiaries, however, can, by the founder’s choice of an appropriate foundation law, be placed in a much weaker position in their lifetime or until they are, say, thirty years old than if they were interested under a trust. After all, if they are kept largely in the dark or if they cannot effectually challenge the board, then they are more likely to carve out for themselves a fulfilling working life, rather than relying upon being ‘trust-babes’ devoted to an easy life of pleasure. To prevent the board of the foundation having too soft a life and to safeguard the interests of beneficiaries, a founder can then provide for a supervisory committee to oversee the board. From the viewpoint of the owner-manager of the assets, it is better not to be a trustee with unlimited personal liability but to be on the board of the foundation which itself enters into contracts. The problem, however, with a foundation is whether for tax purposes it will be classified as a trust or as a company by a revenue authority so as to maximize revenue. While it may be more straightforward for a private trust company running family trusts to be owned by a foundation than a pure purpose trust, there is little to choose between a trust and a foundation since they are such versatile and adaptable vehicles, though trusts have a proven track record and provide substantial input into the detailed provisions needed in the regulations of a foundation that is to operate efficiently in foreseeable circumstances. Tax and trust specialists need to be employed to achieve the best results when creating foundations as well as when creating trust structures. 1. Very exceptionally, a private family foundation may be created by formal signing of the deed of foundation deposited with the Registry of Foundations, though the details are not open to public inspection. Under the new Liechtenstein Foundation Act 2008, the requirement for ‘deposited’ foundations (ie those which do not have a registration requirement) to submit a copy of the foundation deed to the Registrar was even abolished. Instead, a so-called notification of formation must now be drawn up and submitted within 30 days by a member of the foundation board or the representative. 2. Shalson v Russo [2005] Ch 28, A v A [2003] WTLR 1165; Re Esteem Settlement [2004] WTLR 1; A Underhill and D Hayton, Law of Trusts and Trustees LexisNexis (18th edn) paras [4.7]–[4.10] (‘U & H’ hereafter). 3. Moir v Wallersteiner [1974] 1 WLR 991 at 1013 per Lord Denning; Trustor AB v Smalbone (No 2) [2001] EWHC 703 (Ch); [2001] 1 WLR 1177 at [25]; Hashem v Al Shayif [2008] EWHC 2380 (Fam); [2009] 1 FLR 115 at [158]–[164]; Kakay v Iverson [2010] WTLR 1029. 4. Matrimonial Causes Act 1973 (England) s 25 (2) (a) requires the judge to take account of: other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future 5. Charman v Charman [2007] EWCA (Civ) 503; SR v CR (ancillary relief: family trusts) [2008] EWHC 2329 (Fam); PJC v ADC (Ancillary Relief: Trust Fund) [2009] EWHC 1491 (Fam). 6. SR v CR (above), Thomas v Thomas [1995] 2 FLR 668; B v B [2009] EWHC 3422 (Fam). 7. Howard v Howard [1945] P 1 at 4 per Lord Greene MR. 8. Insolvency Act 1986 (UK) ss 423–425; offshore common law islands drastically restrict the scope of these provisions for trusts and foundations. In civil law jurisdictions, there is the Pauline action based on Roman Law. 9. Insolvency Act 1986 (UK) ss 339–342: within 2 years, or within 5 years if the disposition was made when the transferor was insolvent or itself made the transferor insolvent. 10. Matrimonial Causes Act 1973 (England) s 37. 11. Section 10 of English Inheritance (Provision for Family and Dependants) Act 1975 if the gift was made within 6 years of death with intent to defeat claims under the 1975 Act. Fixed forced heirship provisions safeguard the heirs’ interests in civil law jurisdictions, but will normally be ousted in offshore jurisdictions in respect of lifetime gifts as opposed to testamentary gifts. 12. Steps are needed, however, to ensure that the trustee does not diminish the trust fund substantially, eg by distributions to beneficiaries. See BVI Trustee (Amendment) Act 2003 adding s 101 to its Trustee Act. 13. Eg as in BVI Trustee (Amendment) Act 2003 adding ss 95–99 to its Trustee Act and in USA Uniform Trust Code ss 1010, 1012, but problems can arise where the contract concerns dealings outside the jurisdiction and governed by a foreign contract law unless special provisions are inserted into such contract. 14. English Trustee Act 2000 s 31(1); U & H (n 2) paras [81.5], [81.33] and [81.46]. 15. U & H (n 2) paras [81.47]–[81.54]. 16. Eg Austria, Panama, and Liechtenstein. 17. Eg the Foundations (Continuance) (Jersey) Regulations 2009 enable re-domiciliation in Jersey of Panama Private Interest Foundations, Bahamas Foundations, Liechtenstein Stiftungs and Anstalts, St Kitts and Nevis Multiform Foundations and Malta Private Foundations. 18. Eg the Foundations (Mergers) (Jersey) Regulations 2009. 19. See U & H (n 2) paras [100.162]–[100.164]. 20. Choithram International SA v Pagarani [2002] 1 WLR 1 at 11, PC. 21. Vestey’s Executors v IRC [1949] 1 ALL ER 1108, HL. Indeed, there is no trust law reason why the settlor, if he wants, should not be entrenched in the trust instrument as the first discretionary portfolio manager until resignation or death or becoming mentally incapacitated. 22. Under USA Uniform Trust Code ss 603(a), 608(a) this is a valid lifetime trust but other jurisdictions where property is located may characterize it as a testamentary trust requiring compliance with formalities for wills and the property to be available for the deceased settlor’s creditors. 23. A trust like this valid under Bahamas trustee Act s 3 (2) (i) may also be characterized in other jurisdictions as a testamentary trust as in the preceding footnote. 24. Schmidt v Rosewood Trust Ltd [2003] UKPC 26; [2003] 2 AC 709, Freeman v Ansbacher Trustees (Jersey) Ltd 2009 JLR 1 [2010] WTLR 569. 25. Eg Liechtenstein, Panama, and Seychelles. 26. As in Jersey. 27. Purchasers of land who pay their purchase money to two trustees or a trust corporation take free from beneficiaries’ interests which are detached from the land and attached to the purchase money: Law of Property Act 1925 s 27. 28. Under the rule in Saunders v Vautier (1841) 4 Beav 115, see U & H (n 2) art 66; but many jurisdictions have ousted this so that a settlor’s purposes may be fulfilled. 29. Hardoon v Belilios [1901] AC 118, U & H (n 2) paras [81.37]–[81.39]. 30. Schmidt v Ropsewood Trust ltd [2003] UK PC 26; [2003] 2 AC 709; Foreman v Kingstone [2004] INZLR 841; Freeman v Ansbacher Trustees (Jersey) Ltd [2009] JLR 1; [2010] WTLR 569. Confidentiality matters may preclude some entitlements: U & H (n 2) paras [56.2]–[56.9]. 31. Armitage v Nurse [1998] Ch 241 at 253. 32. See AN v Barclays Private bank and Trust (Cayman) Ltd [2007] WTLR 565, U & H (n 2) para [11.86]. © The Author (2011). Published by Oxford University Press. All rights reserved.

Panico, Paolo

doi: 10.1093/tandt/ttr074pmid: N/A

Abstract Private foundations allow founders to retain an active role in the management and control of the structure to an extent that is seldom available to trust settlors. The corporate nature of private foundations does not necessarily undermine an active role of its founder. Nonetheless, a heavy-handed founder may trigger unwanted tax and estate planning consequences. This article reviews founder's powers in civil law private foundations (Austria, Liechtenstein, Panama) and in some selected common law jurisdictions (St Kitts, Bahamas, Anguilla, Seychelles, Jersey and Belize). Some concluding remarks are devoted to nominee founders and the ability to assign founder's rights. Key points Reserved powers under private foundation legislation in civil and common law jurisdictions compared and contrasted. Scope and nature of founder's powers and their impact on the validity of foundation. Foundation councils: membership and incompatibility rules. Nominee founders. Introduction A received view on private foundations, as opposed to trusts, is that they are more attractive to people, especially aspiring founders, with a civil law background. Due to their corporate nature, private foundations are deemed to be more immediately understandable than trusts and, for the same reason, they allow founders to retain an active role in the management and control of the structure to an extent that is seldom available to trust settlors. As it is commonly recognized, the first modern enactment of private foundation legislation was the Liechtenstein Law on Persons and Companies or PGR (Personen- und Gesellschaftsrecht) of 1926, a total revision of which—in respect of private foundations—came into force as of 1 April 2009.1 The Austrian Law on Private Foundations or PSG (Privatstiftungsgesetz) of 1993 was extensively influenced by the neighbouring Principality's model but it included some original approaches that may have been a source of inspiration for the recent overhaul of Lichtenstein foundation law. On the other hand, the Panamanian Law N. 25 of 12 June 1995 regulating Private Interest Foundations or LFIP (Ley 25 de 12 de Junio de 1995 por la cual se regulan las Fundaciones de Interés Privado) followed the Liechtenstein approach within a civilian legal system with a view to increasing the attractiveness of private foundations as offshore wealth management vehicles. A recent wave of legislative experimentation was carried out during the last decade in a number of common law jurisdictions, including some leading trust jurisdictions such as Jersey and the Bahamas. The earliest example of private foundation legislation in a common law context was the St Kitts Foundations Act, 2003 while the most recent appears to be the International Foundations Act, 2010 of Belize. A number of similarities exist between the private foundation models provided for under Liechtenstein and Austrian law and, to some extent, the Panamanian one. On the other hand, common law jurisdictions have adopted diverging patterns in a number of respects, ranging from the legal nature of the beneficial interests under a foundation to the liability of foundation officers. Some alternative approaches may be identified with reference to the founder's role and powers. In many respects, the legislative solutions enacted in common law jurisdictions appear to have been oriented by a clear reference to the corresponding provisions under trusts law. This article attempts to review the founder's powers in civil law private foundations as well as in some selected common law jurisdictions. The reservation of certain powers to the founder is generally admitted under private foundations legislation. These are permissive provisions, not mandatory ones, and in most cases no implied powers are provided for by law. The corporate nature of private foundations, ie their status as ‘legal persons’, is not necessarily undermined by the active role that the founder may have wished to retain. Nonetheless, a heavy-handed founder may trigger unwanted tax consequences and estate planning implications. Founder's powers in the civil and in the common law As a general rule, any instance of private foundation legislation includes some provisions enabling the founder to retain certain powers that are generally not available to a trust settlor. A prominent exception in respect of trusts is the ‘reserved power trust legislation’ enacted in some offshore centres, some of which equally qualify as private foundation jurisdictions (Jersey, Bahamas, Nevis).2 However, the compatibility of such ‘reserved powers’ with the very institution of the trust, as it has been traditionally understood in the jurisdictions following English equity, is questionable. Similarly, the recognition of a ‘reserved powers trust’ in the civil law jurisdictions that have enacted the Hague Convention of 1985 on the Law Applicable to Trusts and on their recognition may give rise to some difficulties. Of course, a doctrine of ‘sham’ is not directly applicable to private foundations, essentially by virtue of the incorporation and registration formalities under which they come into existence as ‘legal persons’. However, the intended legal and tax consequences of any arrangement involving a private foundation may be jeopardized if the founder's role is not carefully designed with due consideration to its impact on the different jurisdictions concerned (ie the residence, domicile or nationality of both the founder and the beneficiaries as well as the location of the foundation assets). Of course, the founder has very wide degrees of freedom in respect of the foundation set-up, as reflected in the provisions of the incorporation documents (foundation deed, or declaration of establishment, foundation charter or articles).3 All instances of private foundation legislation are extremely flexible with regard to the founder's ability to define the beneficial interests and the organizational structure of his foundation. Beyond the set-up phase, the founder may wish to be involved in the ongoing administration of the foundation or to supervise it, as well as to retain the power to modify the structure and functioning of the foundation. The powers that a founder may be able to retain under nearly all instances of private foundation legislation, although with some differences, may fall under four headings: the power to dissolve the foundation, sometimes described as a power to revoke it; the power to amend the foundation documents; the power to appoint and to remove the foundation council as well as to be a member of it; and the power to appoint and to remove additional supervisory bodies as well as to be a member of them. The founder has almost unrestricted statutory powers to revoke the foundation or to amend its incorporation documents before the completion of the registration formalities that cause a foundation to acquire ‘legal personality’.4 A distinction is made under Austrian law5 between the ‘establishment’ (Errichtung) of a foundation, corresponding to the execution of the foundation charter, and its coming into existence or ‘creation’ (Entstehung), which takes place by way of registration in the Company Registry (Firmenbuch). The same notions are provided for under Liechtenstein law, even though only common-benefit (ie charitable) foundations and private foundations carrying out a business activity under a special law are under a legal obligation to be entered in the Public Register.6 The foundation does not exist as a separate legal entity in the preliminary phase preceding its registration: this is described as ‘pre-foundation’ (Vorstiftung) in the Austrian and Liechtenstein doctrine. It is therefore quite possible for founders to change their mind at this stage, and either revoke the incorporation process altogether or amend the terms of the foundation charter. Powers of revocation and amendment The founder's power to dissolve, in German ‘to revoke’ (widerrufen), a private foundation after its creation as a separate legal entity is contemplated under Austrian law, insofar as it is expressly reserved in the foundation charter.7 Only founders that are natural persons may reserve such power: this restriction is meant to enhance the stability of private foundations by limiting the time period during which they may be freely terminated at the founder's will. On the other hand, no such limitation exists in respect of the founder's power to amend the foundation charter, a power, which may be equally retained by the founder of an Austrian foundation regardless of his condition as an individual or as a legal entity.8 The same powers are provided for under Liechtenstein law, though they are only available to founders who are individuals.9 No such restriction exists under Panamanian law, where private foundations are declared to be ‘irrevocable’ unless the foundation charter provides otherwise.10 On the other hand, the foundation charter may contain the founder's power to execute modifications when it is deemed convenient.11 The founder's power to revoke a foundation, ie to dissolve it and to claim back the assets originally transferred to it, does not affect the validity of a private foundation, as it is defined by statute. However, such an arrangement may lend itself to a qualification, so that the intended effects are deemed to take place as of the time of the founder's death. A similar approach was often taken by the English courts in respect of trusts where the settlors retained significant powers during their lifetime.12 Two recent examples, regarding Liechtenstein foundations, are the decisions of the Higher Regional Court or OLG (Oberlandesgericht) of Stuttgart of 29 June 200913 and that of the Düsseldorf OLG of 30 April 2010.14 The same remark may be made in respect of an unrestricted power to modify the very structure of a private foundation by way of amendments to its incorporation documents. A due consideration of this potential problem appears to be at the basis of the opposite approach followed in the International Foundations Act, 2010 of Belize, section 32(5) of which provides that: A founder shall not retain, possess or acquire the power to dissolve a foundation or amend a foundation charter. On the other hand, most common law jurisdictions have followed the civil law pattern allowing the founder to retain the power to dissolve the foundation or to amend its charter. These powers vest in the founder by way of default, subject to the terms of the ‘declaration of establishment’, under section 7(2) of the Foundation Act, 2008 of Anguilla and, as such, they override the description of an Anguillan foundation as ‘irrevocable’ under section 45 of the same act. An express power to dissolve or to amend a foundation, or to approve or direct the exercise of any such powers by another person, may be reserved by the founder of a Seychellois foundation.15 As regards the power of amendment alone, it is impliedly conferred on the founder under section 6(2) of the Seychelles Foundations Act, 2009 if the charter makes no provisions to that effect. The charter of a Bahamian foundation may include without limitation, inter alia, the following provisions:16 (a) for the reservation of rights and powers to the founder; (g) permitting amendment to the charter and specifying circumstances in which it may be amended; (l) except where the charter is contained in a will, for the revocation of the foundation. Section 50 of the Bahamian Foundations Act, 2004 provides a detailed description of the procedures to be followed for the exercise of the powers of revocation or of amendment, with an indication of the founder's role in the convention of the required meetings and in the filing of the necessary applications. Similar provisions apply to St Kitts foundations, the articles of which may include provisions in respect of the dissolution of the foundation or of the amendment of its articles.17 Jersey law18 stipulates the following: If a person has the right to apply to have a foundation wound up and dissolved, details of the right must be specified in its charter. On the other hand, the manner in which the charter or the regulations of a Jersey foundation may be amended may be provided for in its regulations.19 A unique feature of Jersey law is the exclusion in respect of private foundations of the customary rule ‘donner et retenir ne vaut’,20 that was at the basis of the famous, yet probably overemphasized, ‘sham doctrine’ following the Rahman case.21 Powers of management and control The powers of revocation and amendment referred to above allow the founder to shape the very structure of a private foundation. As such, they are called ‘Gestaltungsrechte’ under Austrian and Liechtenstein law. As an alternative to such powers, that may prove exceedingly intrusive and detrimental to the foundation in many circumstances, a founder may retain the right to continually influence its administration and control through the foundation's managing body, often described as ‘foundation council’. This may essentially happen via the founder's right to appoint and remove the council members or to be a member himself. In addition to that, the founder may be entitled to appoint and to remove as well as to be a member of a supervisory or advisory body that may perform the functions typically conferred on trust protectors. The appointment, dismissal, term of office as well as organizational powers and signatory authority of the foundation council (Stiftungsrat) must be provided for in the deed of incorporation of a Liechtenstein foundation.22 Apart from a minimum requirement of two members,23 which may include legal entities as well as natural persons, and that at least a council member must be licensed under Article 180 a of the PGR, no restrictions exist as to the founder's ability to control the council's duration of office or to be a council member with the voting rights and the signatory authority that he wishes to retain. The inclusion of the founder as a member of the foundation council (consejo de fundación)24 as well as the founder's power to remove council members and to appoint new or additional ones25 are expressly permitted under Panamanian law. Nonetheless, the council of a Panamanian foundation must consist of at least one legal entity or three individuals.26 The first management board of an Austrian foundation (Stiftungsvorstand) must be appointed by the founder upon incorporation.27 On the other hand the regulations as to the appointment, dismissal, term of office and signatory authority of the foundation board may be specified in the declaration of establishment,28 subject to a requirement that the board must consist of at least three members, all individuals, at least two of which must be ordinarily resident in a member state of the European Union or of the European Economic Area.29 A unique feature of Austrian law is a strong concern with the foundation board's independence. For this reason, section 15 (2) of the PSG includes a mandatory incompatibility rule preventing a beneficiary, his or her spouse, or any persons that are directly related to the beneficiary (ie grand-parents, parents, children, and remoter issue) from being members of the management board. The same rule extends to the shareholders of a beneficiary that is a legal entity30 and it is construed extensively under Austrian case law, as it was recently made clear by the Supreme Court or OGH (Oberster Gerichtshof) in its decision of 16 October 2009,31 where it was ruled that lawyers and tax advisors who owe fiduciary duties to a beneficiary by virtue of an ongoing professional relationship may not be members of the foundation board. These incompatibility provisions focus on the beneficiaries but they can effectively constrain the founder's ability to be a member of the foundation board if any beneficial interests are meant to be conferred on the founder's spouse, children and remoter issue. The emphasis of Austrian law on the management board's independence of the foundation beneficiaries is similar to the approach that can be expected to be taken by a court of equity in respect of trustees.32 It is certainly intended to strengthen the position of Austrian foundations against any allegations of ‘sham’ or fiscal ‘transparency’. No such restrictions exist in respect of the additional bodies that a founder may appoint under Austrian foundation law.33 However, if a supervisory council (Aufsichtsrat) is required by law,34 the beneficiaries or any persons related to them may not form a majority of its membership.35 For the same purpose of upholding the foundation board's independence, the Austrian Supreme Court recently took a strict approach in respect of such additional bodies, that are often referred to as ‘advisory board’ or Beirat. In a controversial decision of 5 August 200936 the OGH ruled that an advisory board consisting solely of foundation beneficiaries may not interfere with the decisions of the management board. No particular limitations exist in respect of Liechtenstein foundations, where additional bodies may be designated by the founder with a view to manage the foundation assets, advising and assisting the foundation council, as well as monitoring the administration of the foundation.37 Extensive powers of appointment may vest in such additional bodies38 and, conversely, their presence in the foundation set-up entails a restriction of the beneficiaries’ right to demand disclosure of information.39 The term protector is expressly included in the Spanish text of the Panamanian Law on Private Interest Foundations with reference to the supervisory bodies (órganos de fiscalización) that may be provided for under the foundation documents.40 The foundation council may be required to obtain the previous consent of a protector for the exercise of any of its powers, with a corresponding limitation of liability for any transactions carried out in accordance with such consent.41 A significant exception to the legislative patterns followed within the common law world is the International Foundations Act, 2010 of Belize, section 35(2) of which prevents a founder from being a protector of a foundation while section 35(4) goes so far as to provide that: A founder shall not retain, possess or acquire the power to direct a foundation council in respect of the administration of a foundation, nor shall a founder retain, possess or acquire any control, power or dominion over the endowment of a foundation that he establishes or to which he disposes property. In general, the founder may be a member of the council of a Belizean foundation.42 Nonetheless, the same incompatibility rule barring beneficiaries from being members of an Austrian foundation council exists under the laws of Belize.43 As a result, should the founder retain a beneficial interest in the foundation—a circumstance that is expressly admitted under section 13(2) of the International Foundations Act, 2010—he could not be a member of the board. The founder or the beneficiaries are not disqualified from being council members in a St Kitts foundation44 and they are expressly authorized to be ‘guardians’.45 Guardians may be council members as well, provided that—unsurprisingly—if a person is the sole councillor, she may not be a guardian at the same time.46 The founder and the guardian have a statutory, default power to ratify any actions by the councillors beyond the powers conferred on them under the foundation articles47 and they are entitled to attend and to be heard, though with no voting power, at any council meetings.48 The provisions of St Kitts law are matched in the later statutes of some other common law jurisdictions such as the Bahamas,49 where some emphasis is placed on the role of a ‘supervisory person’, and Anguilla,50 The same person may not be a member of the foundation council and its guardian under Jersey law, unless such dual office is conferred on the founder or on the ‘qualified member’,51 ie a person licensed to provide the services specified under Article 2(4)(a) and (d) of the Financial Services (Jersey) Law 1998, whose appointment to the council of a Jersey foundation is mandatory.52 The appointment and removal of councillors as well as of any supervisory person feature among the powers that a founder can validly reserve under Seychelles law.53 Furthermore, the founder may be a councillor or a protector of a Seychellois foundation but he may not be the sole councillor54 nor may the sole councillor be also a protector.55 Nominee founders and assignment of rights and powers The retention by the founder of certain powers under the foundation charter gives rise to a relevant issue in respect of the practice commonly followed in most offshore jurisdictions to have foundations incorporated by a nominee founder. For obvious reasons of confidentiality, the ‘founder’ formally executing the declaration of establishment, or deed of incorporation, and attending to the other formalities to bring a foundation into being tends to be a representative of the trust and corporate service provider that will be subsequently involved in the administration of the foundation. This practice is mandatory in Jersey, where an application to the registrar for the incorporation of a foundation must be filed by a ‘qualified person’. This issue is interwoven with that of the ability for the founder to assign his powers, that in civil law jurisdictions tend to be described as ‘rights’ (Rechte). Austria is the sole onshore jurisdiction with a comprehensive regulation of private foundations being considered in this article. The position under Austrian law is clear under § 3(3) of the PSG: the founder's rights to structure a private foundation (Gestaltungsrechte) do not pass to his successor(s) in title, ie they may not be assigned either inter vivos or mortis causa. This doctrine refers to the ‘highly personal nature’ (Höchstpersönlichkeit) of the founder's position and it implies that the founder's ability to shape the structure of an existing foundation disappears with the demise of the founder, ie it is not transferred to the founder's heirs, who may or may not be beneficiaries. Of course, the founder may not transfer such powers of ‘rights’ during his lifetime. Although not confirmed by Austrian case law, this doctrine is almost unanimously believed to imply that, in the event of a nominee founder, all the powers and rights provided for under Austrian law vest in the nominee and not in the principal. This issue was the subject matter of an evolutionary attitude by the Princely Supreme Court of Liechtenstein or FL-OGH (Fürstlicher Oberster Gerichtshof) which, in an earlier decision of 1 July 199656 had held that the founder's rights may be freely transferred in the same way as those of the founder of an Anstalt.57 This way a common practice of Liechtenstein trust and corporate service providers was upheld, under which they would formally act as founders and then execute an assignment agreement with the beneficial owner, transferring to him the rights and powers conferred on the founder under the foundation charter. This approach was but overturned in a decision of 6 December 2001,58 where the Liechtenstein Supreme Court adopted the approach of its Austrian counterpart and declared the ‘highly personal nature’ of the founder's powers. The resulting uncertainty was resolved under the newly enacted foundation legislation, with the new Article 552 § 4(3) of the PGR specifying that, if a foundation is formed by an ‘indirect representative’ (ie a nominee not disclosing its principal's identity), the principal (or ‘authorizor’) shall be deemed to be the founder. In any event, the ‘indirect representative’ shall disclose the identity of the founder to the foundation council.59 The Liechtenstein statutory approach may be a valuable guidance in respect of the other offshore jurisdictions that admit the role of a ‘nominee founder’ but are silent in respect of the operation and exercise of the founder's powers and rights.60 Similarly, a ‘founder’ is described under Jersey law as ‘the person who instructed the qualified person to apply for the incorporation of the foundation’.61 The civil law approach to ‘Gestaltungsrechte’ found its way in the Bahamian statute, section 9(2) of which specifies that: The rights of a founder in respect of the formation of a foundation shall not devolve upon his successors in title or assigns. A similar provision exists under Anguillan law, where the default statutory power (described as a ‘right’) for the founder to revoke or to amend the declaration of establishment is personal and non-assignable.62 However, this provision is subject to any different terms under the declaration of establishment. Conclusion As regards the founder's position, private foundations may provide a more flexible arrangement than trusts (with the exception of some recent legislative experiments in the field of ‘reserved powers trusts’). Founders may retain the power to amend the overall structure of a foundation in an evolutionary manner, as well as the right to revoke it altogether. In addition to such ‘structural powers’, founders may be involved in the day-to-day management if they join the foundation council, or they may control it if they hold office as guardians or members of a supervisory body. A reasonable combination of such powers may be useful both to the founder and to the other members of the foundation council. A ‘bespoken’ founder's role is perhaps one of the main advantages of private foundations as estate planning vehicles, such as in case of succession at the helm of a family business. Nonetheless, it would be imprudent to rely on the circumstance that a ‘sham’ argument is technically unlikely to be applicable to private foundations. In any event, a heavy-handed founder may lead the structure to be disregarded, mainly for tax purposes but possibly with inheritance or asset protection implications as well. The recent legislative experiments of common law jurisdictions have adopted different approaches to this effect. In the absence of case law for the time being, the experience of civil law jurisdictions, both in terms of legislative development and of local case law, may be an insightful reference. 1. Law of 26 June 2008 on the Amendment of the Law on Persons and Companies, Liechtenstein Law Gazette 2008, Vol. 220. 2. Nevis, International Exempt Trust Ordinance 1994, s 47; Cook Islands, International Trusts Act 1984, s 13 C; Cayman Islands, Trusts Law (2009 Revision), s 13–15; Bahamas, Trustee Act 1998, s 3; Trusts (Jersey) Law 1984, art 9 A; Trusts (Guernsey) Law 2007, s 15. A detailed analysis of ‘reserved powers trusts’ is provided by this author in P. Panico, International Trust Laws (Oxford University Press, 2010), para 1.1.157–1.204. 3. Different terms are used under the many private foundation statutes: the Austrian statutory expression Stiftungserklärung (declaration of establishment or foundation charter) was adopted in the new Liechtenstein law in addition to Stiftungsurkunde (deed of foundation). On the other hand, no uniform terminology can be found across the various English language statutes of the common law jurisdictions (foundation deed, charter, articles, declaration of establishment). In this article, the expression ‘incorporation documents’ is used for general reference but the specific statutory terms of each individual jurisdiction are mentioned in respect of its particular legislation. 4. Austria, PSG, § 33(1); Liechtenstein, PGR, art 552 § 22(1); Panama, LFIP, art 12; Bahamas, Foundations Act 2004, § 50(1), (2), (3), (4), (5) and (6). 5. Austria, PSG, § 7(1). 6. Liechtenstein, PGR, art 552 § 14. 7. Austria, PSG, s 34. 8. Austria, PSG, s 33 (2). 9. Liechtenstein, PGR, art 552 § 30 (1) and (2). 10. Panama, LFIP, art 12. 11. Panama, LFIP, art 5(8). 12. Cock v Cooke (1866) LR 1 P&D 241; Baird v Baird [1990] 2 AC 548. This issue was addressed in the Cayman Islands with the Trusts (Amendment) (immediate Effect and Reserved Powers) Law 1995, which is now Part III (ss 13–15) of the Trusts Law (2009 Revision). 13. 5 U 40/09. 14. I-22 U 126/06. 15. Seychelles, Foundations Act 2009, s 27 (b) and (h). 16. Bahamas, Foundations Act 2004, s 6(2). 17. St Kitts, Foundations Act 2003, s 46(1)(c) and s 62. 18. Foundations (Jersey) Law 2009, art 9(2). 19. Foundations (Jersey) Law 2009, art 16(2)(a). 20. Foundations (Jersey) Law 2009, art 33. 21. Abdel Rahman v Chase Bank (CI) Trust Company Limited [1991] JLR 103. 22. Liechtenstein, PGR, art 552 § 16 (1) (7). 23. Liechtenstein, PGR, art 552 § 24 (2). 24. Panama, LFIP, art 5. 25. Ibid, art 21. 26. Ibid, art 17. 27. Austria, PSG, s 15 (4). 28. Ibid, s 9 (2) (1). 29. Ibid, s 15 (1). 30. Ibid, s 15 (3). 31. 6 Ob 145/09 f. 32. This appears to be exemplified in the finding of ‘sham’ as a result of a trustee carelessly ‘going along’ the settlor's shamming intention in the English case of Midland Bank plc v Wyatt [1995] 1 FLR 696. 33. Austria, PSG, s 14 (2). 34. Ibid, s 22. 35. Ibid, s 23 (2). 36. 6 Ob 42/09 h. 37. Liechtenstein, PGR, art 552 § 28(1). 38. Ibid. 39. Ibid, § 11(1). 40. Panama, LFIP, art 24. 41. Ibid, art 19. 42. Belize, International Foundations Act 2010, s 36(3). 43. Ibid, s 37. 44. St Kitts, Foundations Act 2003, s 12(5). 45. Ibid, s 20(2). 46. Ibid, s 12(5)(c). 47. Ibid, s 8(2). 48. Ibid, Schedule, s 1(2). 49. Bahamas, Foundations Act 2004, s 14, (foundation council), s 26 (limitation of council's powers and supervisory persons), s 35(2) (attendance to council meetings). 50. Anguilla, Foundations Act 2008, s 28 (founder's or guardian's default power to apply to the court for the removal of a council member), s 31 (guardian). 51. Foundations (Jersey) Law 2009, art 14(3)(a) and (b). 52. Ibid, Art 23. 53. Seychelles, Foundations Act 2009, s 27(c) and (d). 54. Ibid, s 35(d). 55. Ibid, s 52(2)(a). 56. 6 C 410/1991, LES 1998, 97. 57. Liechtenstein, PGR, art 541 ff. 58. 1Cg 378/99, LES 2002, 41. 59. This provision is due to obvious ‘know your customer’ requirements as well as to the operation of art 552 § 36 (2) of the PGR, allowing foundation council members to override their duty to professional secrecy and to disclose the founder's identity to a creditor of the foundation in the event that (a) the foundation assets are not sufficient to meet the creditor's claim and (b) the founder is still liable to provide some or all of the foundation assets. 60. Cf Panama, LFIP; art 1; St Kitts, Foundations Act 2003, s 3(1) ‘A founder or a person acting on behalf of the founder …’; Seychelles, Foundations Act 2009, s 2 ‘“founder” means a person … acting on that person's own account or on behalf of another’. 61. Foundations (Jersey) Law 2009, art 1. 62. Anguilla, Foundations Act 2008, s 7. © The Author (2011). Published by Oxford University Press. All rights reserved.

von und zu Liechtenstein, Prince Michael

doi: 10.1093/tandt/ttr055pmid: N/A

Abstract Transparency is certainly good for people who are entitled to information, but not everybody is entitled to all information! Under the hypocritical pretext of transparency, the privacy of individuals and families is being progressively eroded. Data protection by the authorities no longer functions. Media receive any information they want. The desire for asset protection emanates from a simple reason and is historically documented: Assets are at risk! Because of the increasing political and economic uncertainty, the need for appropriate solutions will further increase in the future. Key points Transparency is probably one of the most misused words. It is a fact that authorities continuously wish to extend their control over citizens. The more general ‘voyeurism’ increases under the label of transparency, the more asset protection is required through adequate legal structures. A jurisdiction which wants to offer asset protection must show proof of many years of economic and political stability and have the appropriate legal foundations, knowledge, and infrastructure with which asset protection systems can be implemented and administered. Transparency ‘Transparency’ is probably one of the most misused words. Generally, transparency is acknowledged as something good. However, expressions which are perceived as good, are also an ideal pretext for hidden agendas. Transparency is certainly good for people who are entitled to information, but not everybody is entitled to all information! Unfortunately, we have seen bad examples: under the pretext of transparency, even democratic governments are procuring information on their own citizens (in their own countries as well as abroad) by means of questionable legality or are bending human and frequently even constitutional rights to privacy. As governments constitute such a bad example, it is not surprising that the majority of people are very pleased with other illegal forms of transparency provided by institutions such as Wikileaks. Exaggerated transparency can lead to a danger for private persons and families. Under the hypocritical pretext of transparency, the privacy of individuals and families is progressively being eroded. It is a fact that authorities continuously wish to extend their control over their citizens and their respective finances. Therefore, they gather information by questionable means. The aim appears to justify the means. This certainly jeopardizes confidence in the legal systems, but in reality hardly helps to uncover criminal activities. Data protection by authorities no longer functions. Media can access any information they want. Possible reasons for this might be that either the authorities themselves use the so-called ‘yellow press’ in cases where their own inquiries do not lead to the desired result or that the authorities use the media to increase their pressure on citizens. Any disclosure of the financial situation of richer families fuels the envy-factor. And for some media, in fact, such news are ‘good news’ because they sell well. Any curiosity or sensation is very popular and the picture of the ‘evil capitalist’ confirms a common prejudice. This trend is most regrettable and also frustrates high-quality investigative journalism. Jealousy almost always is to be found within the environment of successful and well-to-do individuals and families. Too much disclosure of their financial situation can have very negative effects: it attracts criminals with the danger of theft, robbery, and kidnapping. It can have a ‘spoiling effect’ and fuel expectations of acquaintances and relatives. Asset protection The more a general ‘voyeurism’ increases under the label of transparency, the more asset protection through adequate legal structures is required. The desire for asset protection arises from a very simple reason and is historically documented: Assets are at risk! As set out before, risk ranges, for example, from extravagance by family members or family problems (such as divorce) to economic instabilities, political risks, confiscatory tax measures, and attacks by alleged creditors. For all of these reasons, measures in the field of asset protection are indispensable! Because of the increasing political and economic uncertainty, the need for appropriate solutions will further increase in the future. At the same time, the fact that private assets comprise not just a private, but also an economic component, speaks in favour of asset protection: private assets have a positive effect on the overall economic development of a state. This is because private assets tend to be invested with a long-term focus. As a result, these assets contribute considerably to the well-being of companies and institutions as well as to social development. Over the past decades, the Liechtenstein financial centre has developed into a jurisdiction for asset protection. The fundamental part of all financial transactions involves questions of asset protection—irrespective of whether this involves trustees, banks, asset managers, insurance companies, or investment funds. The client wants to know that his assets are safe. Thus, a jurisdiction which wants to offer asset protection must, firstly, show proof of many years of economic and political stability and, secondly, must have the appropriate legal foundations, knowledge, and infrastructure with which asset protection systems can be implemented and administered. Many European countries are not equipped for asset protection and long-term asset planning. Liechtenstein possesses the necessary legal framework and guarantees legal and planning certainty. Legal certainty forms the basis of asset protection. The common misunderstanding There is a major misunderstanding about Liechtenstein and its structures, particularly the Liechtenstein Foundation. The misunderstanding prevails that Liechtenstein structures only serve to avoid paying tax. However, the opposite is the case. For almost 100 years, Liechtenstein structures have provided long-term and cross-generational preservation of assets and protected the legitimate private sphere. The repeatedly expressed opinion that fiscal aspects are the sole motivator for offshore structures is quite simply untrue. Liechtenstein is very well equipped to provide solid asset protection structures on an international level which are compliant with the laws and tax rules. A good asset protection structure, like a Liechtenstein Foundation or Trust, separates the assets from the beneficiaries. In that way, increased privacy is achieved and the assets cannot directly be allocated to the beneficiaries. Liechtenstein has concluded a number of international agreements on tax information exchange and will complement them with Double Taxation Treaties. As a consequence, Liechtenstein can also demand from its contracting counterparties the recognition of its asset protection structures. In the future, Liechtenstein will continue to offer an excellent environment for asset protection and will further develop its expertise in this field. The question is not whether Liechtenstein will pass the stress-test between transparency and asset protection. Instead, the recurring breach of the fundamental right to privacy should rather be questioned. © The Author (2011). Published by Oxford University Press. All rights reserved.

Vahlpahl, Tobias

doi: 10.1093/tandt/ttr067pmid: N/A

Abstract Foundation managers have to manoeuvre between economic rationality and ethical behaviour within the normative framework of their organization. Professionalization of their work is a somewhat amorph term since the introduction of the profession of a foundation manager still has to go a long way. What exactly could be understood by professionalization of this line of work? Is it ‘just’ the synthesis of the two types of rationality that exist or is it even a third type emerging as something genuine and new? What consequences would this have for the education of executives and the organizational development? Key points Management of public benefit foundations as a profession. Tension between economic and idealistic rationality. Foundation managers as bridges between different worlds of rationality. Contemporary management of public benefit foundations as the synthesis of the two types: ‘economic management with a heart’. Introduction Rationality and Idealism was the title of the keynote speech delivered by Dr Frank Dörner, CEO of Medecins sans Frontiers Germany, at the graduation ceremony of the first class of the master program ‘Non-profit Management & Governance’ at Heidelberg University in February 2011. In essence, Dr Dörner explained his view of professional behaviour in third sector organizations that needs to be both rational and idealistic at the same time. This double character is the topic of the present article. Like many other aspects regarding the work and management of foundations, the discussion about professionalization of management skills for foundation managers is nothing new. Hwang and Powell1 perfectly and comprehensibly described the term ‘professionalization’ as the implementation of acknowledged and somewhat standardized managerial professionalism and knowledge. Sometimes, this understanding is characterized by the notion of the special ethical and normative aspect of foundation management. This is a shortfall that neglects the very specifics of the task to manage an organization like a public benefit foundation. We can verify this finding already by looking at the behaviour of foundations when it comes to (re-) staffing the post of an executive. Not only do foundations recruit their executives from well established professions. But there are already programs to train non-profit and foundation management as a group of its own with its very own demands and needs. This can be understood as a reaction to the (maybe implicit) finding that foundation management is more than the combination of profound economic and managerial knowledge and the compliance with some ethical ground rules. The main hypothesis of this article is that the management of a public benefit foundation and other non-profit organization is much more of a profession of its own than just the synthesis of economical and ethical rationalities. By using well established theoretical sociological approaches, the article tries to develop the finding that the uniqueness of the type of organization whose foundations stand for calls for a very special and even unique staff to lead and control these organizations. Explanation of a not-so-obvious question The question dealt with in this article is whether professionalization of foundation management only means the transfer and application of managerial knowledge to this field of work or if the specifics of the task to manage a public benefit foundation rather ask for new and unique skills that are not automatically components of acknowledged management education and which is maybe flavoured with the notion of the ethical perspective of executive work. In essence, the article will be centred around two typically constructed ideal models of management rationale and tries to explore possible consequences of these types as well as to evaluate the possibility of a third genuine type of managerial rationale. I will try to depict the task of foundation management as characterized by an inherent conflict between antithetic orientations which is deeply rooted in the insitution of a ‘foundation’ itself as well as in some macro societal trends that we witness in our days. What we can observe in empirical reality is a spreading of managerialism in the foundation world that is mainly based on economic and for-profit rationalities. We see a growing importance of economy oriented semantics and logic gaining ground also in the not-for-profit realm of foundations. At the other end of the spectrum, the main orientation seems to be a rather value-driven rationale. This is at first sight connected to a certain odeur of antiquated, well-meant ineffectiveness and amateurship. The task of this article will be to define the very differences between these two types to understand the position a foundation manager finds himself in. To differentiate between these two ideal types and to explain the tension of the ‘in between’ position in which foundation management seems to stand, we can draw on some well established concepts of classical and contemporary sociology. The ‘concept of ideal types’ lets us emphasize the specifics of the two poles of the continuum and (so is my hypothesis) of the third position as well. And the concept of institutionalization by M. Rainer Lepsius can be helpful to make these characteristics even clearer in terms of a better understanding of the underlying ideas and values. First, ‘ideal types’ in the very sense, as introduced by Max Weber2, are theoretical constructions that overstate some meaningful elements of a phenomenon to make its core elements more visible and understandable. It is important to note that one cannot find ideal types in their pure form anywhere in the empirical reality. It is rather ‘real types’ that can be observed and from which the distance to the theoretical ideal type can be identified. Second and maybe somewhat more in detail, I want to introduce the concept of institutionalization of ideas and values as elaborated by M. Rainer Lepsius.3 In essence, the concepts analyses the process of institutionalization which is understood as the successive gaining knowledge with a view to the relevance for action for the implementation a certain leading idea (‘Leitidee’) in a certain relevant context by developing criteria of rationality that concreticize this Leitidee. For the structure of action, an idea or value has no real relevance per se. It is primarily not more than a vague orientation but no strict ruling of action and behaviour. This institution/institutionalization only has any relevance for action if an idea can be translated from the abstract and normative level into criteria that can help to precisely judge the action in categories of rational/irrational or good/bad; right/wrong.4 The next line of analysis relates to the context in which a leading idea becomes relevant (‘Geltungskontexte’). In the process of institutionalization, a leading idea underpins a certain field. An institution has to develop a certain field in which the leading idea can be put into action. The differentiation of an area of application, i.e. the process of institutionalizing a leading idea is more or less inevitably connected with institutional conflicts.5 Since more or less every part of human (and of course especially professional) behaviour is structured in one way or another, a new institution has to dominate another one in the process of institutionalizing its Leitidee and criteria of rationality. At this moment of change in the structure of social norms and standards, one can observe a state of uncertainty and maybe even struggle in the respective segment of action. For example the introduction of new rules for certain processes in an organization will always be seen as an (unjust, unrightful, problematic and so on) confrontation with the old and established norms and rules. If and how this conflict between institutions will be solved, is an important question in the organizational change and also for the introduction of new elements in the organizational knowledge base. In the following paragraphs, I will ask these questions with a view to the professionalization of foundation management. It is important to keep in mind that the two ideal types of rationality are never to be found in reality but should illustrate the room for possibilities, in which empirical cases could be found. The focus of the following elaborations will lie on the identification of the two leading ideas and the institutional conflicts between them. Herein, I see a major potential for the advancement of the understanding for this field, because only if we see the underlying logic and rationale of patterns of action, we gain both knowledge and instruments to facilitate change. Economic rationale of foundation management At first glance, there are several aspects of the work of foundations that relate directly to economic rationality. First, the very foundation of a foundation is its funding capital i.e. money. Secondly, the executives of the foundation are to safeguard this capital and to carefully spend its revenue for the purpose the foundation statute defines. And thirdly, foundations, like nearly all other organizations in contemporary times, are subject to a scrutiny to ensure that resources are not wasted. Besides this obvious and very tangible level of a connection between foundation management and an economic orientation for action there is also another rather subtle level in this connection. Already the use of the term ‘management’ with a view to the control of a foundation suggests that this task is comparable to ‘management’ in other organizations. This standardization has serious implications for the perception of ‘professional’ behaviour in the organizational type of foundations. Moreover, the introduction of an economically influenced semantic leaves its mark on a ‘good’ and ‘successful’ foundation manager. If his work is evaluated in terms of efficiency and effectiveness, he automatically will organize his work around these (economic) indicators. Therefore, the economic rationale of action focuses on outcome and measures the value of actions in terms of the achievements. In the centre of the evaluation and the orientation as to actions stand questions on the impact, return or effect of the operations themselves. In the economic rational paradigm, ‘efficiency’ is the main leading idea, which is institutionalized in the evaluation of professional action. Such an understanding of professionalism would consequently mean that it is only reasonable to import professional skills in the form of formally trained staff or counsellors. This approach fits to a certain extent into the fact that most foundations are established by economically successful individuals who certainly favour thinking along entrepreneurial and economic lines. On the other hand it needs more than economic success and a certain level of wealth to establish a foundation. There also has to be some altruistic and philanthropic motivation to flower this idea, which already hints to the fact that pure economic logic is not enough to describe the rationale valid for foundations. Value-driven rationale of foundation management In contrast to the above, the other possible aim of the theoretical continuum, a foundation manager could be pursuing, is purely ethical in essence. Decisions would be oriented on values and beliefs that are not necessarily translated into empirically revisable indicators. The carrier of these values and beliefs is not the organization or some certifying agency but the individual itself. This rather metaphysical bearing lays the focus not only on the outcome of one’s actions but also on how the action is implemented. This bearing could be derived from religious norms, transcendental beliefs and other sources of non-scientific knowledge. This form of action orientation might be perceived as something ‘old’ or ‘outdated’ and this holds true if we think in terms of the continually changing paradigms in ideology. For our present times, the economic paradigm seems to gain more and more ground and at the same time pushes other orientations back. One has to understand the history of ideas not only as a development from ‘old’, ‘underdeveloped’ and maybe ‘simpler’ to ‘modern’, ‘elaborated’ and ‘higher developed’ but rather as a chain of leading ideas that (for whatever reason) follow one another. If we can concentrate on this aspect of nominal differences of ideas (in contrast to being superior or inferior), it seems plausible that the orientation focussing on values is the opposite of the economic rationale. This does not mean that ethically oriented action would be irrational in any way. But it is following another kind of rationale and defines other structures of behaviour as rational or right. The leading idea of the ethical paradigm in philanthropy and foundation management would thus be ‘doing good’ or ‘acting rightly’, measured with some ethical or metaphysical indicator. A professional foundation manager in this sense would be someone who puts ethical norms over all economic rationality. But since foundations deal with economic resources and operate in a world that is in many areas dominated by economic organizations, interests and powers, this hypothetical type of professional (like the pure economist) would not be an adequate candidate for a leading position in a foundation. Professionalization as synthesis or vice versa? Coming back to the question raised at the beginning of this article, we can reformulate it now into asking if professional foundation management can be (and maybe should be) more than the synthesis of the two rationalities depicted above. It is clear that both pure types of professionals (pure economist or pure ethicist) are not capable to fulfil the task of managing a foundation. On the other hand, these two leading ideas struggle over the orientation of foundation management and this is exactly the very conflict of institutions we have to expect if we analyse the process of institutionalization. The mainstream interpretation of the finding that foundation management is not only the accplication of economic rationality to non-profit organizations, says, that foundation management should be rational in terms of accountability, transparency, effectiveness, and efficiency but at the same time stay aware of the ethical aspects and the normative basis of the organization. Taking into account the two models depicted above, this means that contemporary management of public benefit foundations is regarded as the synthesis of the two types, an ‘economic management with a heart’, so to say. Since the two types of rationality probably cannot be integrated into one another too easily, the question arises if there should not be (both analytically and in the respective practice) a third type of action orientation that is more than just the combination of the two others. This is not a trivial or pure academic question because the answer has potentially important consequences for the organization with a view to recrutiting staff and training activities for foundations.6 There are some good arguments that this might be the case and there is hence a genuine third type. The basic problem of the integration of ethical or normative principles into the rather cold rationality of economic efficiency and effectiveness (and vice versa) is that these two approaches are opposing each other. If ethical considerations demand to pay wages, relatively high compared to other organizations in the same field, this is irrational from a pure economical point of view. The other way round, an economically very rational decision, perhaps about cost reduction by way of introducing stricter rules of evaluation for funded projects, could be regarded absolutely irrational (or in another semantic ‘wrong’) from an ethical perspective. Many organizations experience this very problem in the wake of the tendency to subsume every program and project under the pressure to achieve the highest impact possible and to measure this very impact with highly sophisticated instruments of evaluation. This could pose high pressure on the staff and therewith diminish possible positive effects, that otherwise could be gained. Since public benefit foundations are in fact neither economic organizations nor public bodies, the management of those entities should be regarded as something special and unique. In the other two sectors, no one would think of introducing the logic of the respective other without a process of intensive interpretation and adaptation. Such a process would go along with the scientific differentiation between the sectors and their respective media as well. The integration of economic semantics, which we can observe in many societal spheres, does not necessarily mean that management in every part of social life must be performed according to the rules that apply to the economic field in the first place. Foundations and third sector organizations should look at the task of steering themselves in a way that follows their very own rules and patterns. Professional foundation management allows for being multivalent in a sense. It knows and accepts the characteristics of the type of organization it deals with and bridges the span between these two poles between which it is situated. The professional foundation manager can be the bridge between these two ideological poles. This bridging position at the same time characterizes this evolving profession quite well. It is much more than the mediation between conflicting positions and aims to facilitate the implementation of both orientations in a certain way. The professional foundation manager in the understanding of this argumentation is in himself the synthesis of the two extremes which means that he is more than a combination of management knowledge with some ethical correctness.7 This leads to the question, how foundations could react to understanding the demand for specially skilled leaders and managers. Would it be wise in the medium and long run to import more and more economically skilled staff or are there other options? The growing demand for the formation of professionals and in response to the growing number of educational programs that deal with the formation of professionals in the field of foundations and non-profit management indicates the growing importance, the sector itself gives to the training of its managers. Conclusion With the above paragraphs, I tried to depict and clarify the special situation in which foundation management is carried out. The two major forces that have to be seen as important for executive tasks in public benefit foundations are the leading ideas of economic efficiency on the one hand and the concept of doing good in an ethical perspective on the other. Both of these concepts do not seem to be appropriate points for orientation with a view to foundation management alone and since the two rationalities are partly concurrent and contradictory, the management of foundation does not only have to be a synthesis of these two but something unique, namely a third. The picture of a professional foundation manager that evolves from the above is one of a professional who is a moderator between two worlds but certainly not without having a personality of his own. The requisite for this developing profession according to our observation is the capability to not only bridge a gap that seems to be unbridgeable for the conflicting characteristics of the two sides and also willingness to develop its own peculiarity at the same time. 1. Hokyu Hwang and Walter W Powell, ‘The Rationalization of Charity: The Influences of Professionalism in the Non-profit Sector’ (2009) 54 Admin Sci Q 268–98. 2. Max Weber, Gesammelte Aufsätze zur Wissenschaftslehre (J.C.B. Mohr (Paul Siebeck), Tübingen 1988). 3. Rainer M Lepsius Interessen, Ideen und Institutionen (Westdeutscher Verlag, Opladen 1990). 4. It should be clear, that one form of institutionalized rationality is not more than one among many possible forms. Cf ibid. 5. Rainer M Lepsius, ‘Institutionalisierung und Deinstitutionalisierung von Rationalitätskriterien’ in G Göhler (ed), Institutionenwandel (Westdeutscher Verlag, Opladen 1997) 57–69, 59ff. 6. Andreas Schröer, ‘Professionalisierung und Non-profit Leadership’ in J Eurich and A Brink (eds), Leadership in Sozialen Organisationen (VS Verlag für Sozialwissenschaften, Wiesbaden 2009) 141–58. 7. Julia Evetts, ‘Professionalitätsdiskurs und Management’ in J Eurich and A Brink (eds), Leadership in Sozialen Organisationen (VS Verlag für Sozialwissenschaften, Wiesbaden 2009) 159–68. © The Author (2011). Published by Oxford University Press. All rights reserved.

Wiggin, Harry

doi: 10.1093/tandt/ttr068pmid: N/A

Abstract The article briefly describes recent developments in the financial services industry in Anguilla, including the establishment of Anguilla Finance. Increasing concerns have been raised that traditional trusts are vulnerable to attack by disappointed or prospective beneficiaries, either on the grounds that the settlor has not effectively disposed of the trust assets or on the grounds that there are objectionable provisions which should be modified by the court. These risks can be largely, if not entirely, surmounted by the use of an Anguilla Foundation, which is significantly less vulnerable to attack than a conventional trust. Key points Anguilla Finance has been created to coordinate the development of the financial services industry. Advisers in the major source countries, like the UK, mainland Europe, Russia, Latin America and the United States, are concerned that trusts established as ‘will substitutes’ and trusts established as primary wealth management vehicles are increasingly vulnerable to attack by beneficiaries and/or their spouses. The Anguilla Foundation, provided it is correctly structured to avoid potential vulnerabilities, is inherently less susceptible to being overridden, inasmuch as it has corporate personality and any entitlements are expressly defined to be interests in personam only, rather than interests in rem. Introduction Last year, in my article entitled ‘Anguilla’s New Lease of Life’,1 I wrote that following the February 2010 election of a new government in Anguilla: The writer shares a strong conviction with others in the Anguilla financial services industry that happier days lie ahead. There is undoubtedly a massive surge of optimism and drive within the industry to make up for lost time and to compete on equal terms with its competitors. Its financial services products, including the Anguilla Foundation, have no equal in terms of flexibility and potential and are under continual development. The writer believes that a ball and chain have been removed from the industry and that it can and will now develop its true potential. I continue to hold that view, but not for the reasons I had predicted. Conventional wisdom is seldom infallible and often totally misconceived. The global financial crisis is a monument to this proposition, as is the fact that so far from spelling the end of offshore financial services, the attack on tax avoidance by the Organisation for Economic Co-operation and Development (OECD) and related agencies has highlighted the other entirely legitimate and worthwhile purposes served by an offshore financial centre such as Anguilla, including, in particular and in the context of this article, the objective of asset protection. Gone are the days when an inordinate proportion of the prospective clientele of offshore financial centres were concerned primarily with tax planning of a rather rudimentary kind. The OECD and their friends have seen to that in recent years and there can be no turning back. More sophisticated and more durable motives have now taken centre stage and will shape the future of Anguilla’s financial services industry. The government elected in Anguilla in February 2010 has, disappointingly, so far provided only lip service towards supporting the financial services industry in Anguilla. But the industry itself has counterbalanced this with a vision and enthusiasm not seen since the 1990s. 2011 marks the establishment, driven almost entirely by the private sector, of Anguilla Finance, a non-profit organization with, for the first time, proper staffing and marketing capabilities independent of the Financial Services Commission and having the determination to develop the industry in Anguilla and make it competitive with the best of the financial services industry’s traditional jurisdictions. The Anguilla Foundation—an engine for growth Against this background, the writer expects the Anguilla Foundation (a foundation established under the Anguilla Foundation Act, Revised Statutes of Anguilla, Chapter A62 (the ‘Act’)), which is undoubtedly one of the most innovative, flexible, and robust of the various foundation regimes offered by common law jurisdictions, to be one of several potent engines of growth for the industry. The chief reason for this expectation is a growing concern among leading advisers in the major source jurisdictions, such as the UK, mainland Europe, Russia, Latin America and the United States, that trusts established as ‘will substitutes’, as very many offshore (and indeed onshore) trusts are, and trusts established as the primary wealth management vehicles for some of the world’s major fortunes, are, owing to developments in the law and in the courts’ approach to the law, both in the home and in the offshore jurisdictions, increasingly vulnerable to attack by disappointed beneficiaries and/or their spouses. This concern is exacerbated by the purported extraterritorial nature of orders granted in matrimonial proceedings, which potentially strike at the very heart of the asset protection objectives of the trusts concerned, in many cases in disregard of express trust law provisions to the contrary. This is particularly so in the case of divorces litigated in the English courts, but the degree to which this phenomenon gives rise to concern will vary from jurisdiction to jurisdiction. Attacks on trusts and possible solutions through the use of an Anguilla Foundation One of the principal reasons for an attack by a beneficiary or a divorcing spouse of a beneficiary seen as most likely is that the beneficiary is dissatisfied with the benefit available to him under the trust. He may be disappointed because he thinks he should be entitled to a greater share or, if he or she is a disaffected spouse of a beneficiary, may see an opportunity to stake a claim. It is suggested that in these circumstances there may often be scope either for the claimant to contend that the trust is a ‘sham’ (under the principles established in the line of cases essentially beginning with Abdel Rahman v Chase Bank (CI) Trust Company Limited and others, a decision of the Jersey Royal Court reported at [1991] JLR 103, and see also article entitled Shams by Philip Laidlow, Isssue No. 12, July 2000, The Association of Corporate Trustees: http://www.trustees.org.uk/review-index/Sham-trusts-Sham-trusts.php) or—and the arguments are closely related—that the trust is a testamentary document and that the assets purportedly comprised within it should be treated as never having been disposed of by way of settlement, thus rendering them as part of the settlor’s free estate. The level of risk presented by this type of argument will vary from jurisdiction to jurisdiction and may often be quite remote. But any risk at all will be unattractive to settlors, especially in cases where the stakes are high and where there is good reason to want to confer disproportionate benefit on one beneficiary over another. Settlors will, therefore, be loath to run this risk, because it would only be logical for a disenchanted beneficiary or prospective beneficiary to mount such an attack after the settlor’s death, when it would be too late for corrective action and when the beneficiary would take under the terms of the settlor’s will or intestacy, or under forced heirship rights. One way of partially sidestepping this risk is for settlors to ensure that their will is not only valid but that it confers no proportionately greater benefit on any beneficiary who, or whose spouse, might have acquisitive intent, than he is providing for that beneficiary under the inter vivos trust. Another approach, which is less restrictive of the settlor’s testamentary freedom, is to use a structure for the inter vivos disposition (or ‘will substitute’) that is likely to be less vulnerable to an attack on its validity. The writer believes that the Anguilla Foundation (established under the Anguilla Foundation Act, Revised Statutes of Anguilla, Chapter A62) is the ideal framework for such purpose, provided it is correctly structured to avoid potential vulnerabilities. Not only is it inherently less susceptible to being overridden, inasmuch as it has corporate personality and any entitlements are expressly defined to be interests in personam only, rather than interests in rem (section 35 of the Act), but unlike an Anguilla trust (or, for that matter, trusts established under the laws of many other jurisdictions), there is no statutory power for the Court in Anguilla to vary the terms of an Anguilla Foundation, although it will of course be capable of being amended, if applicable, according to its own terms. Furthermore, it is expressly provided (section 12 of the Act) that: Where a person contributes assets as property endowment of a foundation, such assets shall (a) irrevocably become assets of the foundation upon the vesting of such assets in the foundation; and (b) cease to be assets of the contributor. Having regard to the corporate personality of the Anguilla Foundation, there is therefore (unlike a trust) no scope for a contention that the assets may effectively continue to belong to the founder of a foundation, because by definition they became statutorily subject to the foundation upon transfer to it. Another possible line of attack by a beneficiary who is dissatisfied, but who would not benefit to any greater extent or at all from the settlor’s estate, is to ask the Court to strike down as objectionable or to modify those parts of a trust which are most susceptible to challenge. These may include provisions seeking to limit the accountability of the trustee, to restrict the beneficiaries’ access to information or to disqualify or suspend their benefit. Here again, the provisions of the Anguilla Foundation Act are very favourable. Section 36 of the Act, for example, expressly provides that the Declaration of Establishment or By-laws of an Anguilla Foundation may provide that any beneficiary shall forfeit any benefit or right under it in the event that he challenges the establishment of the Foundation; the transfer of any assets to the Foundation; or its Declaration of Establishment or By-laws or any provision of such Declaration or By-laws. The jurisdiction considerations that may arise where there are assets in the country where, for example, a divorce is taking place, or in another country which is sympathetic to helping a divorcing spouse, are too complex to address within the scope of this article, but suffice to say that where the relevant assets are outside any such jurisdiction, the Anguilla court is likely to resist any encroachment on its jurisdiction. Furthermore, the Act provides the further possibility of specifying, in the Declaration of Establishment or By-laws of an Anguilla Foundation, that any controversy arising in respect of the Foundation shall be resolved by arbitration; of making provision for the arbitration procedure that should be followed; and of stipulating that, to the extent specified, the arbitration tribunal shall interpret such Declaration of Establishment and By-laws according to their terms and to the principles of civil law, without regard to the principles of common law and equity otherwise applicable (section 72 of the Act). The means of control of a foundation (as of a trust), through trustees and optionally a protector (in the case of a trust) or through the foundation council and optionally a guardian (in the case of a foundation), must also be robust and resistant to external judicial or other interference. Under the Act, there is virtually unlimited freedom to structure these organs of the foundation to meet particular requirements, and sophisticated arrangements can therefore be devised and implemented without any legislative hindrance. It is likely that special purpose foundations will be established to act as foundation council members and guardians, and the opportunities afforded by this possibility will have far-reaching implications. Conclusion The potential vulnerabilities of conventional trusts described very cursorily above are complex and, by their nature, multi-jurisdictional. Where substantial fortunes are involved, a collaborative approach should be adopted involving expert advice from all the relevant jurisdictions, including the jurisdictions of residence and domicile of the parties (both trust settlor/foundation founder and beneficiaries and their spouses); the location of major assets; the jurisdiction of establishment of the foundation or trust; and the possible jurisdictions in which any divorce proceedings might take place. It should also not be forgotten that the law, especially in the jurisdictions of origin, is likely to develop continually, so that arrangements designed to protect against litigation that may frustrate the settlor’s intentions should be regularly reviewed. In any such collaborative effort, it is likely to be found that the inherent characteristics and ongoing adaptability of an Anguilla Foundation will recommend it as one of the leading vehicles of choice for future succession planning. 1. Harry Wiggin, ‘Anguilla's New Lease of Life’ (2010) 16 (6) T&T 411–14. © The Author (2011). Published by Oxford University Press. All rights reserved.

Schwank, Friedrich

doi: 10.1093/tandt/ttr059pmid: N/A

Abstract A prudent and well advised founder will be aware that the private foundation they have set up may well come under attack and be challenged at some point in time. This article discusses from which directions a private foundation may come under fire, the impact of those possible threats and risks and what measures can be taken to protect the Austrian Private Foundation’s integrity and survival. Key points Austrian Private Foundations are fortresses, which protect private or family wealth, created for the benefit of present and future generations. The board members have to know what they are doing, making all their decisions strictly in compliance with the rules and principles laid down in the charter of the private foundation. A private foundation created in contemplation of a forthcoming divorce has a high exposure to being challenged. Some creditors have been successful in attacking private foundations. The Austrian tax administration treats private foundations with respect and restraint provided they are properly managed and audited. The Austrian Private Foundation provides both the benefits of an intransparent trust and the structure of an independent corporation.1 As a matter of standard practice, it is a for-profit structure though it may be used wholly or partially for charitable purposes as well. The most common and frequent use is a for-profit fortress protecting private or family wealth, created for the benefit of present and future generations and protecting wealth against creditors, family rifts, spendthrifts and, in particular, against excessive tax burdens diminishing the asset base. A special and highly efficient use of an Austrian Private Foundation is its establishment as an ultimate holding structure of corporate and other business interests. When a family dominated enterprise is going public, the family shares can be put into the fortress of a private foundation thereby avoiding any disputes within the family and guaranteeing that the block of shares remains intact, protecting the family’s influence and control over the business. In particular, the creation of a private foundation pre-empts any disputes which may be connected with succession in the family and avoids any taxation which may be entailed with succession. Once the fortress of a private foundation has been established and registered in the registry of enterprises kept by the Commercial Court, attacks from outside, or sometimes even from inside, may come along sooner or later challenging the firmness and quality of the structure of the private foundation. This article examines the impact of such possible attacks with the view to be mindful of the risks and provide, as a result, suitable fortifications to protect the integrity and survival of the private foundation. The most common risks are discussed below, in particular risks emanating from the management of the private foundation, the family of the founder and beneficiaries, the forced heirship rules under civil law, creditors of the founder and/or beneficiaries and last, but not least, the tax authorities. These matters should be considered and taken into account at the time of drafting the foundation charter, appointing its board of directors and establishing the foundation. In anticipation of particular risks, additional fortifications can be built into the fortress of the private foundation in order to pre-empt threats. Likewise, stress tests addressing possible threats and risks should be applied in respect to existing private foundations with a view to identifying weaknesses and making improvements to the structure of the private foundation while there is still time and opportunities available to restructure the foundation, to amend its charter or to change its governance. Management risks It goes without saying that a private foundation requires suitable officers to serve on the board of directors in charge of the management of the foundation. They have to know what they are doing, make all their decisions strictly in compliance with the rules and principles laid down in the charter of the foundation and preserve their independence from both the founder and the beneficiaries. Beneficiaries and their relatives must never be appointed to the board. Founders may serve on the board provided they are not beneficiaries or related to beneficiaries. Founders and beneficiaries are always tempted to retain or gain some influence over the board of directors by way of having their own friends or advisors appointed to the board. This allows some informal influence on the decisions board members are about to take. The Austrian Supreme Court has reviewed some of these appointments to boards and decided that advisors, in particular lawyers and accountants who have worked for the family in the past, are disqualified from serving on the board of the private foundation established by the family or for the benefit of the family.2 This has resulted in widespread criticism by the professions which in turn might result in a more lenient attitude by the courts in respect to the disqualification of board members. However, to be on the safe side, it is highly recommended not to appoint current or previous professional advisors to the board of a private foundation. Another area of concern is a situation in which the board allows the founder to take care of certain tasks or exercise powers which are in fact reserved for the board of directors. Particularly risky is a founder’s ongoing ability to operate a bank account or manage assets belonging to the foundation. Both the tax authorities and the courts may consider such a foundation as a sham and treat the founder in such a manner as if there was no intransparent and independent foundation, resulting in the personal taxation of the founder which he wanted to avoid in the first place by way of transferring his assets into a foundation. In foundations where the founder is not at the same time a beneficiary, the founder may, and in fact often will, be on the board of directors of the private foundation. In such circumstances it frequently happens that the one or the other contract is to be made between the foundation and the board member. Also, some other board members may like to enter into an agreement with the foundation for instance for the sale, purchase, or leasing of a property; for the use of an asset owned by the foundation such as a corporate aircraft; for providing consultancy or professional services etc. As there is a situation of conflict of interest, for the contract to be valid, it requires approval not only by the other members of the board of directors, but also by the court.3 The court however cannot replace the consent of a member of the board of directors who refuses to sign the contract with the other member of the board of directors being the other party of the transaction with the private foundation. All other board members have to agree prior to seeking the approval of the court. If there is some likelihood, or even a remote chance, that such a conflict of interest situation may earlier or later arise, the corporate governance structure of the private foundation should be designed in such a manner as to avoid having to seek the approval of the court. Apart from the time required for obtaining the approval of the court, the approval will only be obtained if the court can be convinced that the contemplated contract or transaction is clearly for the benefit of the foundation. The benefit of the foundation will be measured against the special purpose of the foundation as stated in its charter. In case of doubt, the court would certainly refuse its approval. If the governance structure of a private foundation is two-tiered, that is in addition to the board of directors there is an independent supervisory board, then such supervisory board will be in a position to provide the approval which otherwise would have to be sought from the court. In giving its approval, the supervisory board will have to act diligently, bearing in mind the purpose of the foundation, and carefully evaluate the effect of the proposed contract or transaction in the light of the charter and the long-term preservation of the asset and income base of the foundation. As a supervisory board is usually staffed with people of particular expertise and knowledge, they are better equipped for the decision than a judge who considers such a matter in rather exceptional circumstances and quite infrequently. The members of a supervisory board are also likely to understand better the functioning of the foundation and in particular the strategy adopted by the board of directors for pursuing the purpose and goals of the foundation. Family threats The divorce of the founder is often a cause of great concern and even litigation involving a foundation. The founder may have put nearly all of his assets into a private foundation thereby shielding his wealth from a division of property following a breakdown of the marriage with subsequent divorce. In a number of cases the Austrian Supreme Court4 has allowed the veil of foundations set up by a wealthy spouse to be pierced with the effect that in the end the value of the assets of the foundation served as the basis for the determination of the property settlement between the spouses following the divorce. Similar rules are applied in maintenance cases for children. In order to make and enforce a maintenance claim a child can demand disclosure of all assets the parent contributed to a foundation.5 Prenuptials, or matrimonial agreements on separate property regimes available in some jurisdictions, may help to protect a foundation in a forthcoming divorce situation. Eventually, it depends on the applicable law whether or not a prenuptial or matrimonial agreement is considered valid and strong enough to protect the founder’s assets. The applicable law is in most cases determined by the joint nationality of the spouses or the last domicile of the couple. Austrian rules of conflict of laws allow the couple to choose a law applicable to their matrimonial assets.6 In any case, a private foundation being created in contemplation of a forthcoming divorce has a high exposure of being challenged and will create an additional battleground between the spouses. A pre-emptive defence strategy to be considered when drafting a charter of a private foundation is to include the spouse and dependent children among the beneficiaries of the foundation. Such provisions may take care of two possible issues arising from divorce: division of property and maintenance for an ex-spouse and dependent children. Forced heirship Austrian law, along with the succession law of other civil jurisdictions, applies the concept of forced heirship.7 Under these rules a certain portion of the estate goes to spouse and children and, depending on the provisions on the applicable law, to other close family. Under Austrian law of succession, the portion of forced heirship for a spouse and children is half of their intestate share. In the absence of children, the parents of the deceased are entitled to a third of their intestate portion. Lifetime gifts to forced heirs are taken into account when calculating their entitlement. The forced heirship portion is always a monetary claim against the estate.8 In case the testator has transferred his wealth into an Austrian private foundation, Austrian rules on forced heirship are applicable and the assets transferred by the testator into a foundation have to be taken into account.9 According to the Austrian Rules of Conflict, Austrian law applies in cases of succession in which the deceased had Austrian nationality at the time of his death.10 If he had foreign nationality only, then the law of such foreign nationality will be applicable. If the deceased had the nationality of a jurisdiction which applies the principles of domicile, such domicile may however make renvoi to Austrian law if the deceased had a domicile of choice or domicile of origin in Austria. In this instance, Austrian law will apply irrespective of the foreign nationality of the testator.11 The applicable law will also determine whether children born out of wedlock are entitled to a forced heirship portion as well. According to Austrian law, illegitimate children have the same status as legitimate children and are therefore entitled to their portion. Only illegitimate children who have never had any community with the testator, as is usual otherwise, have a reduced entitlement of half the forced heirship portion, if so provided in the testator’s will.12 In case the testator has transferred all his wealth, or the majority of his wealth, to a private foundation, the forced heir might find him or herself in a position of not being able to successfully claim his or her entitlement against the estate. Austrian law enables forced heirs to seek redress and demand that foundations satisfy their claims of forced heirship portions following the demise of their founders. In some instances the heir might be allowed to revoke the foundation or claw back assets contributed by the founder to the foundation. From that it can be assumed that in circumstances where forced heirship rules do not apply, the private foundation would still be exposed to attack by heirs or dependants who are able to claim under foreign law some entitlements such as family provisions or reasonable consideration by the testator. Though these concepts are unknown in Austrian law and in fact irrelevant in view of the existing forced heirship regime, the Austrian courts would still consider it by way of application of the foreign law, provided the rules of conflict of laws determine such foreign law. Creditors Creditors of founders or beneficiaries have quite a difficult task when attacking the fortress of a private foundation. However, there have been some cases where creditors have been successful. As a general rule, the private foundation is a separate legal entity and therefore beyond the reach of creditors of founders and/or beneficiaries. Some unwise or insufficiently advised founders are too greedy and try to retain some form of control over their foundation, in particular by way of reserving the right of revocation of the foundation or the right to change the charter of the foundation. These rights reserved by the founder can be attached by creditors of the founder who are then able to exercise the rights of the founder and revoke the private foundation and/or try to change the charter in such manner which results in assets becoming available for satisfying the claims of creditors.13 The same may apply to creditors of the beneficiaries in circumstances where the beneficiaries have a fairly strong position vis-à-vis the board of a foundation. Secret letters of wishes deposited with the board of directors may turn into hot issues when the board tries to discontinue or reduce distributions to a beneficiary chased by his or her creditors. A protection of distributions to beneficiaries against claims of creditors of beneficiaries is not possible under Austrian law. This risk can be reduced to a great extent by way of careful drafting of the charter of the foundation, avoiding any possibility of revocation of the foundation and avoiding or narrowing any powers of subsequent variations of the foundation deed by the founder. Likewise, the rules on distribution to beneficiaries should be entirely and exclusively at the discretion of the board of the foundation and clandestine letters of wishes should preferably be avoided. Irrespective of careful drafting and putting in place all safeguards, there is still a considerable risk in case of insolvency of the founder in circumstances where the foundation can be attacked as a fraudulent transfer of assets. As the debtor is at the same time the founder he has full and unrestricted knowledge of his credit position and possible risks, commercial, or otherwise, to his assets. Therefore, he might have to prove that even during a long period of time, under Austrian law up to 10 years, he has had no knowledge of financial exposures that are likely to result earlier or later in insolvency. One way to avoid or minimize this risk is to create contemporary documentary evidence to be used in case of need. An independent auditor’s report on the financial and asset situation of the founder at the time of creating the foundation and transferring assets, may be one important piece of useful documentary evidence. Founders who rule out a contingency of insolvency should always be reminded it is always better to be safe than sorry in particular as he or she wants the private foundation to be a fortress withstanding all attacks and changes of time. Taxation As private foundations are strongholds of wealth, they attract the attention of the tax administration. The Austrian tax administration treats them with respect and restraint provided they are properly managed and audited. The preservation of wealth is, at the end of the day, also the preservation of tax revenue. Austrian private foundations are frequently the ultimate holding structures of larger groups of enterprises in Austria which provide jobs for a remarkable size of workforce. The consistent policy and strategy of the Austrian government has therefore always been to protect private foundations and make sure that wealth is kept in Austria and not transferred abroad into foreign vehicles. Since November 1993, when the Austrian Private Foundation Act was created, there have only been some minor adjustments to taxation on assets upon the transfer into the foundation and taxation on the various income streams of a foundation. As of 2011 there have been some minor amendments such as an increase of the interim taxation of interest and capital gains to 25% which in turn replaces the 25% withholding tax otherwise payable on distributions to beneficiaries. Dividends received by an Austrian Private Foundation still remain tax free at the level of the receiving private foundation and are only subject to 25% withholding tax upon distribution to beneficiaries. This is a continuing recommendation by the Austrian legislator to use private foundations as ultimate holding structures. In order to optimize the tax burden of a private foundation, it is recommended that the board of the foundation is tasked with monitoring any tax changes in order to be able to adjust the portfolio of assets for purposes of obtaining the best net revenue for the foundation. Conclusion A carefully drafted charter of an Austrian Private Foundation can act as a fortress governed by a strong independent and competent board of directors with wide discretion in respect to both distribution to beneficiaries as well as the management and reallocation of assets. A supervisory board as a two-tier form of governance safeguards the quality of the management by the board of directors and avoids additional court approvals. In addition, a regular audit of the foundation, its management and policy by law and tax experts will avoid pitfalls, shortcomings, and traps arising from changes in legislation, administrative practice, and court decisions. 1. For details see: F Schwank, ‘The Austrian Private Foundation: between transparency and bank secrecy’ (2010) 16 T&T 415–21. 2. Decisions of the Austrian Supreme Court 5 August 2009, 6 Ob 42/09h; 16 October 2009, 6 Ob 145/09f. 3. Act on Private Foundations s 17(5). 4. Decisions of the Austrian Supreme Court 23 August 2001, 6 Ob 180/01s; 23 November 2000, 2 Ob 295/00x. 5. Austrian Supreme Court 23 September 2008, 10 Ob 46/08z. 6. Internationales Privatrechtsgesetz (Private International Law) (IPRG) s 19. 7. For details see L Garb (ed), International Succession 2009 (Oxford University Press). 8. Austrian Civil Code s 764 ABGB. 9. Austrian Supreme Court 19 December 2002, 6 Ob 290/02v. 10. IPRG s 28(1). 11. IPRG s 5(2). 12. Civil Code s 773a ABGB. 13. Supreme Court 15 January 2009, 6 Ob 235/08i. © The Author (2011). Published by Oxford University Press. All rights reserved.

Thompson, Heather L;Jupp, Colin A

doi: 10.1093/tandt/ttr066pmid: N/A

Abstract In this article, the authors explore the differences between a Bahamian Foundation and an Executive Entity and the advantages of using the latter. The Executive Entity will come into being when the Executive Entities Bill 2010 enters into force. Though similar to a Foundation in certain respects, the Executive Entity has unique features which are certain to make the Executive Entity an attractive vehicle to high net worth individuals and families seeking to manage their wealth. Key points Foundations and Executive Entities are both innovative vehicles tailored for private clients by the Bahamian Financial Services industry. Foundations and Executive Entities are similar with respect to their legal nature, mode of establishment, and both enjoy protection from forced heirship claims along with other benefits. Foundations and Executive Entities, however, will serve different functions. The Executive Entity will provide a valuable tool in the industry for corporate governance and succession planning. Introduction With the coming into force of the Foundations Act (Ch. 369 D), on October 22nd 2004, The Bahamas positioned itself as one of the first common law jurisdictions to provide for the establishment of a private foundation (Foundation). A Foundation can be seen as a hybrid between a company and a trust, combining the best asset protection elements of each and as a vital tool for practitioners in the area of private wealth management. In order to enhance the provision of financial services within the jurisdiction, the Bahamas government, with significant input from the London law firm of Lawrence Graham LLP and local practitioners, has distributed drafts of the Executive Entities Bill 2010, the (‘EEB’) which is expected to come into force during the second quarter of this year. The EEB provides for the establishment of Executive Entities (‘Executive Entities’) as vehicles to carry out Executive Functions within wealth preservation structures (‘Executive Functions’). Despite many similarities in form, Foundations and Executive Entities underlie different legislative frameworks and differ substantially with respect to their purposes. In short, Executive Entities are designed to perform the so-called Executive Functions, such as acting as enforcer, protector, trustee or investment advisor or holding the shares of a company, or other entity of whatever kind. In contrast to a Foundation, they do not directly benefit beneficiaries or wider purposes, a function which hence remains within the sphere of a Foundation. This article compares and contrasts the Foundation with the Executive Entity highlighting the essential differences between the two and the advantages to be gained from employing an Executive Entity to address control and succession issues inherent in wealth preservation structures. Similarities between a Foundation and Executive Entity General legal treatment The law relating to Foundations in The Bahamas is governed by the Foundations Act (Ch.369 D) as amended (the ‘FA’). Likewise, an Executive Entity will be the product of legislation and the statutory basis for its establishment is currently set out in the EEB. Foundations and Executive Entities are similar in that they are legal entities, which are resident and domiciled in The Bahamas which are able to sue and be sued in their own names. This is clearly provided for in the FA and the EEB. In this regard with respect to Foundations, according to section 3 of the FA: 3 (1) An entity — (a) established by a Foundation charter and in accordance with this Act; and (b) which is registered, shall be a foundation within the meaning of this Act. (2) A foundation satisfying subsection (1) shall be — (a) a legal entity; (b) resident and domiciled in The Bahamas; and (c) able to sue and be sued in its own name.1 With respect to Executive Entities, section 3 of the EEB explains: 3 (1) An Executive Entity is a legal foundation – (a) established by a charter to carry on Executive Functions; and (b) which is registered, in accordance with this Act. (2) An Executive Entity which satisfies the requirements of subsection (1) shall be – (a) a legal entity with separate legal personality; (b) resident and domiciled in The Bahamas; and (c) able to sue and be sued in its own name.2 Establishment General legal procedure Foundations and Executive Entities are also alike, with respect to their establishment. Both Foundations and Executive Entities require a charter to be signed by a Founder and registration in order to be formed. The charter The charter of a Foundation and an Executive Entity sets out among other things the following details: the name of the Foundation or Executive Entity; the details of the Founder in either case; the purpose of the Foundation or Executive Entity; and the governing bodies of the Foundation or Executive Entity; Registration In general, the registration of a Foundation and Executive Entity is similar in that both require registration statements along with the prescribed fee to be submitted to the registrar. However, in both cases neither the charter nor the articles, nor the names of the Founder need be filed with the registrar and thus are not necessarily a matter of public record. The registration statement of both entities includes among other things the name of the Foundation or Executive Entity, the date of their respective charters, and their respective purposes. Despite their similarities, however, significant differences between the two are that the registration statement for an Executive Entity unlike that of a Foundation must (i) include a statement that the entity is an Executive Entity and (ii) need not include a statement regarding the initial capital endowed to the Executive Entity, as there is no requirement for a statement on minimum capital. Governing bodies Types of governing bodies Foundations have governing bodies which must act in accordance with their charters, articles (if any), and the FA. Likewise, it is intended for Executive Entities to have governing bodies which must act according to their charters, articles (if any), and the EEB when it comes into force. The governing bodies of Foundations and Executive Entities are to discharge the purposes for which the Foundations and Executive Entities were, respectively, formed. With respect to Foundations, the applicable governing bodies include Officers, a Foundation Council, a Secretary, and a Foundation Agent. With regard to Executive Entities, the applicable governing bodies include Officers, an Executive Entity Council, an Executive Entity Agent, and a Secretary. Foreign members of governing bodies In general, there are no limitations on foreign members of governing bodies under the FA or under the EEB. However, both Foundations and Executive Entities must have a registered office in The Bahamas. In the case of the former, this is provided by the Secretary or Agent as the case may be and regarding the latter this is provided by the Executive Entity Agent. Liability issues and indemnification Both the FA and the EEB provide for restrictions on liability and indemnification to those in positions of authority in relation to Foundations and Executive Entities. With respect to liability under the FA, no officer of a Foundation, including a member of a council, or other supervisory person shall be personally responsible for any liability of a Foundation unless such liability is the result of his own gross negligence, wilful default, or misconduct, fraud, or dishonesty, except that in the case of the Agent he shall only be personally liable, where he commits a fraudulent act pursuant to section 33(1) of the FA. In the case of indemnification, according to section 65 of the FA every officer, Council member, other supervisory person, and protector of a Foundation who acted honestly and in good faith shall be indemnified by the Foundation against all costs, charges, losses, expenses, and liabilities incurred by him in the execution of his duties. The Executive Entity, subject to the terms of the charter with respect to levels and degrees of exoneration and indemnification, also provides that Officers and Executive Entity Council Members can be exonerated and indemnified in respect of any liability, provided they acted honestly and in good faith. The minimum standard of care for an Executive Entity, therefore, need not be as high as for a Foundation. Forced heirship Both the FA and the EEB contain provisions protecting a Foundation and an Executive Entity, respectively, from forced heirship claims. Pursuant to section 68 of the FA and section 63 of the EEB, as applicable, no disposition of property to be held by a Foundation or Executive Entity established and existing under the FA or EEB is void, voidable, or liable to be set aside or defective in any manner by reference to a foreign law; nor is the capacity of any Founder to be questioned nor is the Foundation or Executive Entity or any beneficiary or other individual or other person to be subjected to any liability or deprived of any right because: the laws of any foreign jurisdiction prohibit or do not recognize the concept of a Foundation or Executive Entity; or the disposition avoids or defeats rights claims or interests conferred by foreign law on any other person by reason of a personal relationship to the Founder or by way of heirship rights or contravenes any rule of foreign law or any foreign, judicial, or administrative order or action intended to recognize, protect, enforce, or give effect to any such rights, claims, or interests. General tax treatment At present, there are no taxes in The Bahamas on the income or capital of individuals. Moreover, Founders can enjoy and benefit from the significant tax exemptions afforded to Foundations and Executive Entities under the FA and the EEB when it comes into force. According to section 69 of the FA: 69. (1) A Foundation shall not be subject to any business license fee, income tax, capital gains tax or any other tax on income or distributions accruing to or derived from such Foundation or in connection with any transaction to which that Foundation is a party. (2) The Exchange Control Regulations Act shall not apply to a Foundation registered under this Act or to any transaction by a Foundation, provided such Foundation does not have any founders or beneficiaries who are treated as residents for Exchange Control purposes. (3) No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by a Founder or beneficiary with respect to any interest given to or received from a foundation. (4) Notwithstanding any provision of the Stamp Act, all instruments to which a Foundation is a party — (a) relating to transactions in respect of the assets of a Foundation; and (b) relating to other transactions concerning the business of a Foundation, shall be exempt from the payment of stamp duty, provided in the case of assets no Bahamian real property or personalty is included in such assets.3 The provisions of section 69(1) and (2) are intended to apply mutatis mutandis to an Executive Entity based on section 64(1) and (2) of the EEB. According to section 64(3) of the EEB: No estate, inheritance, succession or gift tax, rate duty, levy or other charge is payable by a Founder or any other Person with respect to any interest given to or received from an Executive Entity.4 Pursuant to section 64(4) of the EEB: Notwithstanding any provision of the Stamp Act (Ch.370), all instruments to which an Executive Entity is a party relating to – (a) transactions in respect of the Executive Entity Assets or Trust Assets; and (b) other transactions concerning the business of an Executive Entity, shall be exempt from the payment of stamp duty provided in the case of the Executive Entity Assets or Trust Assets no Bahamian real property is included in such Assets.5 According to section 2 of the EEB, ‘Executive Entity Assets’ means Assets owned beneficially by the Executive Entity, ‘Trust Assets’ means Assets held by an Executive Entity on the terms of any Trust, ‘Assets’ means property in whatever form wherever situate, and ‘Trust’ means any type of trust, whether for Persons (ie individual or Legal Person which in turn means any company, corporation, partnership, limited partnership, Foundation, or other structure or entity (of whatever kind) having a separate legal personality) or purposes or a combination thereof, which is governed by the laws of The Bahamas or any other jurisdiction. Under section 64(5) of the EEB, the registrar shall upon request by any Person and payment of the prescribed fee certify that an Executive Entity is exempt from certain taxes. Purposes of Foundation and Executive Entity Foundations Despite many similarities of form, Foundations and Executive Entities differ substantially with respect to their purposes. With regard to Foundations, a Founder transfers assets to Foundation by means of an endowment. Once such an endowment occurs, such assets cease to belong to the Founder but rather belong to the Foundation and do not become the property of any beneficiaries until they are distributed according to section 3(4) of the FA. According to section 4(1) of the FA: A foundation’s main purposes or objects shall include the management of its assets6 A Foundation manages, invests, disburses, or otherwise administers its assets, pursuant to the purposes or objects set out in its charter by its Founder pursuant to section 3(6) of the FA. Thus, a Foundation can be employed as a vehicle for holding private assets for the benefit of identified persons or classes of persons, or purposes, which may but need not be charitable. A Foundation may buy and sell assets and engage in any other administrative activity if necessary so as to properly manage its assets provided that such Foundation’s main purpose or purposes are not unlawful, immoral, or contrary to any public policy in The Bahamas and its activities are not prohibited under any law for the time being in force in The Bahamas and the Foundation has any licenses necessary for carrying out its activities. A Foundation may engage in business transactions, but these must be ancillary to the main purpose of a Foundation. Although a beneficiary of a Foundation need not be named when the Foundation is established, the charter must identify a body by which beneficiaries shall be ascertained or state that the Foundation has been formed to benefit the public at large according to section 6(1)(e) of the FA. The Foundation is, therefore, designed primarily to benefit individuals or public purposes. Executive Entity However, according to section 5 of the EEB, the purpose of an Executive Entity: (1) … shall be limited to the carrying out of such Executive Functions as are set out in its charter. (2) The Purpose of an Executive Entity shall not include the carrying on of any activity which under the laws of The Bahamas – (a) is prohibited; or (b) requires a license or authorisation and no such license or authorisation has been granted to the Executive Entity.7 Pursuant to section 2 of the EEB the term Executive Function means: (a) any powers and duties of an executive, administrative, supervisory, fiduciary and office holding nature, including, but not limited to the powers and duties of (i) an enforcer, protector, trustee, investment advisor and the holder of any other office (and a committee of any of the aforementioned) of any Trust, and (ii) the holder of any office (and a committee of the aforementioned) of any Legal Person; and (b) the ownership, management and holding of – (i) Executive Entity Assets; and (ii) Trust Assets.8 Based on the foregoing, it is intended for Executive Entities to be tools for conducting Executive Functions, such as acting as enforcer, protector, trustee, or investment advisor among other things or holding the shares of a company or other entity of whatever kind having separate legal personality discharging Executive Functions. Thus, an Executive Entity may clearly be distinguished from a Foundation because the former is specifically designed to carry out Executive Functions rather than benefitting beneficiaries or wider purposes, which is the domain of the Foundation. Legislative framework According to section 3(3) of the EEB: An Executive Entity shall be governed exclusively by this Act and, for the avoidance of doubt, the Foundations Act (Ch 369D) or any amendment or modification thereto, and any regulations made thereunder does not apply to an Executive Entity.9 As a result, section 3(3) of the EEB makes it clear that Foundations and Executive Entities are subject to different legislative regimes. Moreover, the dissimilarities in their purposes have translated into further noteworthy contrasts between the legislative framework applying to a Foundation and an Executive Entity. Restriction regarding assets Whereas Foundations may hold assets for beneficiaries as outlined above, the EEB prescribes certain limitations concerning the assets which Executive Entities may hold. According to section 4(1) of the EEB: (1) The Executive Entity Assets shall at all times be comprised only of – (a) Assets other than Trust Assets reasonably required by the Executive Entity from time to time or at any time during its existence solely to meet the proper expenses of carrying out its Executive Functions and such proper expenses shall include any liabilities for which any Person is entitled to be indemnified from Executive Entity Assets, including, but not limited to, the cost of any indemnity insurance policies and any expenses … and; (b) shares, securities, or other ownership interests in a Legal Person the business of which is the carrying out of Executive Functions, provided that the value of such shares, securities or other ownership interests shall be restricted to such value as is reasonably required by such Legal Person to meet the proper expenses of carrying out its Executive Functions.10 Thus, Executive Entities are intended to only hold such assets as they reasonably require to carry out their Executive Functions and such shares or other ownership interests in a Legal Person carrying out Executive Functions. In addition, the value of such shares or interest is restricted to the value such Legal Person reasonably requires to carry out its Executive Functions. It is also intended for Executive Entities to be able to hold Trust Assets provided that one of its Executive Functions is acting as trustee of a trust and if necessary it is licensed or authorized to do so in The Bahamas. Conversion or relocation possibilities Subject to any limitations in its charter or Articles (if any), a Foundation registered under the FA may redomicile and register under the laws of another country in the manner provided under those laws. However, where it does redomicile, a Foundation shall continue to be liable for all of its claims, debts, liabilities, and obligations that existed prior to its registration under the laws of another country pursuant to section 51(9) of the FA. However, the EEB does not make provision for an Executive Entity to redomicile in another jurisdiction. This is a logical position given that, at present, there is no other jurisdiction, of which we are aware, that offers such an entity. Advantages of using an Executive Entity Executive Entity and Foundation Given that a Foundation offers perpetual life and asset and forced heirship protection, a Foundation is an effective tool for holding assets in a vehicle for succession planning purposes. However, a Foundation may also be useful for many other planning possibilities such as: perpetuating a particular corporate governance philosophy; providing for philanthropic purposes which need not be exclusively charitable; where shares are transferred to a Foundation, this may provide for the separation of the voting benefits attached to such shares from the economic benefits attached to such shares; investing in family companies whose economic performance may be poor; owning a private trust company; and providing for an employee share option scheme. However, high net worth individuals, seeking to manage their wealth within certain structures, such as a Foundation for example, may encounter succession issues that pose difficulties for the administration of their fortunes. Such persons may desire to have certain trusted family members, relatives, or close friends playing integral parts in the decision-making process, such as acting as an enforcer, protector, or trustee, within particular structures rather than employing professional advisors for these purposes. The spectre of there being a family conflict or other disagreement however, has the potential to make the idea of leaving such power directly to such persons an unattractive one. The ingenuity behind the Executive Entity is that it allows procedures and mechanisms otherwise used for ensuring effective and efficient administration within the realm of corporate governance to be applied within the context of structures geared towards wealth preservation. Therefore, high net worth individuals can obtain the best of both worlds by having trusted family members or friends playing vital roles in administering and managing their wealth without ensuing family conflict. This is so because such persons may now be required to discharge their functions in accordance with the procedure and mechanisms, entrenched in a given wealth preservation structure by means of the Executive Entity. The Founder of an Executive Entity would be able to enjoy the benefit of having those he trusts most, administer his wealth after his demise, and those appointed would enjoy the protection and benefits of limited liability. Moreover, since higher or lower standards of care or levels of exoneration and indemnification may be prescribed in the charter of the Executive Entity; this may be appealing to such Founders as they can to a greater extent tailor the operation of the Executive Entity to function in accordance with their wishes. Also, persons comprising the governing bodies may be more inclined to take on such roles, given the limited liability status of the Executive Entity and that the standard of care can be tailored in the charter. Executive Entity and Company Limited by Guarantee Companies Limited by Guarantee can be formed to act as a Protector or Enforcer for a trust or Foundation. Using the Company Limited by Guarantee in this manner is becoming more popular as the death of a member need not occasion a probate application in The Bahamas. However, given that such company has members that own the company, this may involve management and administration considerations with respect to how ownership interests are appointed, or otherwise transferred. However, with respect to an Executive Entity, such considerations need not arise since an Executive Entity is not the type of entity requiring or dependent upon others owning interests in it. In summary, it is ideal and can be effective as an ‘orphan’ structure. Other developments Trustee Act Amendment Bill and Draft Perpetuities Bill In addition to the enhancements introduced via The Trustee Act (Ch.176), whereby among other things, settlors were given the ability to reserve to themselves the exercise of certain administrative and distributive powers, providing them with greater degrees of control and security in the management of their wealth, the Trustee Act Amendment Bill (TAAB) and the draft Perpetuities Bill (PB) are also noteworthy developments that are expected to come into force early this year. Significant input was provided with respect to the drafting of these bills by David Brownbill QC, Barrister, of XXIV Old Buildings Lincoln’s Inn, London, and a number of senior local practitioners. Under the TAAB, significant developments are to be made in the TA. In particular, provision shall be made for asset management responsibilities under a trust instrument to be allocated between a trustee and a power holder as identified in the trust instrument. Thus, it would be possible for provision to be made in a trust instrument for a trustee to exercise its investment powers only when directed by such power holder. This in turn allows for a settlor to obtain a greater degree of control with respect to the management of the trust fund. Moreover, under the TAAB provision shall be made for trust disputes being referred to and determined by arbitration that is expected to assist in a speedier and more efficient resolution of such disputes. Under the PB, important changes are to be made to the law relating to the rule against perpetuities in The Bahamas. Essentially, the rule against perpetuities is to be abolished. However, this change will not have retroactive effect unless an application is made to the Court for such abolition to apply retroactively with respect to a particular trust. Conclusion The Executive Entity is undoubtedly a significant development which has great potential to assist in meeting the needs, demands, and expectations of high net worth individuals. Although the EEB is still in draft form, it clearly indicates a consistently innovative approach to wealth structuring in The Bahamas, in line with other cutting edge advances by the legislature as demonstrated by changes to the Trustee Act, and the introduction of Foundations themselves. 1. S 3(1) and (2) Foundations Act (Ch.369 D). 2. S 3(1) and (2) Executive Entities Bill 2010. 3. S 69(1)–(4) Foundations Act (Ch.369 D). 4. S 64(3) Executive Entities Bill 2010. 5. S 64(4) Executive Entities Bill 2010. 6. S 4(1) Foundations Act (Ch. 369 D). 7. S 5(1) and (2) Executive Entities Bill 2010. 8. S 2 Executive Entities Bill 2010. 9. S 3(3) Executive Entities Bill 2010. 10. S 4(1) Executive Entities Bill 2010. © The Author (2011). Published by Oxford University Press. All rights reserved.

Hayhoe, Robert B;Valentine, Andrew

doi: 10.1093/tandt/ttr048pmid: N/A

Abstract In this article, the authors discuss two recent legal developments affecting private foundations in Canada. They describe amendments to the annual spending requirement, or ‘disbursement quota’, that will increase the financial flexibility with which private foundations operate and better enable them to engage in charitable micro-finance and programme-related investments. They also describe changes to the non-profit corporate law regime in Canada that will create challenges for founders of private foundations who seek to maintain control over the foundation, and discuss possible solutions to these challenges. Key points The annual spending requirement to which private foundations are subject was substantially reduced in 2010. The requirement to spend 80 per cent of receipted donations and gifts from other charities has been eliminated. This will improve the ability of private foundations to engage in charitable programme-related investments, particularly outside Canada. Changes to the dominant non-profit corporate law statutes in Canada will create membership rights that make it difficult for founders of private foundations to maintain exclusive control over the foundation. Foundations will need to re-structure their membership to maintain founding member control under the new regime. Introduction Significant changes in Canadian law over the past year and a half will have a major impact on the governance and operation of private foundations in Canada. As discussed in two previous articles in Private Foundations: A World Review, private foundations are important tools in Canadian law for individuals, families, and corporations that seek to maintain control and influence over the investment and charitable use of their philanthropic funds.1 Of the three categories of registered charities under the Income Tax Act (Canada) (the ITA),2 private foundations are the only form of charity in which the core funders are permitted to maintain control of the charity.3 This makes them attractive both as tax efficient vehicles for closely directed individual or family philanthropy, and as subordinate components of a larger non-profit corporate structure. Private foundations are subject to a range of rules under the ITA, most of which apply to all Canadian registered charities.4 Like all charities, private foundations must be constituted for exclusively charitable purposes5 and must meet an annual spending requirement known as the ‘disbursement quota’.6 Private foundations are also subject to strict rules limiting the use of their funds to exclusively charitable activities and requiring that they maintain close control over these funds. These rules are applied particularly strictly when registered charities carry on activities outside Canada.7 Private foundations are also subject to various anti-avoidance rules that apply exclusively to private foundations.8 Private foundations have been substantially impacted by two major legislative developments in Canada in the past year and a half. One is overwhelmingly positive for the ability of private foundations to operate, while the other poses new challenges for foundations and their advisors. First, significant changes to the previous disbursement quota regime have lessened the tax law administrative burden of operating private foundations and have greatly increased their financial flexibility, particularly with regard to various forms of sustainable development initiatives. Second, significant changes to the dominant non-profit corporate statutes under which many foundations are incorporated threaten to curtail, at least to some degree, the level of control that founding members can exercise over a private foundation. These changes will require creative solutions to mitigate these effects. This article will summarize these developments and consider some of their implications for private foundations. Changes to the disbursement quota Previous disbursement quota regime The disbursement quota was introduced in 1976.9 The disbursement quota is a mandatory minimum spending requirement which all Canadian registered charities, including private foundations, must meet each year through expenditures on charitable activities or gifts to ‘qualified donees’.10 Its rationale is to prevent charities from excessively accumulating capital and to ensure that charities disburse donated funds primarily on charitable activities, rather than for fundraising or administrative expenses.11 Under the former rules, in order to meet the disbursement quota under the ITA, private foundations were required to disburse the following amounts: 80 per cent of tax-receipted gifts from the previous taxation year (with the exception of gifts of ‘enduring property’, which refers essentially to funds given for the purposes of establishing a long-term endowment); 100 per cent of all amounts received from other registered charities in the past taxation year (with the exception of gifts of enduring property and ‘specified gifts’12); 80 per cent of all enduring property expended during the taxation year, less a minimal right of encroachment; and 3.5 per cent of the value of assets over $25,000 Canadian dollars (CDN) that the private foundation was not directly using in the administration or execution of charitable activities. Under both the previous and current rules, a charity (including a private foundation) that fails to meet its disbursement quota in a taxation year risks being de-registered as a charity.13 Compliance with the disbursement quota is therefore of critical importance to all Canadian charities. These rules, however, were widely criticized as inefficient and unnecessarily complicated.14 Furthermore, while many Canadian charities had no difficulty meeting their annual quota—particularly large charities and those that receive substantial government grants (which are not factored into the calculation of the disbursement quota)—some smaller charities found it to be a more onerous requirement.15 These charities tend only to receive tax-receipted donations, with the result that a larger portion of their revenue is included in their disbursement quota. The disbursement quota rules often left these charities with a small amount of funds to put towards administrative or other activities in a fiscal year. In many cases, it was simply not possible to meet the quota, thus exposing these charities to potential de-registration. Disbursement quota and programme-related investments The disbursement quota rules imposed particular challenges to charities engaged in the making of programme-related investments, or PRIs. PRIs are an increasingly prominent form of poverty relief and community economic development initiative, particularly in the developing world.16 PRIs involve the investment (rather than an outright grant) of a charity’s funds in a project or organization primarily with a view to furthering social and philanthropic purposes rather than maximizing financial returns. A common form of PRI is micro-credit, in which small loans are provided to local entrepreneurs in economically challenged communities (who lack access to normal sources of financing) so as to enable them to develop a business that is hoped to become self-sustaining. The difficulty for PRIs under the disbursement quota regime is that the Canada Revenue Agency (CRA), which is responsible for administering the ITA, did not recognize the full value of a PRI as a charitable expenditure. Pursuant to its current published policy on community economic development programmes (prepared before the disbursement quota changes discussed in this article), CRA only recognizes the ‘opportunity cost’ of a PRI as a charitable expenditure which goes towards the satisfaction of the disbursement quota.17 The opportunity cost is the amount of the loan, multiplied by the amount by which the interest rate on T-bills or Guaranteed Investment Certificates (GICs) exceeds the interest rate changed on the loan. In most cases, because of the high interest charged on most micro-finance loans (due to appropriately high administrative costs), this amount is zero. Thus, PRIs made by Canadian charities to support micro-finance and community development projects could arguably not be counted towards their disbursement quota. Particularly in the international context, the ability to make charitable PRIs was further limited by CRA’s restrictive policy regarding the making of PRIs in entities that are not ‘qualified donees’. CRA takes that position that registered charities may only make PRIs in qualified donees (for the most part, other Canadian registered charities). Thus, even the opportunity cost of PRIs in non-qualified donees could perhaps not be counted towards the satisfaction of the disbursement quota. Registered charities are furthermore not permitted to make outright grants to non-qualified donees.18 Since almost all organizations established outside Canada cannot be qualified donees under the ITA, CRA’s restrictive position substantially prevented charities from making significant PRIs in non-Canadian entities. In order to meet the disbursement quota, therefore, charities were forced to apply their funds to other forms of charitable activities rather than use them in PRIs. Ideally, we would like to see CRA adopt a position similar to that taken in the United States for PRIs. This would allow a Canadian charity to make investments in foreign micro-finance institutions provided that the Canadian charity receives appropriate assurances from the institutions (through contractual or supervisory methods, for example) that funds will only be applied towards micro-finance activities. This would free up Canadian charities to engage in more flexible forms of PRI and micro-credit, while still retaining sufficient control to ensure that the charity’s funds are not misused. Furthermore, our view is that the charitable nature of PRIs should justify counting the full amount of a PRI as a charitable expenditure for disbursement quota purposes. CRA is in the process of preparing a revised policy on community economic development programmes, and it is hoped that the CRA takes on a new and more workable policy direction with respect to PRIs and micro-finance activities. However, even in the context of CRA’s current restrictive policy, changes to the disbursement quota regime in the 2010 Federal Budget have already alleviated some of the constraints which formerly applied to PRIs. 2010 budget disbursement quota reform The 2010 Federal Budget, introduced on 4 March 2010, has substantially reduced and simplified the disbursement quota.19 Specifically, the charitable expenditure rule—which required private foundations to disburse 80 per cent of receipted gifts and 100 per cent of gifts from other charities—has been eliminated, and along with it, several statutory concepts that raised considerable interpretive and administrative complexity.20 For private foundations, the only disbursement requirement that remains is the requirement to disburse on charitable expenditures 3.5 per cent of the value of investment properties above $25,000 CDN. This disbursement requirement is itself subject to exceptions enabling charities to accumulate property for a particular purpose, such as a building project.21 The new regime takes effect for taxation years ending on or after 4 March 2010. The new rules also introduce anti-avoidance rules that will affect gifts between related charities. The new rules provide that when a charity makes a gift to another charity with which it does not operate at arm’s length, the recipient charity would be required to spend on charitable expenditures 100 per cent of the value of the gift by the end of the following year.22 The rules provide, however, that a charity can ‘designate’ any gift made to another charity with the result that the gift would not give rise to this expenditure requirement in recipient charity. If a gift is so ‘designated’ it would not count towards the satisfaction of the donor charity’s disbursement quota. This will enable charities that operate as part of a related group to make intra-group transfers without unnecessarily increasing the disbursement requirements of the members of the group. Implications The elimination of the 80 per cent charitable expenditure rule is advantageous to all private foundations. It increases the ability of foundations to spend funds on charitable expenditures, and reduces the expense and administrative burden associated with maintaining compliance with the disbursement quota. The changes particularly enhance the flexibility of private foundations engaged in PRIs and micro-credit activities. Under the previous regime, the disbursement quota restricted many private foundations from making PRIs, as 80 per cent of their tax-receipted revenue had to be disbursed outright to qualified donees or spent on the private foundation’s own charitable activities. With much of the remaining 20% of the foundation’s tax-receipted revenue allocated towards administrative or other expenses, including the accounting and bookkeeping costs necessary to ensure compliance with the disbursement quota, only the limited remaining funds could then be applied towards micro-financing operations and foreign PRIs. Under the new disbursement quota regime, more funds are available to be used in foreign micro-credit activities and PRIs, as 80 per cent of a private foundation’s funds are no longer required to be disbursed outright. While foundations must still operate within other restrictions which relate to PRIs (eg trust law investment standards), the elimination of much of the disbursement quota significantly enhances their ability to apply a significant portion of tax-receipted donations towards such charitable initiatives. The reform of the disbursement quota, along with a (hopefully) more accommodating CRA policy on community economic development programmes in the near future, should allow for a substantial increase in PRIs by Canadian private foundations and other registered charities. Changes to not-for-profit corporation’s legislation Changes to current regime In addition to the changes to the disbursement quota, the corporate law regime within which the majority of incorporated Canadian private foundations operate has undergone significant changes over the past two years. Both the federal Parliament and the Ontario Legislature have passed broadly similar non-profit corporations statutes to replace the current statutes under which the majority of Canadian charities are incorporated. The new federal Canada Not-for-Profit Corporations Act23 (the ‘CNPCA’) received Royal Assent on 23 June 2009, and will replace the current Canada Corporations Act24 (the ‘CCA’). It is expected to come into force in the spring of 2011. Ontario’s new Not-for-Profit Corporations Act, 201025 (the ‘ONPCA’) received Royal Assent in October 2010, and will replace the Corporations Act (Ontario)26 (‘OCA’). The ONPCA is expected to come into force in 2012. Non-profit corporations incorporated under the CCA or OCA will be required to continue under the new Acts and bring their governing documents into compliance within three years of the in-force date. Under the ONCPA, if a corporations fails to make amendments to its governing documents to bring them into conformity with the ONCPA within that time period, any provisions that are not in conformity with the ONCPA shall be deemed amended to conform to the Act.27 In the case of the CNPCA, a corporation that fails to continue under the new Act within three years risks being dissolved.28 The new legislation is modelled after the corporation’s regime that applies to most business corporations in Canada, and is intended to modernize non-profit corporate law in these jurisdictions. Although space will not permit a detailed review of all the ways in which the new Acts will change the manner in which not-for-profit corporations are structured and governed,29 the essential changes under the new legislation are as follows: introduction of an as-of-right system of incorporation through the filing of Articles of Incorporation, to replace the former Letters Patent approach;30 provision that corporations have all powers, rights, privileges of a natural person (subject to any restrictions set out in the Articles of Incorporation), thus eliminating the use of the ultra vires doctrine under which corporate capacity is limited to activities in furtherance of enumerated corporate objects set out in the Letters Patent;31 establishment of a statutory duty of care for directors and officers, modelled after the duty of care applicable to directors and officers of business corporations;32 establishment of different categories of corporation—with different auditing, governance, and reporting requirements—depending on the purpose of the corporation and the amount of public donations it receives; provision for different levels of annual audit requirements depending on the annual revenue of the corporation;33 increases in ‘member democracy’ through the provision of greater power to members to vote (in many cases as a class) on fundamental changes; and introduction of various member remedies (ie oppression remedy, derivative actions) modelled after shareholder remedies in business corporations statutes.34 Certain of these changes are welcomed by the charitable sector in Canada. The availability of as-of-right incorporation will reduce the time and expense associated with incorporating a non-profit corporation. The clarity and flexibility surrounding audits is also beneficial. Generally, the new statutes are more detailed and organized than their predecessors and will therefore provide clearer guidance in the ongoing operation and maintenance of a non-profit corporation. However, the changes carry some implications which pose significant challenges to the ways in which charities in Canada, including private foundations, have operated. Particularly challenging are the changes to membership rights which make it more difficult for founding members to maintain control over the corporation. Corporate control under the new regime The new regime presents obstacles for the founders of private foundations who wish to maintain ongoing corporate control. As noted, in many cases, the founding member or family of a private foundation has made the vast majority of contributions to the capital of the foundation. For this reason, founding members often seek to maintain control of their foundations, notwithstanding the fact that there may be other foundation governance participants who are unrelated to them. As a result of the increased voting power given to members under the new Acts—from which the corporation cannot opt out in many cases—the structures which have traditionally been employed to provide for such control become ineffective and must be revised. Traditional control structures Under the current legislation, the founders of a non-share capital corporation have considerable flexibility to establish the structure of and conditions for membership. The OCA expressly permits the establishment of membership classes in the same manner that business or share-capital corporations would establish share classes,35 with essentially unlimited discretion to determine the voting rights attaching to each class.36 While the CCA does not expressly provide that not-for-profit corporations may have multiple membership classes, the practice is permitted by Industry Canada (the agency responsible for administering the CCA). Pursuant to Industry Canada’s policies, where a not-for-profit corporation seeks to establish several categories of membership, it must delineate the rights and conditions, including voting rights, attaching to each class of membership in its by-laws.37 Private foundations, as with other categories of registered charity, have used this flexibility to develop membership structures that ensure the ongoing control of the founder(s) of the organizations. This is most commonly accomplished by establishing various classes of members and reserving voting rights on fundamental corporate decisions to a special class of ‘founding members’. These restrictions are typically established in the corporation’s by-laws, and enable the founding member(s) to maintain ongoing control of the foundation. Friends of a founding family, advisors, or members of the public may be admitted into the general membership class, but will have limited or no ability to vote on corporate decisions that require member approval (eg amendments to letters patent or by-laws, dissolution, sale of substantially all assets, etc). Such voting rights can be reserved for the founding member(s). Alternatively, the general membership can be permitted to vote on such decisions, but the founding member can be given veto power. Often the founding member has the power to remove general members, and sometimes directors, at will. Through such multiple membership classes, private foundations have been structured to ensure ongoing founding member control. The flexibility to provide for such ongoing control is one of the attractive features of the OCA and CCA, and in turn of private foundations incorporated under these Acts. Corporate control under the new Acts The new Acts substantially reduce the ability to use multiple membership classes to provide for ongoing founding member control.38 Similar to the previous regime, under the new Acts the corporate by-laws must set out the conditions required for membership in the corporation and multiple membership classes are permitted.39 However, unlike under the previous regime, the new Acts prevent the reservation of voting rights to a single class on fundamental corporate decisions. Notwithstanding that the by-laws may provide that one or more classes of members do not have a right to vote on some or all corporate decisions, all members will be entitled to vote on certain decisions. In most cases, non-voting members will have a class vote, and can as a group veto any action. Non-voting members will have a class vote on corporate decisions to: amalgamate with another corporation;40 continue of the corporation into another jurisdiction;41 sell of substantially all of the corporation’s assets;42 make amendments to the articles or by-laws which would alter the rights of their class of members, or effect an exchange of one class of members into their class;43 and propose to dissolve, or to liquidate and dissolve, the corporation.44 The new Acts also provide for members’ remedies that were not generally available under the CCA or OCA. Under the new Acts, members have the right to bring applications before a court to commence a derivative action.45 Such an action would enable participating members, termed ‘complainants’, to sue in the name of or on behalf of the private foundation. With the exception of religious corporations, it is possible for members to, with court approval, claim against the directors or founding members of a private foundation on behalf of the foundation itself. Similar provisions with respect to members’ rights are also provided for in the new Federal Act.46 Members of CNPCA corporations are also empowered to seek remedies against the corporation or its directors and officers for conduct that is oppressive.47 The provisions in the new Acts are a significant departure from the previous regime with respect to members’ rights, particularly in terms of voting rights. It will no longer be possible for private foundations incorporated under these statutes to ‘opt out’ of providing certain classes of members with voting rights though foundation by-laws. Furthermore, it will no longer be possible to permit the members of a certain class to veto any major corporate decisions. By entitling every member to at least one vote on fundamental decisions, founding members or directors may potentially be outvoted on matters that they disagree with. This erodes the control that founding members enjoyed under the previous regime. In this respect, the membership rights under the new Acts significantly resemble the rights of shareholders under business corporations legislation. While the rationale behind the regime change is to provide individual members with ‘enhanced democracy’ and a greater voice in a not-for-profit corporation’s affairs, it is questionable whether this is appropriate in the context of private foundations that are established by families or a close-knit group of individuals for specific philanthropic purposes. Unlike business corporations, in which shareholders have a direct economic stake in the governance and operation of the corporation, members of non-share corporations have no such financial interest in the corporation. It is appropriate that individual shareholders or groups of shareholders be protected by legislation that provides them with the means to participate in major corporate decisions in order to protect their investments. For private foundations, however, it is questionable that members should be provided with rights similar to those held by shareholders in for-profit corporations where they may not have made any financial contribution towards the foundation. Potential solutions to the control issue These new rules have required private foundations and their advisors to consider creative means of working within the new legislation in order to provide founding members with the control that they seek. Various solutions may be possible to ensure that founders of private foundations can maintain appropriate levels of corporate control. One obvious option is to incorporate under a different statute which provides more flexibility regarding members’ rights than CNPCA or ONPCA. The Alberta Companies Act,48 for example, is one such statute. Naturally, depending on the location of the foundation’s directors and members, this may create practical issues, as corporate statutes generally require that a head office be maintained in the incorporating jurisdiction and in some cases impose residency requirements on directors.49 However, in principle, incorporation under a more flexible corporate statute is one way of avoiding the control restrictions in the CNCPA and ONPCA. Assuming incorporation under one of the new Acts, one solution may be to establish classes that are not, in and of themselves, ‘membership classes’. This could include classifying individuals as ‘patrons’ or ‘supporters’ as opposed to ‘members’. By not being categorized as ‘members’ belonging to a particular class, ‘patrons’ would not be entitled to voting rights under the new Acts. These voting rights would remain vested in the founding members, who would thereby retain control of the private foundation and its decision-making power. Any rights that ‘patrons’ may have—for example, to attend meetings—would depend entirely on the private foundation’s by-laws. While it is possible that a court might take the position that such ‘patrons’ are simply members by a different name, Industry Canada has accepted this structure in at least some cases and several non-share corporations in Canada have already implemented this approach. Another possible solution is to re-structure the membership such that the founding member would be able to ‘stack’ the membership as necessary to ensure a desired outcome. One approach would be to provide for a dual membership class structure, in which one class consists of the founding member(s) and the other consists of the directors from time to time plus any other members which the founding member may permit. Should a situation arise requiring a class vote in which members are likely to vote against the founding members or propose that a director be added to the corporation’s board whose views are contrary to the founding members’, the founding members would be able to add new members to the general membership class prior to any vote taking place. These members could serve for a limited period of time and would likely be individuals whom the founding members know will vote in their favour (indeed, the newly added members may themselves be members or friends of the founding family). As such, the founding members could use the favourable votes of newly added members to outvote other dissenting votes, thereby indirectly retaining control of the private foundation and its decision-making power. As the new legislation has yet to come into force, it is also uncertain how it will be interpreted by courts in Ontario and other parts of Canada, or whether solutions such as those referenced above would withstand legal challenge. Measures adopted to circumvent or diminish the membership rights provided for under the new Acts may not ultimately be accepted by Canadian courts. All will depend on the facts and circumstances of a particular case. However, until clear guidance is handed down by the courts, or until legislative amendments may be introduced, foundations and their advisors will continue to work towards solutions to the issue of corporate control that will enable private foundations to continue to have structural flexibility while remaining compliant with the new Acts. Conclusion Familiarity with these new legislative changes is essential for all Canadian private foundations, and particularly for those looking to engage in foreign activities. These changes have presented private foundations with both opportunities and challenges. In order to take advantages of the new opportunities presented by the disbursement quota changes, as well as to ensure compliance with the new corporate statutes, foundations are well advised to consider their impact carefully. The authors wish to thank Rahul Sharma, Student-at-Law, Miller Thomson LLP, for his very helpful assistance with this article. 1. See Robert B Hayhoe, ‘Canada: Recent Developments for Private Foundations’ (2009) 15 (5) T&T 330 for more information about the Canadian regulatory regime with respect to charities, with a particular emphasis on the advantages of private foundations. See also Robert B Hayhoe, ‘Canada: Private Foundations and Foreign Activities’ (2010) 16 (6) T&T 430 for a discussion of the regulatory and compliance issues that Canadian private foundations face when seeking to participate in foreign activities. 2. Under s149.1(1) of the Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], registered charities are divided into three designations: charitable organizations, public foundations, and private foundations. 3. Under the ITA (n 2) s149.1(1), charitable organizations and public foundations must have a governance structure in which the majority of the directors, trustees, and/or like officials deal with each other at arm’s length. A single person or group of people is also restricted from controlling a charitable organization or public foundation where that individual or group has contributed more than half of the organization’s overall capital. 4. For more information on the categories of Canadian charities and their regulation under tax laws, see Arthur BC Drache, Robert B Hayhoe and David P Stevens, Charities Taxation, Policy and Practice, looseleaf (Thomson Carswell Limited, Toronto 2007). 5. See Hayhoe (n 1) 333. In Canada, the meaning of ‘charitable purposes’ derives from the English common law, and particularly the ‘heads of charity’ identified in Pemsel v Special Commissioners of Income Tax [1891] AC 531 (HL), which include (i) the relief of poverty, (ii) the advancement of religion, (iii) the advancement of education and (iv) other purposes of a charitable nature that benefit the community as a whole. 6. ITA (n 2) s 149.1(1) ‘disbursement quota’. 7. See Canada Revenue Agency, ‘Guidance: Canadian Registered Charities Carrying on Activities Outside Canada’ (8 July 2010) <http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/tsd-cnd-eng.html> accessed 1 April 2011. See also, Robert B Hayhoe, ‘A Critical Description of the Canadian Tax Treatment of Cross-Border Charitable Giving and Activities’ (2001) 49 Can Tax J 320. 8. For a detailed discussion of these rules, see Robert Hayhoe and Andrew Valentine, ‘The New Excess Business Holdings Rules for Private Foundations: Practical Considerations in Advising Clients’, paper presented at the 7th National Charity Law Symposium, Canadian Bar Association (Canadian Bar Association, Toronto 2008). 9. For a detailed discussion of the disbursement quota regime, see Drache, Hayhoe and Stevens (n 4) ch 8. 10. ‘Qualified donees’ are defined in the ITA to include Canadian registered charities, registered Canadian amateur athletic associations, non-profit housing corporations, Canadian municipalities and the federal or provincial Crown, the United Nations and its agencies, certain universities outside Canada ordinarily attended by Canadian students, and charities outside Canada that have received a gift from the federal Crown in the previous year. 11. See M Elena Hoffstein, ‘Private Foundations and Community Foundations’, in Report of Proceedings of the Fifty-Ninth Tax Conference, 2007 Conference Report (Canadian Tax Foundation, Toronto 2007) 32:1, 32:16. 12. ITA (n 2) s149.1(1) ‘specified gift’. Specified gifts were gifts between charities which the donor charity specially designates in its Information Return. The result of the designation is that the gift does not increase the disbursement quota of the recipient charity, and does not count towards the satisfaction of the donor charity’s disbursement quota. 13. ITA (n 2) para 149.1(4)(b). 14. See, for example, National Charities and Not-for-Profit Law Section, Canadian Bar Association, ‘Concept Paper on the Reform of the Disbursement Quota Regime’ (July 2009). 15. Ibid 3–4. 16. For general background on micro-finance, see Consultative Group to Assist the Poor, ‘What is Microfinance’, <http://www.cgap.org/p/site/c/template.rc/1.26.1302/> accessed 1 April 2011. 17. Canada Revenue Agency, ‘RC4143 Registered Charities: Community Economic Development Programs’ (23 December 1999) <http://www.cra-arc.gc.ca/E/pub/tg/rc4143/rc4143-e.html> accessed 1 April 2011. 18. Making grants to non-qualified donees is a basis for de-registration as a charity: ITA (n 2) proposed sub-s149.1(4)(b.1). 19. See ‘Special Report: The Federal Budget, March 4, 2010’, Canadian Tax Reports, Special Report No 1982, Extra Edition, 349–52. 20. The concepts that have been eliminated in the 2010 Federal Budget include ‘enduring property’, and ‘specified gifts’ (a provision that enabled charities with excess disbursements to help charities with disbursement quota shortfalls). 21. ITA (n 2) s149.1(8). 22. Ibid s149.1(4.1)(d). 23. SC 2009, c 23 [CNPCA]. 24. Canada Corporations Act, SC 1970, c C-32 [CCA]. 25. SO 2010, c 15 [ONPCA]. 26. RSO 1990, c C.38 [OCA]. 27. ONPCA (n 25) s207(2). The amendments will be deemed to take effect on the third anniversary date after the ONPCA comes into force. 28. CNPCA (n 23) s297. 29. For a more detailed review of the legislative changes, see Susan Manwaring, Hugh Kelly and Amanda Stacey, ‘Nonshare Capital Corporations: Charities and Not-for-Profit’ in Business Laws in Canada (Thomson Reuters/West, Toronto 2009) ch 16. 30. CNPCA (n 23) ss6–9; ONPCA (n 25) ss7–9. 31. CNCPA (n 23) s16(1); ONPCA (n 25) s15(1). 32. CNPCA (n 23) s148(1); ONPCA (n 25) s43(1). 33. CNPCA (n 23) s182; ONPCA (n 25) s76. 34. CNPCA (n 23) pt 16; ONPCA (n 25) pt XIV. 35. OCA (n 26) s120. 36. Ibid s125. 37. Policy 13.2, Canada Corporations Act Part II, Incorporating a Not-for-Profit Corporation (1 May 2007). 38. General membership provisions are set out in ss48–62 of the ONPCA; and ss152–71 of the CNPCA. 39. ONPCA (n 25) s48(1)–(3). 40. CNPCA (n 23) s206; ONPCA (n 25) s111. 41. CNPCA (n 23) s213; ONPCA (n 25) s116. 42. CNPCA (n 23) s214; ONPCA (n 25) s118. 43. CNPCA (n 23) s199; ONPCA (n 25) s105. 44. CNPCA (n 23) s221. 45. CNPCA (n 23) s251; ONPCA (n 25) s183. 46. CNPCA (n 23) pt 16. 47. Ibid s253. 48. RSA 2000, c C-21. 49. S90(1) of the Alberta Companies Act requires that at least 50 per cent of the members of the Board of Directors must be resident Albertans. © The Author (2011). Published by Oxford University Press. All rights reserved.