On 25 July 2012 the States of Deliberation, Guernsey's parliament, approved the projet de loi The Foundations (Guernsey) Law, 2012 (the "Law"). Subject to Privy Council approval, the Law is expected to come into force in late 2012 or early 2013. This note is a brief summary of certain features of the new Law.
1. An analysis of The Foundations (Guernsey) Law, 2012
The Law is intended to reflect accepted civil law characteristics of foundations but is not a replication of the foundation laws of other jurisdictions. The draftsman has considered market needs and has looked to create something bespoke that should be well suited to meet the requirements of the Island's clients.
The Law is separated into three parts; the substantive law itself and two schedules. This was done deliberately to mirror the civil law tradition of having a short law with clarification coming in the form of regulations. The first schedule deals with administrative matters, such as the establishment of foundations and their registration. The second schedule deals with migration of foundations, their revocation, dissolution and termination. The migration provisions are helpful as it is understood that there are a number of existing foreign foundations that would welcome a chance to relocate to somewhere with greater administrative capability and reputation, such as Guernsey.
2. What is a foundation?
Foundations have some characteristics that are similar to those of a company as it has separate legal personality and a management board known as a council. On the other hand it is entirely independent and has no shares and no members nor any concept of share capital. A foundation may also be compared to a trust, as assets are held for the benefit of others or for a specific purpose although trusts, of course, have no separate legal personality. An important legal distinction is that with foundations there is no separation of legal and beneficial title of property whilst in trusts there is such separation. Both foundations and trusts can be used to hold assets in "orphan" structures, legally separated from the original owners of those assets. Although there are similarities a foundation is neither a company nor is it a trust. Furthermore, trusts and companies are not two ends of a spectrum with foundations somewhere in the middle. They are three distinct and different legal structures which have evolved differently to serve different purposes and to work in different environments.
Set out below are the key features of the proposed Guernsey foundation:
- They are ideally suited for private wealth management, succession planning structures and charitable giving.
- They are familiar to those from a civil law background.
- They are more flexible than a company structure in that the Law allows a substantial degree of bespoke adaptation.
- They have legal personality and may contract or sue, in their own name.
- There is no segregation of legal and beneficial title, as with a trust.
- The concept of "disenfranchised beneficiaries" (hereinafter discussed) allows concerned founders to limit the flow of information to certain classes of beneficiaries.
- They are private structures.
- They require registration but the information that is publicly available is restricted.
3. The Key features of a Foundation:
- The Council
A Guernsey foundation will be managed by a council comprised of at least two councillors unless the constitution permits a single councillor. If one of the councillors or the guardian is a Guernsey licensed fiduciary the foundation will be brought into the ambit of the regulatory regime. If neither of the councillors, nor the guardian, is a Guernsey licensed fiduciary, then the foundation will require a Guernsey resident agent to hold the foundation's records within the jurisdiction
- The Constitution and Rules
The core document by which a foundation is established is its constitution. The constitution comprises two parts; the charter and the rules. The charter must contain the name and purpose of the foundation, a description of its initial capital or endowment and, if it is a foundation with a limited duration, that duration must be stated. It may contain anything else that the founder wants to include.
The rules set out the operative provisions of the foundation. As such the rules detail the functions of the councillors, deal with the procedures for the appointment, retirement and remuneration of councillors and any guardian, and identify the default beneficiary. The rules may also specify other matters such as how the assets of the foundation should be applied and how beneficiaries may be added or excluded. They may also impose obligations on a beneficiary such as a condition of benefitting or contain protective measures to terminate a beneficiaries' interest for example if he becomes insolvent or otherwise.
- The Register
Section 4 of the First Schedule of the Law sets out the information which will be publicly available in Part A of the Register. This includes: the name and registered number of the foundation, the name and address of the councillors appointed to act, the name and address of the guardian (if there is one) and the details of the registered office. In addition the registrar shall maintain a non-public Part B of the register which shall include all declarations and other documents filed with the Registrar pursuant to the Law.
- The Founder
The founder of a Guernsey foundation may determine the purpose of the foundation, craft the foundation's constitution and endow it with its initial capital. The founder (or his agent) must also subscribe his name, as the founder, to the constitution of the foundation by signing it. It is also the founder's role to appoint the initial councillors and any guardian and to seek to have it registered. The founder can either be a councillor or a guardian (but not both simultaneously) in addition to being a beneficiary.
A Guernsey foundation must have a guardian only where there are either disenfranchised beneficiaries or where there is only a purpose but no individual beneficiaries. The guardian's function is to enforce the purposes of the foundation on behalf of disenfranchised beneficiaries or, where there are no beneficiaries in substitution for them. Foundations that have beneficiaries but no disenfranchised beneficiaries are not required to have a guardian. The founder may act as guardian. The guardian will be named in the register and may not serve on the council at the same time. He must maintain accurate accounts and records of his guardianship.
- Reservation of powers by the Founder
Consistent with the approach taken on the European continent the founder can only reserve to himself limited powers set out in section 11 of the Law such as the power of amendment or revocation of the constitution or of the purposes of the foundation. Such powers can be reserved only for the duration of the founder's life (if he is a natural person) or for 50 years from the date of establishment in the case of a legal person whereafter the reserved powers will automatically lapse. This does not preclude the council from delegating certain functions to the founder.
A foundation will come into being upon registration by the Registrar. In order to register a foundation the person seeking to register it must provide the Registrar with: the charter, a declaration signed by the founder (or his agent), the names and addresses of the proposed councillors and their consents to act, the name and address of the proposed guardian (if any) and his consent to act, the address and telephone number of the registered office of the foundation in Guernsey and of course the ubiquitous registration fee (the amount of which has yet to be confirmed). Provided the name is not unlawful or already taken and the purpose is not contrary to the law of Guernsey it will then be registered, given a number and a certificate of registration whereupon it becomes a legal person separate from its founder, the foundation officials (the councillors and any guardian) or beneficiaries. The Registrar has a discretion as to whether or not a foundation will be subject to an annual renewal process (similar to a company's annual validation) and like companies, foundations will be capable of perpetual existence.
- Legal Personality
Unlike a trust which is not a legal person, a Guernsey foundation will have a legal personality of its own. It is a person in its own right able to contract and sue in its own name. The assets of a foundation belong neither to the foundation council, the founder or the beneficiaries. They belong to the foundation in the same way that the assets of a company do not belong to the directors or to the shareholders but to the company itself.
The existence of a separate legal personality underscores a fundamental difference between a foundation and a trust with a number of significant consequences that flow from that. The beneficiaries of a trust, if all of them are adult and competent and there are no unascertained beneficiaries can between them terminate a trust because they are together the owners of the entire beneficial interests in the trust property (this is known as the rule in Saunders –v– Vautier (1868)).
The beneficiaries under a foundation cannot do so because they have no legal or beneficial interests in the foundation's assets. All they have are the rights given to them under the constitution.
- Duties owed
Another consequence flows from the question as to whom the members of a foundation council owe its duties. These duties are owed to the foundation itself in the same way as a director of a company owes the company fiduciary duties to act in the best interests of the company. The foundation council and its members do not owe duties to the beneficiaries of the foundation.
Pursuant to section 19 of the Law the councillors have a duty to act in good faith and en bon père de famille. The councillors also have a duty not to profit (otherwise than as permitted by the constitution), to preserve the foundation property, to give information to the guardian and enfranchised beneficiaries, to maintain accounting records, to act together with their fellow council members and to be impartial.
A guardian, however, owes fiduciary duties to the founder and the beneficiaries to enforce the constitution.
- Types of Beneficiary
A beneficiary of a foundation is someone who is entitled to benefit from a foundation. Beneficiaries must be identified by name or be ascertainable as a member of a class or by their relationship to another person. The Law provides for enfranchised and disenfranchised beneficiaries. An enfranchised beneficiary is entitled to a copy of the constitution, records and accounts of the foundation and to apply to Court to change the purposes or revoke or dissolve a foundation. Subject to the terms of the constitution disenfranchised beneficiaries are not entitled to any information. This novel feature which is not found in any other jurisdictions may be attractive for family arrangements where the family wish to protect their younger generations from the potentially corrosive effects of the knowledge of substantial wealth. Once the reason for a disenfranchised beneficiary's classification (such as age) falls away they may then become an enfranchised beneficiary.
Guernsey is a well regulated, transparent and respected jurisdiction with a wealth of knowledge and globally recognised experience as well as a reputation for excellence in private client matters. Carey Olsen is a leading law firm of the Channel Islands with the largest and most established fiduciary department in the Channel Islands, specialising in such work. Partner Russell Clark has been actively involved in the preparation of the Law, placing Carey Olsen in an ideal position to advise clients in relation to foundations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.