Russell Clark, Deputy Managing Partner of Carey Olsen in Guernsey, discusses the merits of Guernsey's new Foundations Law.
Before the success of Guernsey's horticulture and finance industries a mainstay of the Guernsey economy was quarrying of the granite from which much of the island is formed. The island was quarried by the Romans and earlier visitors. Guernsey granite was used in the 19th century in the construction of numerous bridges and pavements in London. Perhaps the local industry's proudest commission was to provide the steps for St Paul's Cathedral.
From January 2013 Guernsey started to export a new kind of foundation, when the Foundations (Guernsey) Law, 2012 (the Foundations Law) came into force. For the first time the Foundations Law has been introduced into domestic Guernsey law, a legal institution which has been well known to civil lawyers for centuries.
Foundations v Trusts & Companies
Like Guernsey companies, Guernsey foundations will be registered. However, not all foundations around the world are registered. In some jurisdictions it is sufficient for you to appear before a notary public in order to establish the foundation. It was thought that, in the interests of transparency, there should be some public profile of a Guernsey foundation; albeit the information available to the public is limited to the name of the foundation, its registered number, the names and addresses of the councillors and (if applicable) the guardian.
Like a company a foundation is governed by a management board. In a company this is called the board of directors. In a Guernsey foundation this is the council. When trustees enter into a contract it is the trustees who are bound by it. There can be no other contracting party. When councillors of a foundation enter into a contract they do so in order to bind the foundation, but not themselves, in the same way that directors of a company sign contracts for and on behalf of the company. A company in Guernsey may have unrestricted objects meaning that they can do anything that is lawful.
A Guernsey foundation "may sue and be sued in its name and may exercise all the functions of a legal person..." – Para 6(5)(a) of the First Schedule.
A company is capable of perpetual existence provided the annual renewal processes are followed; so too is a foundation. A company may in its constitution specify that it shall exist for a finite period but very few do. Similarly a foundation may, in its charter, specify that it will only exist for a limited period. It is expected that very few will do.
The assets of a foundation vest in the foundation itself. Similarly company assets vest in the company. Something that shareholders of companies sometimes need reminding of is the fact that shareholders do not own the assets of a company. The shareholders have no property rights in the assets of the company at all. Their rights are limited to ownership of the shares they hold and they have the rights that the law and the articles of the company afford to the shareholders. Beneficiaries of a foundation, if there are any, similarly do not have vested property rights, equitable or legal or otherwise, in the assets of the foundation. The beneficiaries of a foundation have the rights afforded them in the law and in the constitution of the foundation and nothing else. Unlike a company limited by shares, a foundation does not have shareholders. It is not owned by anyone. In other ways a foundation can be compared to a trust; assets are donated by a founder like they are with a settlor and are held for the benefit of others or for a specific purpose.
Trusts are not really intended as trading vehicles; nor are foundations. Foundations can be created for any purpose save that it cannot carry out any commercial activities except those necessary for, and ancillary or incidental to, its purposes. Like certain trusts a foundation can be expressed to be revocable by the founder or irrevocable. Although revocation of a foundation does not necessarily mean that the assets vest back in the founder.
A particularly welcome feature of the Foundations Law is that, as for a trust, the Royal Court will be able to give directions to its administrators in the exercise of its function in supervising foundations. In contrast the courts in civil jurisdictions typically regard themselves as existing to resolve disputes between competing parties.
It is not generally possible to seek the assistance of the court to avoid the dispute arising in the first place.
Guernsey is not the first common law jurisdiction to introduce the foundation. However, the Guernsey Foundations Law offers a fresh and flexible entity for private wealth management taking the best of others and introducing innovation where needed.
A Guernsey Foundation has a constitution that may comprise of two parts; the charter and the rules. The charter must contain the name and purpose of the foundation, a description of its initial capital 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 functions of the council, deal with the appointment, retirement and remuneration of council members and the guardian and identify the default recipient who will take any remaining assets once the foundation is wound up.
The rules may also deal with (and in practice will deal with) how the assets of the foundation will be applied, whether additional funds can be accepted, provide for the addition or exclusion of beneficiaries, impose obligations on a beneficiary as a condition of benefitting and may also contain protective measures to terminate a beneficiaries' interest if he becomes insolvent or otherwise. Once drafted, the constitution can only be revised if it contains a provision to such effect. One might dispense with the rules and put what the law requires to go in the rules into the charter. The only difference between the charter and the rules is that the Registrar of Foundations receives a copy of the charter. The charter is not open to public inspection.
Management and Accountability
Like the settlor of a trust it is the founder's role to determine the purpose or will of the foundation, craft its constitution (and he/ she or their agent must sign it) and endow it with its initial capital. It is also the founder's role to appoint the initial councillors and any guardian and to seek to have the foundation registered. The founder can be a councillor or a guardian (but not at the same time) and a beneficiary. It is important to appreciate that once the foundation has been established it must have an existence independent of the founder.
A Guernsey foundation will be managed by a foundation council of at least two (unless the constitution specifies that one only is possible). If one of the council members is not a locally-licensed fiduciary there will be a need to appoint a Guernsey resident agent who has all the details of those interested in the foundation. This ensures that the foundation will be brought into the normal anti-money laundering regime. The council owes the foundation a duty to act in good faith in the discharge of its functions but the council owes no duty of care to the beneficiaries. The beneficiaries are not reliant upon equitable rights enforceable against the council. The beneficiaries have the rights afforded to them by the constitution and, if those rights are not respected, their complaint lies against the foundation. It is clearly proper that the council must be accountable for their actions. If they owe their duty of care to the foundation and they manage and control the foundation what accountability do they have?
More specifically, what power does a beneficiary have if it all goes wrong? Under the Jersey law the only person to whom the council members are accountable is the "guardian" and every foundation must have a guardian under Jersey law. The council cannot be held to account by the beneficiaries but, in Jersey, the guardian does not have any particular duty to the beneficiaries. His duty again is to the foundation. The Guernsey law adopts a different and innovative regime. The approach taken was to balance the need for there to be effective accountability with the need to ensure that in appropriate circumstances it is possible to withhold information from certain beneficiaries.
For example, the courts in Guernsey have recognised the principle that it is not generally in the best interest of young beneficiaries to have access to significant wealth given its potentially corrosive effects. A founder may well object to, for example, accounts being shared with beneficiaries below a certain age or before they have achieved a particular qualification. In Guernsey there are two types of foundation beneficiary; 'enfranchised' beneficiaries who are entitled to see the constitution of the foundation (charter and rules) and the records and books of account of the foundation (but not the sort of material which a trustee can presently deny to a beneficiary of a trust – the Re Londonderry information) and to make certain applications to court. 'Disenfranchised' beneficiaries are not entitled to any information. Guernsey law also recognises the role of guardian. One must have a guardian whenever one has disenfranchised beneficiaries.
The Use of Guernsey Foundations
At the time of writing more than half of the foundations established in Guernsey so far have been established for philanthropic or charitable purposes. Others have been established as private wealth vehicles in circumstances where a trust might have been otherwise contemplated.
It might be thought that a prospective client (or more usually his or her adviser) might choose to establish either a trust or a foundation based upon personal preference. However, our recent experience suggests that sophisticated clients are comfortable using both as part of their wealth planning. Given that foundations and trusts are taxed differently around the world it is relatively common to find families using both structures to benefit different family members depending upon their tax residency.
Recently Carey Olsen has advised the use of a foundation to own shares in private trust companies instead of a non-charitable purpose trust and even, in a move which would have probably confounded traditional civil lawyers and trust practitioners alike, as the trustee itself.
Although the foundation and trust are engineered differently, and have evolved in different environments, they can be used for similar purposes and both have at their core the same offering; the professional administration of assets for persons or purposes with skill and integrity. Although the foundation is a new concept for Guernsey the provision of excellent administration is something that the island has been specialising in for the last 60 or so years.
It is not just the island's granite that continues to provide the bedrock on which at least some of the City of London – and other financial centres - are built.
Originally published by IFC Review, August 2013.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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.