Forthcoming reform of foundations law

Ministerial draft bill of the German Ministry of Justice dated 28 September 2020 standardising the law on foundations

On 28 September 2020, the Federal Ministry of Justice and Consumer Protection [Bundesministerium der Justiz und für Verbraucherschutz, BMJV] published a first ministerial draft bill on the reform and standardisation of the law governing foundations. The meaning and purpose of the reform is to strengthen legal certainty. Unfortunately, the current patchwork of federal and federal state laws (as well as the acknowledged principles of customary law) only inadequately provide such certainty. In addition, a public register of foundations is going to be created, which should then create greater transparency in the foundation landscape. A definite need for action exists for all foundations that manage their administration from abroad.

I. Overview

A uniform German law on foundations currently does not exist. The law governing foundations is split up into a number of Germany-wide regulations contained in the German Civil Code [Bürgerliches Gesetzbuch, BGB] and 16 federal state laws. What all these laws have in common is that they do not or only insufficiently cover many situations of practical relevance, such as the addition or consolidation of foundations. The previous foundations law of the BGB contains very few fundamental provisions. To what extent these are supplemented by federal state laws varies from state to state. Since federal law has hierarchical precedence over the law of the federal states, a question that currently also arises is whether individual federal state regulations do not violate federal law. These facts, together with the lack of a comprehensive and uniform judiciary, create uncertainties in practice time and again. The implementation of foundation projects is always dependent on the legal opinion and goodwill of the respective local foundation authority.

II. The ministerial draft bill in detail

The ministerial draft bill now presented corresponds almost 1:1 to the discussion draft of the federal and federal state working group "Foundations Law" established back in 2014 for a law to standardise the law on foundations dated 27 February 2018. An overview of the proposed amendments to the foundations law as well as the ministerial draft bill itself can be found here.

The draft strives to eliminate abuses through numerous additions and amendments to federal law. Below, we describe the essential amendments of the ministerial draft bill (hereinafter "BGB-RefE").

1. Definition and nature of the foundation

§ 80 (1) sentence 1 BGB-RefE contains for the first time a legal definition of the foundation as a non-member legal entity endowed with assets for the permanent and sustainable fulfilment of a specified purpose. § 80 (1) sentence 2 BGB-RefE expressly clarifies that the foundation can be limited to a certain period of time. The limited life foundation, which is already provided for under current law and which expends its assets to achieve its purpose, remains possible (§ 80 (1) sentence 2 BGB-RefE).

2. Name affixes "e. S." and "e. VS."

A further innovation is the name affix provided for in § 82c BGB-RefE. According to this, the foundation must bear the name affix “eingetragene Stiftung” ("e. S.") [registered foundation] once it is entered in the foundation register. For limited life foundations, the name affix “eingetragene Verbrauchsstiftung ("e. VS.") [registered limited life foundation] is envisaged. This now clearly distinguishes the "genuine" foundation from other legal structures which previously also had "Stiftung” [foundation] in their name, such as "unselbstständige Stiftungen” [dependent foundations] based on a fiduciary relationship or corporations operating under the name "Stiftung-GmbH". 

3. Mandatory administrative headquarters in Germany

Pursuant to § 83a BGB-RefE, it is a mandatory requirement that the administration of the foundation is conducted in Germany, as this is the only way to ensure effective supervision. If a foreign administrative seat is not transferred to Germany, contrary to a corresponding demand by the supervisory authority, the latter will be obliged to dissolve the foundation (§ 87a No. 3 BGB-RefE).

4. Composition and preservation of the foundation's assets

With the exception of the limited life foundation, which is already provided for in applicable law, the BGB does not currently contain any rules on the composition and preservation of the foundation's assets. The principles for this, which are partially standardised in federal state law and have already been applied in practice, are now being explicitly laid down.

Pursuant to § 83b (2) BGB-RefE, the so-called "basic assets" (the initial assets, endowments and property dedicated to the foundation, which are expressly designated for this purpose) are to be received undiminished at the starting point. The purpose of the foundation must be fulfilled through uses of the basic assets. Besides this, there are the "other assets", which can be freely expended at the starting point. The limited life foundation, which expends its entire assets within a certain period of time in order to fulfil the purpose of the foundation, is still possible - in this case the entire assets are "other assets", § 83b (1) sentence 2 BGB-RefE.

For the first time, the ministerial draft bill explicitly addresses two types of statutes, which range between perpetual and limited life foundations and which are already often desired and implemented in practice due to the flexibility they provide. Firstly, according to § 83c (2) sentence 1 BGB-RefE, a foundation that is set up on a permanent basis is expressly permitted to expend a specified part of its assets in conducting the business of the foundation (partial limited life foundation). Secondly, § 83c (2) sentence 2 BGB-RefE recognises the possibility of having the foundation’s statutes permit access to basic assets on a merely temporary basis, provided that such assets are restored to their original value in the foreseeable future.

5. Business judgement rule

In § 84a (3) BGB-RefE, the so-called Business Judgement Rule is now anchored. According to this, members of the executive bodies of a foundation cannot be accused of misconduct if they could reasonably assume in the course of their management activities that they were acting in the best interests of the foundation on the basis of appropriate information, in compliance with the legal and statutory requirements. The adoption of the Business Judgement Rule, a concept already known to corporate law, will create greater legal certainty.

6. Changes to the statutes 

The requirements for amending the statutes will now be regulated uniformly throughout Germany for the first time. To date, the BGB has only regulated the amendment of the statutes externally by the foundation supervisory authority, but not by the foundation itself. Furthermore, other rules exist at federal state level whose reconcilability with federal law is sometimes disputed. It is partly unclear to what extent a foundation's statutes may deviate from the current legal situation.

According to the proposed new regulation in § 85 (1) to (3) BGB-RefE, the requirements for a permissible amendment of the statutes depend on the severity of the amendment:

• "Simple" amendments to the statutes require that they facilitate the fulfilment of the foundation’s purpose.
• Changes in the foundation’s purpose as well as changes in the provisions of the statutes which are formative for the foundation (name, registered office, manner of fulfilling its purpose, preservation of the basic assets and the tasks of its executive organs) require that the circumstances have changed so substantially since the foundation was established that an adjustment is necessary.
• As the most serious form of amendment of the statutes, the exchange of purpose and the considerable restriction of purpose require that the permanent and sustainable fulfilment of the foundation’s purpose is impossible or that such purpose endangers general welfare.

These requirements apply both to autonomous amendments to the statutes by the foundation itself and to amendments to the statutes initiated by the foundation supervisory authority, § 85a (1), (2) BGB-RefE. In the former case, as is already the case under most of the current federal state foundation laws, the approval of the foundation supervisory authority is required. The foundation statutes may provide for deviating (higher or lower) hurdles for an amendment to the statutes, § 85 (4) BGB-RefE, whereby it expressly stipulates a broad scope for their structuring.

7. Addition and consolidation of foundations

To date, the addition - the transfer of the foundation’s assets as a whole to a receiving foundation - and consolidation - the transfer of the assets of several foundations as a whole to a new, joint foundation - of foundations requires a combination of individual measures – the liquidation and transfer of the individual assets to the receiving foundation - which entail a great deal of legal uncertainty and whose success ultimately depends on the goodwill of the foundation authority.

The procedures and requirements for adding and consolidating foundations are now contained in §§ 86 et seq. BGB-RefE, which creates flexibility, especially for the many foundations suffering in the current low-interest environment, the federal state foundation law or foundation statutes of which previously contained no or unclear regulations. Here, opportunities are being created which are otherwise only available to companies under the German Transformation Act [Umwandlungsgesetz, UmwG].

We will report on this in more detail in a separate newsletter. 

8. Dissolution and cancellation of foundations

The termination of foundations was previously only insufficiently regulated in the BGB, namely only for the foundation supervisory authority. A disputed issue was how this matter is regulated by the many supplementary provisions of federal state law. According to §§ 87 et seq. BGB-RefE, termination by the foundation itself or the competent foundation supervisory authority should now be uniformly possible if the permanent and sustainable fulfilment of the foundation’s purpose has become impossible and this cannot be remedied by amending the statutes. The resolution to dissolve the foundation requires the approval of the foundation supervisory authority.

9. Foundation register

There has been no nationwide uniform register of foundations to date. In some cases, registers which disclose specific information have been introduced at the federal state level. Until now, this has led to problems when proof of the right of representation of the executive board has had to be proven in legal transactions. Up-to-date proof of representation currently has to be requested from the foundation supervisory authority.

The criticism raised by this issue has now been countered. The ministerial draft bill introduces for the first time a central register of foundations comparable to the German Commercial Register [Handelsregister] (§ 82b (1) BGB-RefE), which also and especially identifies the representatives of the foundation (§ 82b (2) BGB-RefE). Other facts that require registration are amendments to the statutes, the addition and consolidation of foundations as well as their dissolution, cancellation and liquidation. As with entries in the Commercial Register, entries have to be publicly certified by a notary public.

The register of foundations will be kept at the Federal Office of Justice [Bundesamt für Justiz] and will be open to inspection by anyone. Similar to the Commercial Register, entries in the register of foundations will enjoy protection of legitimate expectations (§ 82d BGB-RefE). Outsiders can plead the correctness of the entries vis-à-vis the foundation, even if they are actually incorrect. Conversely, the foundation may only plead facts that are subject to a registration obligation if they have actually been entered in the register of foundations. For many foundations, this will also facilitate entries in the transparency register. 

10. Lifetime rights of the founder

The Federal Government and Federal State Working Group's draft already refrained from including special statutory founder's rights, such as the right to change the foundation's statutes and purpose during the founder’s lifetime. The corresponding stipulations still have to be expressly included in the foundation's statutes.

III. Appraisal

The reform of the law on foundations is long overdue and is to be welcomed. Many of the new regulations have already been implemented in practice as is now being proposed, on the basis of a mixture of the BGB, federal state law and customs. A major achievement of the reform project is the structuring and harmonisation of already existing provisions. The implementation of the foundation reform will create a high degree of legal certainty for foundations in practical terms. The extended and codified possibilities of adding and consolidating foundations will allow the foundation landscape to reorganise, which is indeed necessary in some areas. 

For existing foundations, the creation of a public register of foundations in particular will cause a change. The draft law currently proposes a deadline of one year from the date of entry into force, within which existing foundations must notify themselves to the register. Current and future projects which could be influenced by the proposed legislation, such as changes to the statutes and purpose; additions or consolidations, etc., should already now be based on the anticipated legal situation.

For all foundations that manage their administration from abroad, a definite need for action exists. They face the threat of supervisory measures that can only be averted by returning the administrative headquarters to Germany.

In conclusion, it is to be hoped that the Federal Government will swiftly take up the ministerial draft bill and transfer it into the parliamentary legislative procedure as a draft law by passing it on to the Bundesrat. Otherwise, the urgently needed reform of the law on foundations threatens once again to be postponed indefinitely.

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