The foundation reform is coming: Early action before the tightening of foundation law is required

The Ministry of Justice has meanwhile presented the draft bill for the standardization of foundation law in the German Civil Code (BGB), which had been expected for some time. This is intended to make a large number of legal adjustments.

Currently, the law on foundations is regulated in §§ 80-89 of the German Civil Code (BGB) and in the foundation laws of the German states. In the BGB there are mainly regulations that regulate the creation and amendment of foundations as well as their relationship to third parties. These foundation-specific regulations are supplemented by references to the law on associations. Further regulations can be found in the respective state law.

The aim of the draft bill is first of all to regulate the legal form of the foundation uniformly and finally in the BGB. The material regulations in the foundation laws of the federal states should be dropped as far as possible. In addition, the participation of the foundation in legal transactions should be simplified. In this context, the "handling of representation" is to be improved.

The legal character of the legal form "foundation" is to remain untouched in its core, even after the speaker's draft. This means, in particular, that any permitted non-profit or private purpose is still sufficient for its establishment.

Nevertheless, the draft bill could result in some important changes for existing foundations as well as for foundations to be newly established, provided that the bill becomes law. It is to be assumed that it will soon come into force, possibly even in this legislative period. The speaker's draft is based on the discussion draft that the federal and state working group on foundation law already presented more than two years ago and which has been intensively discussed among experts in foundation law. It is therefore to be expected that the main content of the draft can become law even after the upcoming consultations in the Federal Cabinet, the Bundestag and the Bundesrat.

 

Introduction of a central register of foundations

For foundations, there is no public register that is legally comparable with the commercial or association register. Although the federal states maintain registers of foundations and so-called "economically entitled persons" have had to be entered in the transparency register since 2017, these registers do not have any publicity effect, especially with regard to the representation regulations in the foundation. In order to provide proof of their power of representation to other participants in legal transactions, they have so far used certificates of representation. Since these have to be updated again and again, a not inconsiderable amount of administrative work has arisen.

The introduction of a register of foundations, which is provided for in the draft, is therefore a simplifying innovation. This is to be managed centrally by the Federal Office of Justice and - only - will have a negative publicity effect. A fact not entered in the register of foundations can only be held against a third party if it is known to the third party.

The Register of Foundations should have a purely declaratory effect. The legal capacity of a foundation would thus continue to depend on recognition by the competent foundation authority.

The registered foundations should be required to have an additional name: "e. S." for registered foundations or "e. VS." for registered consumer foundations.

Facts that are subject to registration are intended:

  • Name and registered office,
  • Date of the foundation transaction, recognition or approval of the comparable act of establishment (also publication of the respective current statutes),
  • Board members with power of representation: Name, date of birth, place of residence,
  • Restrictions on representation of the Board of Directors,
  • Changes to the wording of the Articles of Association,
  • Termination of the foundation.

After a three-year transition period, the register establishment is to become binding. If the law is promulgated before the end of this year, the register of foundations can be expected to be established on January 1, 2025. The registration would then be binding for existing foundations within the year of establishment (i.e. 2025).

In our opinion, the planned creation of the Register of Foundations is to be welcomed. Overall, the administrative workload for the foundations should be reduced. Official certificates of representation no longer need to be applied for. In many cases, there will also be no need for an entry in the transparency register: This is because the disclosure obligations under the Transparency Act are often deemed to be fulfilled by entry in the register of foundations, namely when any "beneficial owner" emerges from it (or from the co-published statutes). In addition, the notification obligations arising from the regional foundation laws for the maintenance of regional foundation registers do not apply.

Especially for family foundations, it should be noted that according to the draft pension scheme, the foundation statutes must be published. Adaptation measures to ensure the financial privacy of beneficiaries should be considered at an early stage.

 

Partial tightening of liability for the foundation's executive board and other foundation bodies
With regard to the organs of the foundation, the draft bill provides for extensive regulations. The hitherto existing references to the law of associations will be replaced by explicit adoptions and supplemented by new regulations.

In particular, the draft regulates the liability of the foundation organs anew. Currently, members of the foundation's executive board are liable for damages according to §§ 86, 27 paragraph 3, 664 ff., 280 paragraph 1 BGB (German Civil Code), whereby the general liability standard according to § 276 BGB for intent and negligence applies.

Contrary to the previously applicable regulation of § 280 I 2 BGB, the draft does not explicitly stipulate that fault is presumed to be attributable to the foundation's governing body. Some experts in foundation law and advisors from well-known law firms already sense a far-reaching reduction in the liability of the executive body. However, a departure from the presumption of fault would be a novelty in German law of obligations and corporate law. Neither single board members nor GmbH managing directors or AG board members are entitled to such a privilege. However, a comparison with the rest of the company law shows that the foundation's directors cannot look forward to a reduction in liability in this respect.

Quite the opposite: With the omission of an independent regulation of the burden of proof, the general principles of the law on the liability of executive bodies simply come into effect. According to these, the prevailing view in case law and literature is that not only fault but also breach of duty is presumed if the legal entity - in this case the foundation - accuses its organ of potential damage. Whether a breach of duty is suspected in the case of the liability of the foundation's executive board despite § 280 I 2 BGB in view of these general principles has so far been a legal dispute. The draft bill satisfies this dispute at the expense of the foundation's executive board (and the members of the foundation's organs) by no longer containing a separate regulation on the reversal of the burden of proof. In this respect, the draft bill provides for a tightening of the liability of executive bodies under foundation law.

The intervention of the general principles on the reversal of the burden of proof in the liability of executive bodies is also not opposed by the corresponding statements in the draft's explanatory statement. There it says succinctly: "§ 84a paragraph 3 sentence 1 BGB-new does not provide for a reversal of the burden of proof for fault, unlike § 280 BGB". The explanatory memorandum states that the new regulation in foundation law does not formulate a separate regulation. However, the explanatory memorandum is not directed against the applicability of general principles of directors' and officers' liability.

In contrast, the codification of the so-called Busi-ness Judgment Rule contained in the draft of the new foundation law would relieve the foundation's executive board of liability: Although the Busi-ness Judgment Rule was, according to the prevailing view, already applicable to the foundation's executive board as an unwritten legal principle, details regarding its scope and limits were particularly controversial. The speaker's draft would create more legal certainty here. The Business Judgment Rule provides the foundation's executive boards with a liability-free scope of discretion. It states that a foundation's executive board is not liable even if its actions have a detrimental effect on the foundation, in particular if it has acted on an appropriate information basis.

Against the background of the previous controversies, the new regulation of the liability of executive bodies in foundation law is on the one hand welcome because it provides the foundation's executive boards with more legal certainty about their obligations and liability risks. On the other hand, there will be an increased need for advice on transactions with high financial implications or legal risks in the future, so that the "safe harbor" of the Business Judgment Rule can be applied at all.

For the foundations themselves, the elements of the draft bill that tighten up liability mean increased protection, especially in cases of abuse, since their position in liability proceedings tends to improve. This is also likely to have an effect on a more stringent obligation for any supervisory bodies ("foundation supervisory boards"), since in the event of misconduct on the part of the executive boards, they are more likely to be obliged to call upon the foundation's executive boards for the foundation.

The speaker's draft also allows for liability limitations in favor of all or certain members of the foundation's governing bodies: against the background of the new liability situation, founders as well as designated foundation directors and members of other foundation bodies should urgently consider whether they want to include liability limitations in the "foundation statutes", for example to prevent excessively risk-averse behavior of the foundation directors. In addition, legally enforceable regulations on the distribution of responsibilities will become more important, since they can also be used to achieve a limitation of liability. In order to be prepared in the event of liability, it is important to deal with these issues at an early stage.

It should be taken into account that according to the draft, the liability privilege for non-remunerated and marginally remunerated board members should be maintained.

 

Changes to the Articles of Association

In principle, it should be noted with regard to planned structural changes within a foundation that the more intensive a planned intervention in the foundation identity is, the higher the legal hurdle for a change should be. Thus, with regard to a change of purpose (this represents the most intensive intervention), a purely economic imbalance should no longer be sufficient.

Other characteristics that determine the identity of the foundation should only be adjusted in case of a substantial change of circumstances, whereas other characteristics may already be changed to facilitate the fulfilment of the purpose.

A right of the living founder to amend the statutes will not be provided for in the future either. However, the living founder may have himself appointed as an organ authorized to amend the statutes, provided that he already specifies the content and extent of the authorization to amend in the statutes.

The establishment and consolidation of foundations should also be possible by foundation boards exclusively with the will of the founders of the transferring and the receiving foundation. In this case, the accepting foundation will be the universal successor.

Structural changes made by organs have priority over measures taken by the foundation authorities, whereby - with the exception of dissolution - the founder may make deviating arrangements. Such measures are still only effective with the approval of the foundation authority.

Existing foundations, in particular, should immediately examine whether an amendment to the statutes should be implemented before the stricter provisions of the draft bill become law. According to the current law, amendments to the articles of association are regularly possible if it can be assumed that the founder's will to do so exists. Although the draft bill only permits deviating regulations in the "Establishment Statutes", early amendments to the statutes of existing foundations are likely to be protected.

 

Religious Foundations
The speaker's draft takes into account that the churches' rights of participation in the recognition of church foundations remain guaranteed. Since in the individual federal states there are often different regulations on the responsibilities between state and church, which are historically based on treaty agreements with the churches, the reference to the "authorities responsible under state law" will make it clear that federal law cannot have any effect here; the regulations on responsibility under state law continue to apply unchanged.

 

Conclusion
The planned standardization of foundation law will lead to an overall positive change in foundation law. In particular, the codification of previous administrative practice and the introduction of a register of foundations will increase legal certainty.

The participation of the federal states and associations in this draft, which has already taken place, leads us to expect that it will be adopted largely unchanged.

However, the desired legal security also entails tighter requirements, especially with regard to the prerequisites for amendments to the statutes and the liability of the organs.

Against this background, foundations are faced with the task of reviewing the legality of existing statutes in the light of the new regulations. The remaining scope for liability limitations and amendments to the statutes until the reform of the foundation comes into force soon should be used at an early stage if there is a need for action. We are happy to provide advice and assistance to foundation boards, foundation councils and donors!

Your contact person:

 

Heinrich Rohde
Specialist lawyer for commercial and corporate law
Lecturer Frankfurt School of Finance & Management
Certified company succession consultant (zentUma e.V.)

 

Sarah Emmes

 

Hubertus Scherbarth, LL.M., B. A.