While many of us have spent the last few weeks in cooler climates, the Abu Dhabi Global Markets (ADGM) team spent their summer developing a new offering to meet the expectations of the global business community.
They have introduced the Foundations Regulations 2017 – the first legal structure for foundations in the GCC/Mena region. Designed to provide an alternative mechanism for wealth management and the safeguarding of assets for individuals, companies and families, the foundation structure is available to international users as well as those based in Abu Dhabi. Here is a guide to how it all works:
Foundations
While common law jurisdictions developed and perfected trust structures, a number of civil law ones, such as the Netherlands, Liechtenstein and Jersey, have adopted a foundations regime.
In layman’s terms, a foundation is an organisation established by a founder, from donated funds, for the purpose of donating or granting money to others or towards a specific prescribed purpose.
Foundations legislation and a number of entities that have a type of foundation can be found in most continental European jurisdictions, where foundations are often used for charitable purposes.
Interestingly, foundations can also be found in offshore jurisdictions, for instance in Panama, the Bahamas, Mauritius, Nevis and St Kitts, Jersey, Guernsey and Cyprus.
The laws of a number of continental European countries often allow a public foundation to serve the public for charitable purposes. A foundation, however, can also be dedicated to a private cause, an individual or a group of individuals. A private foundation would normally be established by its founder who dedicates certain assets towards a dedicated purpose. The foundation is given a separate legal personality. Unlike a typical corporate vehicle, it does not have partners or shareholders or members, but is rather “self-owned”. The foundation operates in accordance with the framework prescribed under its charter/by-laws. It is normally governed by a council. The administrators of the foundation are required to administer it as per the charter/by-laws. Finally, the foundation’s liability is limited to the value of its assets.
Trust versus foundation
Confusion sometimes arises over the difference between trusts and foundations. Trusts are a legal entity created by a party – the settlor – through which a second party – the trustee – holds and manages the settlor’s assets/property for the benefit of a third party called the “beneficiary”.
While the concept of trust is known to common law legal systems, foundations have historically been a feature of civil law jurisdictions. This can become more complex as some charitable trusts formed in certain common law jurisdictions would bear the name “foundation”.
While a foundation has a separate legal personality, a trust does not. A board of trustees will normally look after the administration of a trust; a foundation would be administered by its council.
Trustees are bound to comply with their fiduciary duties. On the other hand, administrators of a foundation may be subject to stringent stewardship obligations.
Finally, unlike a board of trustees, the members of the foundation board do not assume any personal obligations and the "corporate veil" – a legal concept that separates the personality of a corporation from the personalities of its shareholders and protects them from being personally liable for the company's debts and obligations – protects the members of the foundation council.
Foundations may continue for an unlimited period of time. The lifetime of a trust, on the other hand, may be subject to perpetuity period (in those jurisdictions where rule against a pepetuity has been introduced). This is where property is left on trust for beneficiaries and may be indefinitely unavailable to the beneficiaries or for a certain period of time, for example 21 years. Foundation structures are less susceptible to conflicts of interests that tend to arise between the settler, trustees and beneficiaries.
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Utilisation
Foundations are often used:
1. As vehicles for family wealth or succession planning.
2. In commercial transactions (for example, for off-balance sheet holding of funds).
3. For the purposes of securitisation structures (normally public foundations).
4. For long-term businesses holding.
5. As anti-hostile takeover instruments.
In the context of succession planning, foundations can be used by local families to structure their GCC/Mena assets, as long as the local ownership restriction, as well as Sharia principles, are respected.
Once the founder transfers the assets to the foundation, those assets cease to form part of his/her estate. The fact a foundation has no owner and can exist for an unlimited period of time, so long as its objects are being fulfilled, succession planning transmission issues do not arise.
Should the founder wish to form a vehicle that cannot be subject to outside influence, for example, by impacting the changes to the charter/by-laws or a hostile takeover, a foundation is an ideal solution.
Finally, the founder can remain in control of the assets of the foundation during his/her lifetime and beyond.
ADGM Foundation
An ADGM Foundation’s objects shall concern management and distribution of its assets and income in accordance with the Charter of the Foundation.
A Foundation is not allowed to get involved in the following:
1. Charitable purposes.
2. Unlawful activities under ADGM or the UAE law.
3. Activities contrary to ADGM or the UAE public policy.
It may be dedicated to a beneficiary (natural or legal person) or to a specified purpose. An ADGM foundation is governed by its charter and its by-laws.
While an ADGM foundation is required to have an initial asset with a value of US$100 or its equivalent in another currency, its assets may include any type of property.
The foundation is governed by a council comprised of at least two councillors. In the event that there is no surviving founder, a guardian must be appointed.
Finally, an overseas foundation can transfer or migrate its incorporation to ADGM as long as the law of its home jurisdiction does not prohibit such a transfer.
The introduction of ADGM Foundation Regulations 2017 is a legislative milestone that is likely to be applauded by the business community.
Not only does it make it possible to structure wealth of families in the region in a more efficient manner but also allow a new vehicle to be used for the purposes of commercial transactions.
It is especially welcomed as part of the ADGM regime as it is the only jurisdiction in the region that has adopted a foundation regime of this kind.
Izabella Szadkowska is a partner at Al Tamimi & Company