Fundamental reform of the law on foundations adopted

The reform of foundations law is on its way: at last, there is going to be a uniform German law on foundations and several legal uncertainties that have existed to date will be eliminated. However, a central Foundations Register is also going to be introduced, which will bring this hitherto very non-transparent legal form much more into the public eye - this has both advantages and disadvantages. Founders and the executive bodies of foundations should use the time available until the law takes effect to check whether they need to act. Our experts have summarised the most important changes for you in our newsletter.

After a long wait, the Bundestag passed the Act Standardising the Law on Foundations [Gesetz zur Vereinheitlichung des Stiftungsrechts] on 24 June 2021. The reform is based on the work of the Federal and Federal State Working Group “Foundations Law”, which began its work back in 2014. The reform aims to comprehensively standardise and re-regulate foundations law on a national level, as it has been divided into 16 state foundation laws to date. This will create more legal certainty in many areas of the previous foundations law. Through the newly introduced nationwide Foundations Register, information about foundations is being made public to an unprecedented extent.

The reform comes into force on 1 July 2023. The Foundations Register will be introduced on 1 January 2026. Previously established foundations must be registered by 31 December 2026 at the latest.

Overview

There is currently no uniform German law on foundations. The law on foundations is split up into a number of Germany-wide regulations of the German Civil Code [Bürgerliches Gesetzbuch, BGB] and 16 federal state laws, which differ from state to state. Many issues that are of practical relevance are not or only insufficiently regulated, such as the addition or consolidation of foundations. Moreover, because of the precedence of federal law, it is not uncommon for it to be unclear whether the provision of a federal state law violates federal law and is therefore void. In practice, this repeatedly causes uncertainty. The implementation of foundation projects is therefore always dependent on the legal opinion and goodwill of the respective local foundation authority.

The reform of the law on foundations can fundamentally be welcomed and was long overdue. It will probably be years before the goal of standardising foundations law throughout Germany is achieved, during which time case law and the legal literature will reposition themselves. The federal state foundation authorities remain responsible for the recognition and supervision of foundations. It therefore continues to make sense to approach the authority most accessible to the foundation project and to choose the relevant statutory seat appropriately. It remains to be seen whether this will also lead to a significant standardisation of the administrative practices of the individual federal states. As the reform of the law on foundations does not provide for any transitional regulations (apart from the obligation to register foundations in the Foundations Register), it is imperative that existing foundations check in good time before 1 July 2023 whether there is a need for action on the basis of the new legal situation. The establishment of future foundations should already be oriented towards the future legal situation.

The reform in detail

Definition and nature of the foundation

The reform legally defines the foundation for the first time. According to the definition, the foundation is a non-member legal entity endowed with assets for the permanent and sustainable fulfilment of a purpose specified by the founder. The legislator expressly clarifies that the foundation can be limited to a certain period of time. The limited life foundation (“Verbrauchsstiftung"), which is already provided for under current law and which expends its assets to achieve its purpose, remains expressly possible. It is now also expressly possible to convert a perpetual foundation (“Ewigkeitsstiftung") into a (partial) limited life foundation at a later date if the permanent and sustainable fulfilment of the foundation's purpose is impossible.

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

Another innovation is the affixes to the names. According to this, the foundation must bear the name affix “eingetragene Stiftung” ("e. S.") [registered foundation] once it is entered in the Foundations Register. For limited life foundations, the name affix “eingetragene Verbrauchsstiftung (“e. VS.”) [registered limited life foundation] is envisaged. The affix to the name now clearly distinguishes the "genuine" foundation from other legal structures. To date, these have also had "foundation" in their name, such as "dependent foundations" based on a fiduciary relationship or corporations operating under the name "Stiftung-GmbH".

Mandatory administrative headquarters in Germany

A mandatory stipulation of the reform is that the administration of the foundation must be conducted in Germany. The foundation supervisory authority is now obliged to dissolve the foundation if the latter’s administrative seat was established abroad and is not transferred to Germany within a reasonable period of time.

Composition and preservation of the foundation's assets

With the exception of the rules on the limited life foundation, the BGB does not yet contain any guidance 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.

The so-called "basic assets" fundamentally have to be maintained undiminished. The basic assets include the initial assets dedicated to the foundation, endowments and assets expressly designated for this purpose by the foundation. The purpose of the foundation is to be fulfilled by using the basic assets. However, the Act clarifies that provisions in the statutes are effective which stipulate that the profits from reallocations of the basic assets can be used to fulfil the foundation's purpose. Accordingly, no strict surrogation is prescribed.

Besides this, there are the "other assets”, which can be freely expended at the outset. The limited life foundation, which expends its entire assets within a certain period to fulfil the foundation’s purpose, is still possible - in this case the entire assets are "other assets".

For the first time, the Act now mentions a statutory structure that is somewhere between a perpetual foundation and a limited life foundation. This has become increasingly important in practice to date, as it ensures a higher degree of flexibility. Thus, a foundation that has been established on a permanent basis is now expressly permitted to expend a part of its assets in conducting the business of the foundation (partial limited life foundation). In such a case, an increase of the basic assets by the expended part must be provided for in the foreseeable future.

Prohibition of the perpetual execution of wills

The reform expressly clarifies that the assets dedicated to the foundation upon its establishment must be at its free disposal. This excludes the possibility that, in the case of a foundation established mortis causa, the assets of the foundation are placed under the perpetual execution of the will. Corresponding provisions in testamentary dispositions urgently need to be adapted. Because of further disadvantages of a foundation mortis causa, we advise at least (instigating) a foundation inter vivos.

Foundation bodies and the business judgement rule

The rights and duties of the executive board are now also expressly regulated. In addition, the possibility of creating further executive bodies of the foundation is envisaged.

The emergency measures in the event of an absence of members of the executive body are being extended. Currently, in urgent cases, the local court can appoint the foundation's executive board in order to preserve the foundation's ability to act. This is supplemented in part by emergency measures in the federal state foundation laws. In the future, only the federal state foundation authorities will be responsible for taking the necessary measures to ensure the foundation's ability to act. In particular, the reform mentions the possibility of appointing new members of the executive body for a limited period of time or of deviating from the statutory number of members of the executive body, in particular by granting individual members of the executive body additional powers. The foundation authority acts ex officio or at the request of an interested party who can prove a legitimate interest (in particular creditors). In such emergency constellations, the foundation authority will have a strong role in the future. In order to prevent the foundation authority from interfering, the statutes should therefore ideally be designed in such a way that an inability to act cannot occur in the first place.

In addition, the so-called business judgement rule has now been codified for foundation law. According to this, members of the executive body 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.

Amendments to the statutes

The requirements for amending the statutes are now being 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. In addition, there are other rules at federal state level whose reconcilability with federal law was sometimes disputed.

According to the reform, the requirements for permissible amendments to 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. According to the legislative materials, this also includes amendments to the statutes that affect the composition and duties of the executive bodies.

However, the purpose of a foundation may only be subsequently changed or substantially restricted if the permanent and sustainable fulfilment of the foundation's purpose is impossible or if the foundation's purpose endangers general welfare.

Other changes of purpose of the foundation as well as the amendment of provisions of the statutes that are formative for the foundation require that the circumstances have changed so substantially after the establishment of the foundation that an adjustment is necessary (name, registered office, manner of fulfilling its purpose as well as administration of the basic assets).

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. 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 made by the foundation itself. Accordingly, the provision explicitly permits a broad scope for their structuring. However, the authorisation of foundation bodies to amend the statutes is only effective if the founder sufficiently specifies the content and extent of the authorisation to amend. Existing foundations should definitely check before 1 July 2023 whether these requirements are met or can still be met.

Addition and consolidation

The procedure and conditions for adding and consolidating foundations are now also explicitly regulated. In the current low-interest environment, the new regulations provide distressed foundations, whose federal state foundation laws or foundation statutes previously provided for no or unclear regulations, with new and flexible options for action.

To date, the addition (the foundation transfers its assets as a whole to a receiving foundation) and consolidation (at least two foundations each transfer their entire assets to a new receiving foundation) of foundations requires a combination of individual measures (liquidation and transfer of the individual assets to the receiving foundation). These entail a great deal of legal uncertainty and their success ultimately depends on the good will of the foundation authority.

An addition or consolidation under the new law constitutes a universal succession prescribed by law. One of the prerequisites is always that the circumstances have changed significantly since the foundation was established and that an amendment to the statutes is not enough to adapt the foundation to the changed circumstances. The addition or consolidation is effected by contract and requires the approval of the foundation authority. The receiving foundation must provide security to creditors under certain conditions.

Dissolution and cancellation of foundations

The termination of foundations was so far only regulated in the BGB with regard to the dissolution of a foundation by the foundation supervisory authority. As a result, the legality of supplementary provisions of federal state law is a particularly disputed issue.

The termination of a foundation and its consequences in terms of property law are now regulated uniformly throughout Germany. Dissolution (termination by the foundation itself) and cancellation (termination by the foundation supervisory authority) now take place if the permanent and sustainable fulfilment of the foundation's purpose has become impossible and this obstacle cannot be removed by amending the statutes. The resolution to dissolve the foundation requires the approval of the foundation supervisory authority.

Foundations Register

There is still no nationwide uniform register of foundations. In some cases, informational online registers are kept at federal state level, but unlike the Commercial Register, for example, they are not binding in legal transactions. If, for example, the authority to represent the executive board has to be proven, this is currently only possible by means of current proof of representation from the foundation authority.

The German Act Standardising the Law on Foundations introduces for the first time a central register of foundations comparable to the Register of Associations, which also and especially makes it possible to identify the representatives of the foundation. Other facts that require registration are, for example, 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 in the Foundations Register also have to be publicly certified by a notary public.

The Foundations Register is kept at the Federal Office of Justice [Bundesamt für Justiz] and is open to inspection by anyone. The same applies to the inspection of the documents submitted to the Foundations Register, in particular the statutes. Exceptions apply only if access to the documents is restricted or excluded on the basis of a legitimate interest of the foundation or of third parties. Through this, the foundation becomes public for the first time. Family foundations in particular should be aware of this and take measures in good time to protect themselves (amendment of the statutes before the introduction of the Foundations Register, early application for registration with restrictions).

Lifetime founder's rights and founder's intention

The draft of the Federal Government and Federal State Working Group already refrained from including special statutory founder's rights, e.g. the lifelong right to amend the statutes and purpose of the foundation. The corresponding stipulations still have to be expressly included in the foundation’s statutes. The reform at least explicitly stipulates that the foundation’s bodies and the competent supervisory authorities must take into account the intention expressed when the foundation was established and, in the alternative, the presumed intention of the founder.

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Dr. Axel Wenzel<br/>LL.M. (Norwich)

Dr. Axel Wenzel
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