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Title Research

Under pressure

  • Author : Christop Kerres
  • Author : Florian Proell
  • Date : October 2010
ABOUT THE AUTHORS: Dr Christoph Kerres TEP, is partner and Florian Proell is an Associate of Kerres Partners, Vienna

A n Austrian private foundation is a legal instrument formed by the founder, which contains rights and responsibilities, through the private foundation’s board of directors. Therefore, the board of directors is obliged to pursue the intended purpose of the founder. Normally, the members of the board of directors are in place to assist the beneficiaries in relation to the wealth contained within the private foundation. The founder can himself exercise a range of influence such as alterations and the right of withdrawal. The beneficiaries are in most foundations close relatives of the founder and, according to Austrian law, beneficiaries cannot inherit personal rights such as the right to revoke the private foundation. If the founder passes away, the foundation’s assets are subject to the foundation and are administrated by the board of directors. According to Austrian Law, there is the imminent risk that beneficiaries could attempt to divert the foundation from its original purpose. Therefore, it is the intention of the law that beneficiaries are not allowed to try and gain influence or to interfere with the administration of the foundation. After the demise of the founder, the beneficiaries listed in the deed of foundation are accordingly subject to the will of the board of directors and changes to the deed of foundation therefore become much more difficult. In order to control the board of directors, the legislator balances this with the concept of a ‘supervisory board’ to the board of directors. Alternatively, the founder can also establish a simple ‘advisory board’ that replaces such formal supervisory boards. In practice these advisory boards consist of individuals who are vested with rights of control.

The Austrian Supreme Court has recently, in its case law, decided that such advisory boards, which primarily consist of beneficiaries, may not interfere with the board of directors, otherwise the board of directors may be influenced by the beneficiaries. As a consequence, it also ruled against advisors to the beneficiaries, who are lawyers or tax advisors, being appointed to the board of directors.

According to the Supreme Court, there is a risk that lawyers who have been empowered by beneficiaries will not be able to act independently. In most foundations the founder is also one of the beneficiaries. As a consequence thereof, lawyers (and their entire law firm) empowered by the founder can no longer establish, administrate or settle the private foundation.

This decision was not very well received because in almost every Austrian private foundation there is a lawyer on the board of directors who theoretically is now required to resign. If this were to apply to the law of trusts, it would mean that the lawyer who established the trust could not act as a trustee.

Advisory board

In 6 Ob 42/09h, the Austrian Supreme Court made a decision relating to the above case, where the advisory board consisted of individuals who were at the same time both founders and beneficiaries. The advisory board was given a large amount of control in the deed of foundation and therefore could make influential changes. Following the case material, the advisory board could potentially be given a certain degree of direction and controlled function. For example, it is possible that decisions regarding business dealings or the appointment of a new member to the board of directors would be subject to the agreement of the advisory board. The Austrian Supreme Court ruled that beneficiaries must not make up more than 50 per cent of the advisory board, where the advisory board is responsible for the appointment and dismissal of members of the board of directors. In cases like this the advisory board is close to having extensive control.

A consolidation of the beneficiaries’ position could be meaningful, if compatible with the ‘Primacy of Founders Way’ doctrine. This is a good argument for the choice of the foundation ceasing to apply after the distribution of inheritance and donations. It is difficult to comprehend why the beneficiaries, as the legal followers of the founders, only due to fiscal privileges, should be worse off compared with someone who inherited through universal succession. The fiscal privilege of a private foundation has the profound aim of preventing such property outflows to ‘tax havens’ abroad.

Membership of board of directors

Surprisingly, the High Court has also ruled that professional agents of the beneficiary (in practice commonly lawyers and tax advisors) may not be members of the Board of Directors where a fully empowered relationship with the beneficiary (who in most cases is also the founder/client) is in existence. The incoherent adjustment control stipulates that beneficiaries and close relatives may not be members of the board of directors. The ensuing objectiveness of the board of directors serves, according to the High Court, to protect the donors and the entire legal relationship.

The rationale of the High Court extends the incoherency to substitutes of beneficiaries as well. Otherwise, the rule could easily be circumvented. This rule shall in the future also relate to the substitute of the beneficiaries if a relationship between the beneficiaries and their advisors exists. On the other hand, the High Court states that former terminated activity by an advisor is harmless unless it seems that the legal representative is prejudiced. In this case the court can recall the said legal member if it wishes to do so. This ruling contradicts the legal text and creates fundamental conflict between founders, the foundation’s assets and the beneficiaries, who are usually the legal successors of the founders. This could make the Austrian Private Foundation increasingly impractical. Because many founders are also beneficiaries, lawyers, who have to establish and administrate the foundation, will be excluded from the board of directors. Being a member of the board of directors and substituting the beneficiary is not an illegal double substitution in the Austrian law for advocates. A full power of attorney obliges this precise and lawful action. Where there is a conflict of interests, the attorney has to resign membership of the board of directors or is obliged to cancel his power of attorney.

If a legal agency is involved in a certain affair, it does not automatically have a general voting connection and is not in every regard bound by instructions. An exclusion of the right to vote could only be accepted if the beneficiary instructs his lawyer to act against the foundation. If there is a conflict of interests in a foundation, a request can be made for a judicial recall of the member of the board of directors to confirm that the foundation purpose is still being adhered to. The payment barrier protects creditors in case of personal liability of the board of directors, should the foundation be unable to fulfil the foundation’s claims. The decision of the Austrian High Court raises many questions, for instance, the future treatment for the commercial register or the validity of enactments of an incorrectly appointed board of directors. This leads to serious judicial uncertainty.

It is to be expected that Austrian lawyers and tax counsels will still wish to be members of the board of directors. With the current decision over the expansion of the incompatibility on representatives of the beneficiaries, the Austrian High Court would be well advised to consider all the facts of the individual case.


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