Because a Jersey foundation can be formed with or without beneficiaries; have a constitution similar in form to either company articles or a trust deed; can vest the founder or guardian with extensive positive or veto powers; and promote a purpose or benefit individuals (or both), it offers a good deal of flexibility, for a variety of functions.
Origins of Foundations
The concept of a Jersey Foundation is derived from a civil law concept, adopted in countries whose laws developed from France’s Napoleonic Code (most of Europe, South America and parts of Asia). Originally established for public interest purposes (e.g. as charitable bodies), the private foundation is a more modern initiative adopted in various civil law jurisdictions for succession planning and asset protection purposes.
Common law jurisdictions, with laws based on the English law model (USA, Commonwealth countries), instead adopted the concept of trusts with separate legal and equitable interests in property.
Though Jersey is principally a common law jurisdiction, in July 2009 it adopted legislation, the Foundations (Jersey) Law 2009 (the Jersey Foundations Law), introducing the Jersey law governed foundation. It was perceived that this would add flexibility to Jersey’s financial services offering, being particularly attractive to those based in civil law jurisdictions.
Characteristics / features of a Jersey foundation
A Jersey foundation could be described as a hybrid between a trust and a company, though the flexibility of the Jersey Foundations Law enables the establishment of a foundation having features either more characteristic of a trust than a company, or vice versa.
A foundation shares similarities with a company, in that it is an incorporated body with separate legal personality which can transact in its own name. However, unlike a company, a Jersey foundation is an orphan vehicle – it has no owners (no shareholders).
A foundation shares similarities with a Jersey trust because it is established with beneficiaries or for a specific purpose. The foundation’s guardian serves a somewhat similar oversight function to a trust’s protector (or a Jersey purpose trust’s enforcer), and the role of founder is analogous to a trust’s settlor – the founder being the originator of the foundation.
The management functions of a Jersey foundation is performed by its council. The foundation council must have a qualified member – a person licenced by Jersey’s financial services regulatory authority.
Jersey foundation – Creation / incorporation
Being an incorporated body, the formation process of a Jersey Foundation is similar to that of a Jersey company. It requires an application to Jersey’s Registrar of Companies for incorporation / registration. The foundation is formed on registration by the Registrar. Applying to form a foundation is a regulated activity, requiring a person holding a Jersey trust company business licence to act as formation agent.
The Foundation’s constitution
The charter identifies the foundation’s objects, which can be to benefit a person or a class of persons, and / or to carry out a specific purpose or purposes. It may be charitable or non-charitable, or a combination of both.
The charter identifies the name of the foundation and any initial endowment. The charter must record what is to happen with the foundation’s assets on dissolution, however, if that is sensitive information, it can be dealt with by cross–reference to the regulations. If the foundation is to be of limited duration, then the dissolution date needs to be specified. It is possible to limit disclosure of information in the charter, so that anything of a confidential nature is instead included in the regulations.
Jersey’s foundation legislation requires that the regulations (or alternatively the charter):
• establish a council;
• identify how decisions of the council are to be made, and if they need approval of another person for certain decisions, set out whose approval is needed and when;
• set out the functions of the council and whether it can delegate its powers;
• provide for the appointment, retirement and remuneration (if any) of the council members, and the mechanism for appointment of a new qualified member if there ceases to be one;
• identify the initial guardian, how a guardian may be appointed / retire, and any entitlement to remuneration the guardian will have.
The Founder is the person who gives instructions to apply for the foundation’s incorporation. A founder has such rights in respect of the foundation and its assets as are conferred on him / her by the charter and the regulations. The regulations could, for example, reserve certain powers of the founder in relation to the foundation’s assets, empower the founder to give prescribed directions to the council in relation to certain matters, or require input from the founder before the council can exercise powers in relation to certain specified assets.
The founder can assign his / her rights to another person if the charter or regulations permit that. Otherwise, on the founder’s death his / her rights will automatically pass to the guardian, unless the regulations make other provision.
The council’s role is to manage the foundation, administer its assets and carry out its objects. It can have one or more members (being individuals or corporate entities), but must have a qualified member. Council members must act in accordance with the charter and regulations, act honestly and in good faith with a view to the best interests of the foundation, and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Nothing in the terms of the charter or regulations can relieve a council member from liability for fraud, wilful misconduct or gross negligence. Like company directors, council members can be subject to disqualification orders preventing them from acting as a council member, or a company director.
A foundation must have a guardian, which can be an individual or a corporate body. A council member cannot also be the guardian unless that council member is the foundation’s founder or its qualified member. The guardian’s role is to ensure that the council carries out its functions, the council being accountable to the guardian for its administration of the foundation and the furtherance of its objects.
The regulations can confer on the guardian power to approve / disapprove of any specified actions of the council (similar to the type of veto powers that a protector of a trust might have). In addition, unless the regulations prohibit it, the guardian can sanction actions of the council that would otherwise not be permitted by the charter or regulations – provided the guardian is satisfied that the council is acting in good faith, and that what is proposed is in the interests of the foundation.
The Foundation’s objects
A foundation need not have beneficiaries. It can exist solely for a given purpose. If a foundation does have beneficiaries, their position vis-à-vis the foundation is quite different as compared with beneficiaries of a trust. A foundation’s beneficiary has no interest in the foundation’s assets, and is not owed any fiduciary or analogous duty by the foundation, its council or anyone else vested with a function under the regulations.
Accordingly, the beneficiaries of a foundation do not, for example, have collective power to vary or terminate the foundation in the same way that beneficiaries of a trust have under trusts law.
In contrast to trust beneficiaries, a foundation is not required to provide a beneficiary with any information about the foundation, (such as its administration, assets or how its objects are being carried out), unless the charter or regulations provide otherwise.
The Foundations Law does however include protections for a foundation’s beneficiaries. If a beneficiary does become entitled to benefit by virtue of something written into the regulations or by having benefit conferred on him / her by the council, and that benefit is not satisfied, then the beneficiary can apply to Jersey’s Royal Court to enforce that entitlement.
Powers of the Court
Jersey’s Royal Court has broad supervisory jurisdiction in relation to Jersey foundations. The Foundations Law sets out various actions that the Court can take following a request by a person who, under the legislation, has “standing” (such as the foundation itself, the founder, council members, the guardian and beneficiaries) to make a court application in relation to the foundation.
Among its powers, the Court can order a person (including the foundation itself) to comply with requirements / obligations set out in the Foundations Law or the foundation’s constitution, amend the charter and regulations (if that will assist with administration of the foundation’s assets or further its objects), and dismiss or appoint a member of the council.
Article 32 of the Foundations Law contains provisions to the effect that any questions arising in relation to the foundation or an endowment of a foundation is to be determined by reference to Jersey law without reference to the laws of any other jurisdiction. That includes rules of foreign law affecting founders and beneficiaries. This addresses concerns that foreign forced heirship rules might be used to attack the validity of a founder’s transfer of assets to the foundation by way of endowment or a claim (say by a beneficiary) of entitlement to the foundation’s assets.
Uses for foundations
A foundation is a popular entity for use in estate planning and wealth structuring, especially for persons based in civil law jurisdictions which do not recognise, or may be unfamiliar with, the concept of a trust. Being an orphan vehicle it is suitable for holding the shares in a private trust company (PTC) or acting as the PTC itself.
A foundation can be ideal for charitable or philanthropic uses. It can have unlimited duration. Its objects can be purely charitable, or can mix charitable purposes with purposes which are not “technically” charitable in that they are not regarded as charitable as a matter of law. It can provide benefit for purposes and to specific people or classes of people (as beneficiaries). The philanthropic founder can take a direct active role in the management and application of the foundation’s assets by assuming the office of guardian or council member. It is therefore common to see foundations used for a range of philanthropic causes such as promoting art, theatre, education and scientific research.
A Jersey foundation can be formed for the sole object of holding a specific asset. The Foundations Law does not impose an inherent duty on a foundation’s council to preserve, enhance or diversify the foundation assets. The same cannot be said for trustees of a trust, who do have such duties unless they are expressly excluded by the trust terms. Accordingly, a foundation is well suited to holding wasting assets such as a yacht or aeroplane.
A foundation can also serve as a robust retaining vehicle for a family business where competing family interests may arise – some in favour of selling the business, others in preserving it. The council’s duty is to the foundation, not its beneficiaries, and it is accountable to the foundation, not its beneficiaries (in contrast with a trustee, whose duties and accountability are to the trust’s beneficiaries and whose actions may therefore be more susceptible to challenge by the beneficiaries). A foundation is not obliged to provide information to beneficiaries. In contrast, a trust beneficiary has a prima facie right to certain trust information. Accordingly, in comparison to a trustee, a foundation’s council may be better able to resist requests for information from beneficiaries seeking grounds on which to challenge council decisions, or to establish an entitlement to benefit.
For structured finance transactions, a foundation meets the need for the SPV to be a legal entity in its own right. As it has no owner, is satisfies the requirement for it to be an orphan vehicle which does not share common ownership with other entities in the structure. The object of the foundation can be a single limited and specific purpose – such as to hold shares in a particular company.
Seeking further advice?
If you require further information or advice on setting up a Jersey Foundation please contact our head of department, Mason Birbeck on +44 (0)1534 630530 or email email@example.com
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