Guiding decision on foundation law

Leading decision of the Supreme Court shows dangers in the restructuring of foundations

In a groundbreaking decision in September 2018, the Supreme Court clarified fundamental foundation law issues that are particularly important in the restructuring of foundations.

The decision was based on a transfer of all of the foundation’s assets to a new foundation structure in 2010, in which the same directors were active at the transferring and receiving foundations. After the assets were transferred, the transferring foundation was terminated. In the underlying case, the transferring foundation, represented by an advisor, sued for reversal and claimed that the entire transfer was invalid because the newly established foundation did not pursue the same purpose as the transferring foundation.

The Supreme Court has now upheld the claim. The Supreme Court has clarified that the provisions of the PGR on the restriction of the effects of representation, in particular Art. 187 para. 2 PGR are also applicable to foundations. According to the Supreme Court, acts of representation are therefore not binding on the foundation if they exceed the foundation’s purpose and the third party was aware or should have been aware that the foundation’s purpose would be exceeded.

The Supreme Court also clarified that the transfer of the foundation’s assets to another foundation does not per se constitute a change in the foundation’s purpose. Rather, it is important to consider whether authorizations to change the purpose of the foundation exist or whether the legal requirements for changing the purpose of the foundation are met. According to the Supreme Court, changes from a charitable to a private foundation or vice versa are undoubtedly to be regarded as a change in the purpose of the foundation. The same applies to a change from a pure family foundation to a mixed family foundation and vice versa.

In this case, a pure family foundation was changed into a mixed family foundation and no right to change the purpose of the foundation was provided for. The Supreme Court therefore ruled that the transfer of the foundation’s assets in 2008 violated the purpose of the foundation and was therefore invalid ex tunc. As a consequence, the Supreme Court awarded the transferring foundation a claim for reversal plus interest.

The decision attaches a particularly high level of protection and importance to the foundation’s purpose, i.e. the core of every foundation, in which the founder’s will, which has been defined and set in stone by the founder, is reflected, and also highlights the risks in connection with the restructuring of foundations in particular. If a transfer is not made in accordance with the intended purpose, there is a high risk that it will be reversed even after many years.

(Note: the author acted as legal representative in the proceedings).