Foundations in Jersey I - General Guide

Background

The draft Foundations (Jersey) Law (“the law”) was approved by the Island’s parliament on 22 October 2008 and it is anticipated that it will become law in Spring 2009.

This is a “first” for a common law jurisdiction such as Jersey to introduce what is in essence a civil law concept. The law is important for the private wealth management industry in Jersey in that it opens up new opportunities with clients in geographical locations where the trust concept is not well known or understood. It will also be important for general commercial transactions such as orphaned special purpose vehicles.

What is a Jersey Foundation?

A Jersey Foundation is in essence a hybrid of a trust and a company. Like a company, it is a body corporate (but without shareholders) and will act through its council, which will be the body charged with the administration of the foundation’s assets and the attainment of its objects. It is akin to a trust in that a foundation must have one or more objects which may be a purpose (charitable or non-charitable) and/or be for the benefit of one or more beneficiaries.

A Jersey foundation will therefore be capable of exercising all the functions of an unincorporated body, save that it will not directly be able to hold Jersey immovable property nor engage in commercial trading activities unless such activities are incidental to the attainment of its objects.

Every Jersey Foundation will be obliged to have a “qualified member” which must be a person licensed to act as a council member of foundations under the relevant provisions applying to trust company business pursuant to the Financial Services (Jersey) Law 1998 ("the 1998 law").

Moreover, every Foundation will be required to have a guardian to oversee the carrying out of the functions of the council. This is to ensure that there will always be a person who can call the council to account. The guardian will not be required to be a licensed person.

Incorporation

The person who calls for the foundation to be incorporated is known as the "founder" who may be (but does not have to be) a council member and/or a beneficiary under the foundation.

However, only a person who is licensed under the 1998 law can apply for the incorporation of a foundation.

The application for incorporation will be accompanied by a copy of the proposed charter of the foundation (but none of the regulations), together with a certificate signed by the applicant. This certificate will identify the initial qualified member of the council and will give the business address in Jersey of that person. The certificate must also confirm that (i) regulations for the foundation are held by the applicant which have been approved by the founder and the first qualified member of the council, and (ii) a guardian has been selected for the foundation.

The Charter

The Charter will be filed with the Registrar and will be available for public inspection at the Registry. It is a mandatory requirement of the law that a foundation shall have a valid charter at all times.

The charter must contain the following:

• the name of the foundation (which must end with the word "Foundation" or its equivalent in a different language);
• the lawful object(s) of the foundation. These must be lawful and can be charitable or non-charitable or both. If the objects are to benefit a person or class of persons, it will be sufficient for the charter to state that such person or class is to be determined in accordance with provisions found in the regulations;
• information regarding winding up, dissolution and the term of the foundation; and
• details of the initial endowment (if there is one) and if appropriate a statement that it may be endowed further.

The charter may state:

• the name(s) of the members of the first council members;
• any provisions regarding the amendment of the charter; and
• anything which must or may appear in the regulations

As can be seen from the above, there will be considerable flexibility as to the contents of both the charter and the regulations.

The Regulations

Every foundation must have regulations, unless all of its governing provisions are contained in its charter. The regulations will not be filed with the Registrar and accordingly will not be available for public inspection.

The Law provides that regulations of a foundation must:

• establish a council;
• provide for the retirement, appointment, removal and remuneration of council members;
• set out how decisions are to be made by the council;
• set out what decisions (if any) need approval from a separate person and the identity of that person;
• include provisions relating to the appointment of a guardian; and
• include provisions relating to the retirement, appointment and remuneration of the guardian.

As with the charter, the regulations will be able to contain any other matters beyond those which are prescribed by the Law.

The Founder

The founder will be defined as the person who instructs the qualified member to apply for the incorporation of a foundation, together with any person who subsequently becomes a founder under Article 19 of the law. The latter article provides that the endowment of a foundation by a person will not make that person a founder or confer founder’s rights upon that person unless the regulations stipulate otherwise. The founder will not therefore be required to provide any endowment or financial contribution to a foundation, and the regulations will need to provide for a person who does make such a contribution to be treated as a founder.

The founder can be given such rights (if any) as are provided by the charter and if permitted by the charter or regulations, those rights can be assigned to other persons. Where the current holder of such rights (including the founder) dies or ceases to exist, the rights will vest in the guardian unless the charter or regulations provide otherwise.

The Council

A foundation must have a council to administer the affairs of the foundation and to carry out its objects. The council must at all times include a member who is a qualified member. The qualified member who applied for the incorporation of the foundation automatically becomes the qualified member of the council on incorporation but a subsequent one can be appointed at a later date. Although the Council may include more than one qualified member it may not have more than one qualified member at any one time. Any removal or retirement of the qualified member will not be effective unless and until the appointment of a replacement qualified member has taken place. Every qualified member must inform the Jersey Financial Services Commission of its appointment and, on an ongoing basis, its business address in Jersey.

The council members will be required to act honestly and in good faith with a view to the best interests of the foundation, and to exercise the care, diligence and skill of reasonably prudent persons in similar circumstances. It will not be possible for the charter or regulations to relieve the members of the council from liability for fraud, wilful misconduct or gross negligence.

One of the unique features of a foundation is that it and any persons appointed under the regulations do not owe any form of fiduciary duty to the beneficiaries. It is generally thought therefore that the courts will interpret and construe the provisions of the charter and regulations as if they were a form of contract.

The Beneficiaries

A foundation will have beneficiaries to the extent that the foundation's objects provide a benefit to a person and/or class of persons. The Law expressly provides that a beneficiary under a foundation has no interest (whether legal or beneficial) in the foundation's assets or in the foundation itself. This provision effectively means that foundations are "ownerless" structures. However the Law does permit a beneficiary under a foundation to seek an order from the Royal Court ordering the foundation to provide a benefit but this right may only be exercised whenever a particular beneficiary has become entitled to receive a benefit under the foundation in accordance with the charter or regulations but the beneficiary has not received that benefit.

Furthermore and except as specifically required by the Law, a court order, or by its charter or regulations, a foundation is under no obligation to disclose any information relating to the administration of the foundation, the assets of the foundation or the way in which the foundation is carrying out its objects, to any person (whether or not a beneficiary). This is in marked contrast to a trust arrangement where ordinarily a trustee is under a statutory duty to produce documents relating to a forming part of the trusts accounts to a beneficiary on request.

The Guardian

All Jersey foundations will be required to have a guardian, and the initial guardian will be identified in the regulations, which will also provide for matters of succession and remuneration (if any).

The guardian's role is roughly equivalent to the role of an enforcer of a non charitable purpose trust in that it must take "such steps as are reasonable in all the circumstances to ensure that the foundation carries out its functions". Accordingly the Law envisages that the council will account to the guardian for the way in which the council has administered the foundation's assets and acted further to the foundation's objects.

The regulations of a foundation may give the guardian the power to approve or disapprove any specified actions of the council.

Administrative Matters

A foundation is obliged to include its name and business address on all written communications and to keep certain records (the charter, regulations (if any), register of council members, financial records and the names and addresses of those who have endowed the foundation) at the qualified member's business address. Documents may be served by leaving them at or posting them to the business address.

The foundation will be required to keep certain records at its business address, namely:-

• A copy of the current charter and regulations
• A register of the names and addresses of the members of its council
• Records sufficient to show and explain its transactions
• Records to disclose with reasonable accuracy its financial position
• A record of the appointment of the guardian showing his/her name, address and the effective date of appointment
• A register of the names and addresses of all the persons who have endowed the foundation.

There will be an annual administration fee payable to the Registrar in respect of every foundation before the end of February.

The Registrar will supply (upon payment of a fee) a certificate of the incorporation and status of a foundation and a certified copy of its charter.

Judicial supervision

The Royal Court has been given extensive powers by the Law to ensure that a foundation complies with all and any requirements and obligations found in the Law, its charter or its regulations. Those powers include:

• the power to order amendment of a charter or regulations;
• the power to give directions;
• the power to protect the interest of minors and unborn beneficiaries under a foundation; and
• the power to dismiss and appoint a qualified member.

How can IFG help?

IFG has a significant presence in Jersey, and has already had substantial experience in administering private foundations incorporated in a number of other jurisdictions. This experience, together with a detailed understanding of the provisions of the Jersey Foundations Law (which does not in some ways replicate the foundation model in other jurisdictions) means that IFG is well positioned to assist clients with both the establishment and provision of ongoing services for such an arrangement.

Summary

The new Jersey Foundation will appeal to high net worth private clients and corporates seeking an effective planning tool which offers flexibility and simplicity from both an establishment and ongoing administration perspective.

IFG does not provide taxation or legal advice. The information and expression of opinion expressed in this briefing note are not intended to be a comprehensive study or to provide taxation or legal advice. Specific active concerning individual situations should be taken and IFG can provide introductions to advisers who specialise in this area.