Distributions from a
foundation to a founder some considerations based on
current legislation and the
proposed new Foundations
Act
1.Background
The article will focus on the challenges
that typically arise when the founder
is a charitable foundation, or
association with a similar purpose,
that overlaps with the foundation's
purpose. It will thus exclude typical
"family foundations".
Let's say that a charitable foundation
operates in many different countries.
They have their headquarters in Paris,
for example, but wish to set up a
foundation in Norway that can help
promote their purpose. In reality, this
foundation composition will operate as
a group. The problem that arises, and
which will be discussed in the following
article, is the movement of capital
between the subsidiary foundations
and the founder. The founder can make
distributions to daughter foundations
and daughter foundations can make
distributions to each other, but for
distributions from daughter foundation
to parent foundation there are strict
constraints in the law.
By way of illustration, one can envision
a nonprofit organization, such as
Doctors Without Borders, that starts
foundations across national boundaries
with the same charitable purpose.
Assuming that the founder and the
local foundation have the same
purpose, a distribution from the
foundation to the founder will
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nevertheless generally be illegal. Is this
a reasonable arrangement? And will the
proposed new legislation change the
legal situation?
2. Legal basis
There is currently a general prohibition
against making distributions to related
parties, ref. section 19, second
paragraph, first sentence of the
Foundations Act:
"Distributions cannot be made to
the founder, the founder’s close
associates pursuant to section 5
subparagraph a, or to companies
where some of these separately
or together have decisive
influence as mentioned in
section 4, third paragraph. If
there are special reasons, the
Foundation Authority may grant
exemptions from the first
sentence."
The general rule is therefore that it is
not permitted to make distributions
from a foundation to a founder. This
provision is based on the independence
requirement and the need to highlight
that starting a foundation must have a
genuine effect for the founder.
There are exceptions to the general rule
in the section 19, second paragraph,
second sentence of the Foundations Act
(see quote above). This provision has
been used sparingly and has only been
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applied if there is a specific case. It has
not been applied to future decisions.
Section 59. Prohibition against
distributions to founder etc.
3.
Distributions may not be made to:
Distributions from a foundation
to another foundation with the
same founder?
This layout resembles a "corporate
group" in a corporate law context. The
Foundation Authority, however, has
assumed that the distributions between
the two "sister foundations" are not in
breach of the distribution ban:
"The Foundation Authority does not
find that distributions from a
foundation to another, with the
same founder, causes a violation of
the section 19 of the Foundations
Act. The ban is primarily intended to
apply where, for example, the
founder has a stake in a company
that the foundation wishes to
distribute to. A foundation has no
owners in the usual sense, it is
owned by its purpose."
It is thus possible to "organize" oneself
away from the distribution ban. The
purpose as described in the rationale,
however, could just as easily have been
applied when the founder of a
foundation is also a foundation.
4. Will the proposed new Foundations
Act alter the existing state of the
law?
Under the proposed new law, the rule
that distributions should be in
accordance with the foundation’s
purpose will remain. In the following
section, it is assumed that a
distribution to the founder who is also a
foundation, is in accordance with the
foundation's purpose.
Proposed new wording of the
legislation (section 59) reads as
follows:
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a) the founder or the founder's
close associates pursuant to
section 5 subparagraph a,
b) anyone who has contributed
original capital to the
foundation or to his/her close
associates pursuant to section 5
subparagraph a,
c) a company where someone
specified in subparagraphs a or
b, separately or together, has
decisive influence as mentioned
in section 6, second paragraph.
If there are special reasons, the
Foundation Authority may grant
exemptions from the first paragraph.
Such exceptions may be made for a
single distribution or for future
distributions to a specified recipient.
The Foundation Authority may impose
conditions for exemption under the first
sentence, such as the recipient's use of
the received funds.
The provision continues the distribution
ban in the current law section 19,
second paragraph. However, certain
changes are made which are discussed
below. First paragraph, subparagraph a
and subparagraph c continue the ban
against distribution to the founder’s
close associates pursuant to the draft
section 5 subparagraph a, or to the
company where these persons
separately or together have decisive
influence as mentioned in the draft
section 6. As mentioned above, this
does not prevent distribution between
sister foundations.
The Foundation Authority’s authority to
grant exemptions remains, but with
certain changes.
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In accordance with the provision of the
current law, the exemption warrant is
limited to situations where there are
special reasons. In the preparatory
works for the current law, it is assumed
that the provision will constitute a
limited exception. On this basis, the
Foundation Authority has in practice
been somewhat cautious about using
the exemption warrant.
The committee does not exclude that
there may have been cases where
exemption has been denied in
situations where the distribution, even
though it is covered by the ban’s scope,
nevertheless appears loyal to the
independence criterion and the
foundation's purpose. The committee
refers in this regard to what is said
about the use of the exemption warrant
in the preparatory works, where the
committee after having pointed out
that the exemption warrant is intended
as a limited exception, states:
"This is meant as a limited
exception. The purpose is to
prevent non-profit organizations
and the like which, together with
other such organizations, start a
foundation for a purpose that
the organization fulfils, from not
being able to receive
distributions from the
foundation. Another case that
may be included is e.g. where a
person has made a contribution
to a foundation whose purpose is
to pave the way for people with
a particular disease, and where
he/she later gets the same
disease. In these cases, there
does not exist the kind of close
identification between the
founder and the purpose that
the general rule is otherwise
meant to counteract the
consequences of."
This committee especially emphasizes
what is said about cases where there is
"the kind of close identification
between the founder and the purpose
that the general rule is otherwise
meant to counteract the consequences
of ", and believes this should be
emphasized when assessing whether an
exemption application should be
granted. The committee points out the
possibility that the Foundation
Authority is given in the draft second
paragraph, third sentence, to set
conditions for an exemption. On the
basis of this provision, the Foundation
Authority may ensure that an
exemption is not used for disloyal
circumvention of the purpose of the
general rule, but ensure that the
distribution that the exemption applies
to is used for a specified purpose that is
true to the foundation's independence
and purpose.
The current authority to grant
exemptions is interpreted so that an
exemption may only be granted for
individual, specific distributions. This
frequently fails to safeguard the
predictability that the foundations in
question need, and therefore limits the
practical significance of an exemption
decision. On this basis, the committee
proposes in the second paragraph,
second sentence, that an exemption
may also apply for future distributions
to a specified recipient. This means
that an exemption decision may give
the foundation the necessary
predictability for future distributions,
and allows it to plan for this without it
being necessary to submit a new
application for each distribution.
On this basis, it will be interesting to
see how the authority to grant
exemptions will be practiced when the
new Foundations Act comes into force.
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-March 2017 -
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