Malta Foundations: Present and Future STEP Malta Conference 2018 13 April 2018
Malta Foundations Salient Features (1) SETTING THE SCENE With Malta being a civil law jurisdiction, foundations have long been recognised by our courts, even though codification of the laws only happened in 2007; Foundations are regulated by the provisions of the Second Schedule to the Civil Code (CAP.16, Laws of Malta) which also deals with legal personality and administrators of organisations; A Foundation is a separate legal entity having its own assets and liabilites; The setting up of a Foundation creates a separate patrimony which is distinct from that of the founders, that of the administrators and that of the beneficiaries just like a trust does; In some legal systems, Foundations can only have social or charitable purposes. In Malta a foundation can have any legal purpose;
Malta Foundations Salient Features (2) The management and administration of the assets of a Foundation are entrusted to administrators (non- Maltese administrators are possible); The administrators of a Foundation are bound by fiduciary obligations; Foundations are constituted in writing by means of a public deed or a will; Malta Foundations can be classified on the basis of form or purpose; In terms of form, a foundation can be set up: either as a private foundation for the private benefit of beneficiaries (identified/identifiable); or as a purpose foundation without beneficiaries.
Malta Foundations Salient Features (3) All foundations must have a purpose which must be lawful, possible, not immoral, not against public policy; A foundation can be established for a private, social, lawful purpose or a combination of purposes; One of the distinctive features of Maltese Foundations is the possibility of establishing segregated cells - a pool of assets and liabilities segregated from the Foundation s assets and liabilities or the assets and liabilities of other cells: - for the purpose of achieving particular goals and objectives through the use of particular assets; - each cell, although not a legal person, creates a distinct patrimony.
Malta Foundations Salient Features (4) A Foundation can exist for a period of 100 years except in the case of: - a purpose foundation; - a foundation used as a collective investment vehicle; or - a foundation used in a securitisation transaction, which may be established for an unlimited term; Although registered in the Public Registry, privacy is a very important element, especially in the case of private foundations; In fact, deeds of private foundations are not available to third parties: unless such parties prove a legitimate interest in the contents thereof; and obtain prior written consent of the administrators, the supervisory council, if any, or of the Court.
Malta Foundations Salient Features (5) A Malta Foundation can: without having to be dissolved and wound up, convert into another organisation which has a different form, provided that such other organisation is a legal person; convert into a trust for the benefit of persons that are beneficially interested in the foundation, subject to prescribed regulations enacted by the competent Minister; amalgamate with another organisation or organisations to form one organisation; be divided into two or more organisations; re-domicile to (continue in) another jurisdiction or be re-domiciled into Malta; establish other organisations to achieve all or any of the purposes for which it has been established.
Uses of Foundations Asset Protection (1) Assets and liabilities of the foundation are kept distinct from those of its founders, administrators and beneficiaries: - distinguish between the creditors of the foundation and the creditors of the founder, administrators, beneficiaries; General rule: the administrator of a foundation is not personally liable for the obligations of the foundation; Creditors of the foundation may seek redress from the administrator s personal estate if there is fraud or dishonesty on his part; The creditors of the administrator cannot attack the assets of the foundation; Administrators are not liable for the debts of the foundation except to the extent that they expressly agree to be so liable or as expressly stated in the law.
Uses of Foundations Asset Protection (2) Any of the beneficiary's creditors or any other person (spouses, heirs or legatees of the beneficiary) may seek redress up to the extent of the beneficiary s entitlements under the foundation; The interest of a beneficiary can be: (a) (b) (c) (d) liable to termination; subject to restriction on alienation or dealing; subject to diminution or termination in certain cases; not liable to attachment under a garnishee order issued against the administrator or to termination without the prior consent of the Court (when the interest is expressed to be for the maintenance of the beneficiary or as a pension).
Uses of Foundations Asset Protection (3) Creditors of the founder: - can attack the foundation assets if this was established to perpetrate fraud (creditor can resort to Actio Pauliana); - cannot exercise the founder s right to revoke a foundation (action is personal to the founder). If the foundation is not registered unregistered organisation: administrators and promoters are jointly and severally personally liable for the liabilities of the organisation.
Uses of Foundations Estate Planning (1) A founder may set up a private foundation for estate planning purposes, e.g.: 1. to reduce causa mortis tax liability of beneficiaries upon the death of the founder or any of them; 2. to address a potential risk (to protect the founder from possible future creditors and from unforeseen situations which may cause financial damage); 3. to address the lack of capacity of a relative; 4. to protect an estate from perishing in the hands of a spendthrift. Segregation of assets: since foundations constitute a separate legal entity they are a useful tool in the context of segregating assets from those owned by the founder or the beneficiaries.
Uses of Foundations Estate Planning (2) A founder could nominate his children as the beneficiaries of the foundation: 1. the foundation is unaffected by the founder s demise; 2. avoids potential disputes over the division of the inheritance (founder may nominate an administrator to make the distributions); Can be established to administer: - the property of a minor: (Parental authority terminates when minor reaches majority. The foundation and its administrators, however, continue to operate); - the assets of an incapable beneficiary.
Uses of Foundations Traditional Uses vs More Modern Uses (1) Traditional Uses of Purpose Foundations Charitable Purposes: foundations have been and still are widely used in the context of charitable/social purposes such as for the advancement of health and education; Provided certain criteria are fulfilled, purpose foundations can also register as voluntary organisations in terms of the Voluntary Organisations Act (Chapter 492, Laws of Malta).
Uses of Foundations Traditional Uses vs More Modern Uses Modern Uses of Purpose Foundations A foundation can be endowed with commercial property or a shareholding in a profit making enterprise, a franchise, a trade mark or other asset which gives rise to income, as well as a ship as long as the foundation is only the passive owner of such assets; A foundation may be used as a collective investment vehicle, including a pension or employee benefit arrangement; A foundation may be used as a vehicle for the purpose of a securitisation transaction, borrow monies against the issue of bonds and do all relative and ancillary acts.
Uses of Foundations Securitisation (1) Asset securitisation transactions are complicated transactions - careful legal structuring needed; Even though Foundations resemble companies in certain aspects, they allow the possibility of an ownerless structure (no shareholder). Practical Example 1. The Foundation is set-up for the specific purpose of holding the shares in the SPV and implementing a securitisation transaction as defined; 2. Initial endowment (required by law) used for the SPV share subscription; 3. Subsequently the Foundation will incorporate the SPV and hold the shares in the SPV.
Uses of Foundations Securitisation (2) Benefits: 1. Bankruptcy remoteness; 2. Facilitates asset backed securities being assigned higher credit rating than the credit rating of the originator; 3. Avoids consolidation of accounts of the SPV with those of the originator; 4. Avoids administrative and other implications; 5. Administrator does not own the assets avoids change of legal owner in case of resignation.
Uses of Foundations Securitisation (3) Malta is already being used as a jurisdiction in which to locate not just the owner of the SPV (i.e. the Foundation) but also the securitisation vehicle (the SPV) itself; Foundations set up for a lawful purpose with no beneficiaries; Purpose foundations are not limited to a particular duration (so far - perpetuity possible); Flexible and secure in nature; Mechanism for asset-backed securitisation and structured finance transactions that are not carried out from Malta; Robust legal regime: the Securitisation Act (Chapter 484, the Laws of Malta).
Uses of Foundations Practical Example of a more Innovative Approach to the use of Foundations Ownerless Malta Purpose Foundation (Shareholder and Owner) Issue of Private Placement Notes Transfer of Assets/Risks Noteholders Malta Limited (SPV) Originator Purchase price
Cell Foundations (1) The Administrator must have the power to create cells in the Foundation; Cells are used to segregate and protect cellular assets; Cells may be established by reference to (a) shares and interests; (b) the rights of the beneficiaries or classes of beneficiaries; (c) purposes; Each cell: - is regulated by its own cell rules (established by administrator resolution); - may have its own beneficiaries and its own distribution rules.
Cell Foundations (2) Each Cell: - may subscribe to and hold different classes of shares in a holding company; - may pay funds into other cells for benefit of beneficiaries of other cells by way of established agreements. Each cell may receive: (a) dividends from such shares according to the dividend allocation policy; (b) capital gains on the sale of such shares and to exercise all rights in relation thereto.
Cell Foundations (3) Beneficiaries: a. may request information regarding the Cellular Assets and the conduct of the administration; b. may only request information about their cell. Administrator may add Cell Beneficiaries, and determine: which Cell Beneficiaries are to benefit; the quantity of any benefit; at what time and in what manner Cell Beneficiaries are to benefit. Creditors have rights limitedly to the extent of the Cell Beneficiary s entitlement under the cell.
Cell Foundations (4) A Cell of a Foundation may be terminated as follows: (i) by Cell Beneficiaries with their unanimous agreement; (ii) on the instructions of the Founders; (iii) by the Administrator: an Administrator may terminate a Cell if: - such Cell has no Cell Beneficiaries; - such Cell has no Cellular Assets or Cellular Liabilities; - the purpose of such Cell has been achieved, exhausted or has become impossible; and the Administrator considers such termination to be beneficial in the interest of the Foundation.
Cell Foundations (5) A practical example 1. Persons want to participate in a number of projects by providing finance; 2. Flexibility compared to holding companies with shares; 3. Structure: Private Foundation (established for the benefit of beneficiaries); 4. Projects: There will be a number of projects Foundation will be established with Cells one for each Project; 5. Trade: The Foundation may not trade therefore, it must establish companies as subsidiaries for the projects; 6. It accumulates all dividends upwards and is used to distribute profits to beneficiaries.
Cell Foundations (6) Private Foundation PROJECT Cell 1 PROJECT Cell 2 Trading Company PROJECT SPV PROJECT SPV
Companies, Foundations and Trusts compared... Companies Foundations Trusts Companies Act Civil Code - Second Schedule Trusts and Trustees Act Separate legal personality Separate legal personality Separate patrimony Company owns the assets Foundation owns the assets Trustee owns the assets Indefinite duration Established for commercial purposes 100 year duration (exceptions exist) * to become 125 years Purpose Foundations / Private Foundations 125 year duration (exceptions exist) Private Trusts / Charitable purpose trust Limited use of segregated cells Segregated cells Separated patrimonies Board of Directors Board of Administrators Trustees Fiduciary Duties Fiduciary Duties Fiduciary Duties Re-domiciliation possible Re-domiciliation possible Re-domiciliation possible
Proposed Amendments What does the future hold in store? 1. One of the most salient proposals being made is the clarification of the classification of foundations under Maltese law; 2. These can take the form of: a. a beneficiary foundation (for the benefit of beneficiaries); or b. a purpose foundation (to achieve a specified purpose, without beneficiaires); In both cases a foundation may have as its purpose one which is lawful, possible, not immoral and not against public policy; 3. It is being proposed that the jurisdiction of the Court under the provisions of the Second Schedule to the Civil Code be extended to matters that begin as noncontentious matters before the Court but become contentious throughout the proceedings; in these cases the proposal is that the Court continues to deal with the matter as a contentious issue.
Proposed Amendments What does the future hold in store? 1. In the context of a purpose foundation, where the statute does not contain provisions allowing for amendments to the statute, it is being proposed to give the Court the power to make variations to the statute of the foundation (including the variation of the purpose for which property may be applied); 2. the Court must be satisfied that: a. circumstances exist to justify such a request for variation; and b. the request is (as far as reasonably practicable) consistent with the spirit of the founder s intention.
Proposed Amendments The Proposed Law contemplates the introduction of various provisions similar to those applicable to trusts, bringing the law on foundations at a par with the law on trusts, including: rules of mandatory application (such as for instance, the protection of minors, the proprietary effects of marriage and succession rights) in the case of a foundation governed by Maltese law coupled with the introduction of management of conflict provisions, on which matters the direction of the Courts may be required to be sought; Founder reserved powers: the right of a founder to reserve for himself the power to: appoint, add or remove administrators, protectors or beneficiaries; as well as investment advisors or managers.
Proposed Amendments The rule, as with trusts, that a person dealing with the administrator of a foundation: 1. need not enquire into the terms of the foundation or any endowment; or 2. need not obtain the beneficiaries or other person s consent and, subject to being in good faith, may rely on declarations made by the administrators; The right of a founder to give non-binding guidance to the administrators as to the ways in which he wishes the administrators to exercise their discretions and power in terms of the foundation statute (similar to letters of wishes); Increasing the duration of a beneficiary foundation to 125 years (from the existing 100 years).
Proposed Amendments Other Proposals The Arbitration Act It is being proposed to allow a founder to insert an arbitration clause in the foundation statute.
Thank you. Anthony Cremona TEP (Partner) acremona@ganadoadvocates.com www.ganadoadvocates.com Important Notice: This presentation is for informational purposes only and does not contain or convey legal advice. The information contained in these slides should not be used or relied upon in regard to any particular facts or circumstances without first obtaining specific legal advice. In this presentation GANADO Advocates refers to the law firm Ganado & Associates, Advocates, an association established under the laws of Malta. A full list of members is available upon request at the principal office of the firm at 171, Old Bakery Street, Valletta VLT1455, Malta.