New Act on commercial Foundations

Date 7 jul. 2014
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Introduction

3 June 2014, the Danish Parliament passed a new act on commercial foundations. This Act modernizes the existing act on commercial foundations and involves a number of significant amendments compared to the existing rules on commercial foundations, including the following:

  • Ensuring greater transparency in the foundations, e.g. in relation to management, remuneration and share-outs.
  • Intensifying the criteria for the board of directors.
  • The commercial foundations supervisory authority will in future be the Danish Business Authority and will be provided with further competences.
  • Establishment of a Committee for Good Governance of Foundations (in Danish: Komité for god Fondsledelse) whose task will be to formulate recommendations on good governance of foundations.
  • Increased uniformity in relation to the Danish Companies Act.

The Act does not set a date of its entry into force, but it is expected to be 1 December 2014, and no later than summer 2015.

 

Background

The Act has been prepared based on a report made by a committee (in Danish: “Erhvervsfondsudvalget”) from December 2012. This report included a draft bill concerning commercial foundations and a draft on recommendations on good governance of foundations.

 

The committee’s tasks included illustrating and reviewing the consequences that the modernization of company law should have on commercial foundations, the need to strengthen rules on transparency, independence, management, and social responsibility as well as the public supervision of commercial foundations.

 

The most significant Amendments

Founding and capital Changes

In future, it will be possible to set up foundations with financial effect, both retrospectively and forward-looking similar to what is enforced in limited companies.

 

A definition of a commercial foundation will be inserted and will take form as a codification of previous practice. The new Act provides that any commercial foundation must include the word “foundation” in its name and that registered foundations have exclusivity (but no obligation) on the use of terms such  

as “commercial foundation”, “trade fund” and the Danish abbreviation “EFR”. 

It has been made possible to increase the initial capital by transferring profits or free reserves that have arisen or been released during the financial year.  

 

The Composition of Management

A foundation must be managed by a board consisting of at least three members, and there is no possibility of having a supervisory committee. The new Act requires all foundations to have an independent management.  The report made by the committee indicates that if a board has more than four members, approximately one-third of the members must be independent. This means, among other things, that a certain part of the board members must be independent of the founders and major donors, and that the majority of the board members cannot serve as directors of the foundation.

 

The board of directors of a company that has established the foundation must not constitute a majority of the board members of the foundation, unless the commercial foundations supervisory authority gives its consent.

 

The board of directors of a company that has established the foundation must not constitute a majority of the board members of the foundation, unless the commercial foundations supervisory authority gives its consent.

 

The management of a subsidiary to a foundation must not appoint members to the foundation board, and a director of a subsidiary cannot be elected chairman or deputy chairman of the parent company, unless the commercial foundations supervisory authority exceptionally consents thereto. This amendment is the result of the fact that the control duty exercised by any owner in respect of a subsidiary is in risk of being affected if the owner’s board has too close ties to the subsidiary. 

 

The new Act implements requirements concerning the rules of procedure for the board of directors. These rules must be based on the activities and needs of the foundation. In addition, the new Act directly states that the board of the foundation must manage the objectives and interests of the foundation.

 

Remuneration of the management

Remuneration of the management must take into account the financial position of the foundation as well as of the group if it has any subsidiaries. With a view to transparency, the new Act requires that the total remuneration of the management and their connected persons must be indicated in the annual report, regardless of the size of the foundation.

 

Distributions

The new Act states that the directors’ report in the annual report or on the website of the foundation must include a statement of the foundation’s distribution policy, including a division into main categories of the distributions made. The commercial foundations will be required to submit an annual list of recipients of distributions to the commercial foundations supervisory authority.

 

It has also been clarified that the board of directors is responsible for ensuring that distribution is sound in consideration of the financial position and not detrimental to the foundation or the creditors. The expectation is to meet future criticism concerning the use of amounts for statutory distributions by creating transparency in relation to the distribution policy of the foundation.

 

If any transactions between the foundation and its connected persons have taken place, the annual accounts of the foundation must provide information about the relationship between the parties and on any transactions and balances that may affect the annual accounts.

 

The Function of the Auditor

In principle, the auditor must be elected by the board of directors for one year at a time at the foundation’s annual accounts meeting. If the auditor is appointed in accordance to the articles of association, such appointment may not exceed seven years from the founding of the foundation. From thereon, the auditor is appointed by the board of the foundation for a period of one year at a time.

 

The new Act introduces a requirement to hold an annual accounts meeting every year where attendance is compulsory for the auditor unless it is agreed that the participation of the auditor is not required. The new Act also provides the auditor with the opportunity to request the convening of a board meeting of the foundation.

 

The auditor has an obligation to inform the commercial foundations supervisory authority of any non-insignificant violations of the regulation of foundations or the articles of association of the foundation. 


The Function of the commercial Foundations supervisory Authority

In future, the commercial foundations supervisory authority may dismiss a board member of the foundation if the member “has proven inadequate”. Previously, the commercial foundations supervisory authority only had this option to sanction if the member had “proved clearly unsuitable” for the position.

 

Under special circumstances, the commercial foundations supervisory authority may also require that the board of the foundation dismiss they managing director.

 

Seeing as commercial foundations have many features in common with businesses such as limited companies, the new Act provides that in future, the Danish Business Authority will act as the commercial foundations supervisory authority. The Civil Affairs Agency currently acts as the commercial foundations supervisory authority, but this authority will be transferred to the Danish Business Authority on the Act’s entry into force. The Danish Business Authority will become the commercial foundations supervisory authority as of 1 December 2014. However, the consent of the Civil Affairs Agency must be sought in connection with any amendments of objective, statutory provisions on the distributions, and dissolution of the foundation.

 

 

If you have any questions or would like additional information on the recommendations of the Danish FSA, please contact partner Dan Moalem (dmo@mwblaw.dk), partner Christian Bredtoft Guldmann(cbg@mwblaw.dk) or senior associate Henning Hedegaard Thomsen (hht@mwblaw.dk).

 

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.