When Is a Private Foundation “Born” – and Why Does What Happens Before Matter?
There are many moments in time that may pretend to be seen as the beginning of the existence of a legal person. In many European jurisdictions, there is a legally defined moment of acquiring the “legal personality” or “legal capacity”. Since such moment, the entity is able to enter legal relationships and has to be recognised by the actors of the legal world – the state and other persons, both natural and legal ones. This means that an act of a legal person’s founder (founders) that establishes a new entity is not enough on its own – there is a need for a norm that accepts the fact that a legal person is created and transforms a founder’s initiative into a legally binding phenomenon. Before such full legal personality is acquired, state authorities typically perform a test of formal and, sometimes also substantive, requirements, so that no invalid legal persons join the commerce and cause chaos because of their questionable status or lack of fundamental characteristics.
Such an approach leads to a time span between the establishment (called Errichtung in German, or ustanowienie in Polish) of a legal person by its founder (founders), and the moment the legal person is fully recognised and capable of acting (called Entstehung in German, or powstanie in Polish). An established but not yet fully created “legal person in the making” may be kept in a legal “limbo” for a considerable period of time, especially if the procedure of acquiring the legal capacity is long. This raises a question: to what extent is the entity-in-the-making able to perform any legal transactions (acquire rights, conclude contracts, sue, etc.).
This text addresses that question from the perspective of private (family) foundation regulations in several Central European countries. Is there any amount of legal capacity before a foundation is officially a legal person – similarly as in the company law of many countries there is a pre-company, a company in formation, or a company in organisation – an entity with partial legal capacity? Or, is there no legal entity before the foundation obtains full legal personality, even if a considerable amount of time has passed since the establishment? And are there any options between these two extremes?
Before describing the variety of possible answers, there is a terminological issue to be clarified. In the majority of the legal systems analysed below, the moment of acquiring the legal personality by a foundation is its registration (i.e. entry into the foundation register) by a relevant register court (in the same way as in the case of companies). Only in Germany there is no registration requirement. Instead, the Entstehung occurs with the recognition (Ger. Anerkennung) by a state administrative organ, as the country follows the so-called “licence system” (recognition-based system) for foundations. Historically, the main difference between registration and recognition lay in the amount of discretionary power of the state authority: there is a right (entitlement) to be registered, if the formal requirements are fulfilled, whereas a recognition is an independent decision of the state. As German legal doctrine now refers to an entitlement for recognition (when all formal requirements are fulfilled), this practical distinction no longer applies.
Legal Personality from the Outset (No Registration Requirement)
Before analysing the approaches of various jurisdictions to the time span between the establishment of a private foundation and its acquisition of legal personality, let us first consider the Liechtenstein case. In this country, most private foundations are not subject to any registration requirement, as such foundations acquire legal personality directly by operation of law (ipso iure) upon their establishment by the founder’s constitutive act. Only private foundations that directly engage in business activities, and public benefit (charitable) foundations, have to apply for registration (and wait for the legal personality until the entry into the register is completed). Since most private foundations do not engage in business activities directly, but instead hold shares in companies that conduct such activities in their own name, a typical private foundation in Liechtenstein is therefore not required to register.
In practice, a private foundation can start operations immediately after being established. This means that it can enter into contracts, acquire rights and assume obligations, as well as sue or be sued. The foundation’s beneficiaries may therefore begin receiving distributions as soon as the procedure of establishing the foundation is finished.
Interim Legal Capacity Before Registration
In contrast, Liechtenstein private foundations that engage in business activities directly, Polish family foundations, Austrian private foundations, and all Swiss foundations are required to register and acquire legal personality only then. As a result, foundations in statu nascendi find themselves in an intermediate stage: they have already been established but do not yet enjoy full legal capacity. The jurisdictions mentioned above address this issue by granting such entities interim or limited legal capacity. However, they adopt different approaches to achieving this.
Polish law recognises the intermediate legal status of “family foundation in organisation” (fundacja rodzinna w organizacji), which applies to family foundations that have been established but not yet registered. The legal framework is modelled on the “limited liability company in organisation” under Polish company law: although the entity is not formally a legal person, it enjoys most of the characteristics of a legal person – it may manage its assets in its own name, acquire rights (including ownership of real estate), assume obligations, sue and be sued. Upon registration, the entity continues to exist in a new legal form: as a legal person. Consequently, no transfer or succession of rights and obligations is necessary. Since the Polish registration procedure can be extremely lengthy (due to the large number of registration applications submitted to the Registration Court in Piotrków Trybunalski in the first years of the Family Foundations Act being in force), this flexible approach can prove particularly useful, as a family foundation in organisation can commence its operations regardless of how long the registration formalities eventually take.
In Austria, a so-called pre-foundation (Vorstiftung) is also recognised as an intermediate legal arrangement during the period between establishment and registration. However, this concept has not been explicitly regulated. The legal doctrine describes it as a “legal entity sui generis” and widely accepts its interim legal capacity, analogous to that of a pre-company. However, the differences between a company, which has members (shareholders), and a foundation, which has no members, may pose difficulties when this analogy is applied in practice.
In contrast to Polish and Austrian approaches, Swiss legal scholarship and case law treat a foundation that has been established but not yet registered like a nasciturus (although such a view is not universally accepted). This Latin term refers to an “unborn child” – a human being after conception and before birth. According to an ancient Roman legal maxim, a nasciturus enjoys certain rights under private law, provided that the child is subsequently born alive, and may therefore, for example, inherit from a person who dies before the child’s birth. This approach allows Swiss lawyers to avoid the difficulties involved in applying rules designed for partnerships and companies to foundations. At the same time, however, this approach may cause other practical limitations: Since the legal capacity of a pre-foundation is conditional upon its registration (in a manner analogous to the nasciturus’s rights being conditional upon live birth), this capacity does not extend to the acquisition of ownership of real estate, as this would require an entry in the land register, which cannot be conditional.
No Legal Capacity Before Recognition
The situation of a foundation that has been established but not yet recognised is different under German law. A clearly prevailing view in German case law and legal scholarship denies non-recognised foundations any degree of legal capacity. In recent years, some opposing views have emerged, suggesting that a “pre-foundation” should be treated as a nasciturus, or granted procedural capacity (both for a very limited scope of cases); however, they remain a minority.
Thus, although there are hardly any practical differences between the German recognition-based system and the court-registration systems found in the other jurisdictions analysed, German foundation law stands out for another reason: an entity that has not yet been recognised as a foundation cannot commence its operations. A pre-foundation is denied any legal existence, and consequently cannot enter into contracts, acquire rights, make distributions to beneficiaries, or otherwise participate in legal transactions.
Conclusions
The analysis of the five legal regimes (or six, if the situation of Liechtenstein private foundations engaging in business activities directly and indirectly is considered separately) leads to several observations. Firstly, there is little practical difference between systems in which legal personality is acquired upon registration by a court (Austria, partially Liechtenstein, Poland and Switzerland) and that in which it is acquired upon recognition by an administrative authority (Germany). The fundamental difference between these systems lies in whether they recognise any legal capacity on the part of a foundation that has been established but not yet registered or recognised. From this perspective, Liechtenstein (at least regarding most private foundations established there) stands apart from the other jurisdictions.
Secondly, however, this opposition becomes less clear when the practical possibilities of acting on behalf of a foundation that has not yet acquired legal personality are considered. The categorical rejection under German law of any legal capacity for a pre-foundation contrasts sharply with the efforts made in other jurisdictions to enable such entities to operate immediately after their establishment. From the perspective of founders, members of the foundation’s governing bodies, beneficiaries, or business partners, the Polish “family foundation in organisation” may appear to be closer to the Liechtenstein model, under which legal personality is acquired immediately upon establishment, than to the German approach, which does not recognise a pre-foundation at all, or the Swiss concept of treating a pre-foundation as a nasciturus.
Finally, although efforts to facilitate the operation of foundations during their initial stages are commendable from the perspective of those involved, this approach is not without its difficulties. For example, adopting the Swiss approach narrows the range of activities that a foundation may undertake before registration. Moreover, uncertainty surrounding the legal status of a pre-foundation (especially when based on the analogous application of regulations governing pre-companies) may create legal uncertainty for those dealing with an entity in that form. Such uncertainty may occur not only where the legal status of a pre-foundation is not explicitly regulated (or is regulated only to a limited extent), but also where the relevant legislation contains a set of provisions on the matter. This is illustrated by the extensive debate in Polish legal commentaries and scholarship concerning issues such as the starting moment of legal existence of a family foundation in organisation and the rules governing its representation. Thus, granting legal capacity to a foundation in formation is only the first step; providing a clear legal framework for its status is equally important.
Krzysztof Grzegorczyk
The text provides an accessible, non-specialist overview of the research findings obtained within the framework of the project “The Dead Hand. Private Foundation as a Multi-Generational Estate Planning Tool” (National Science Centre, Poland, grant no. 2021/41/B/HS5/00857).