Landmark decision of Supreme Court shows risks in restructuring of Foundations

In a landmark decision of September 2018, the Liechtenstein Supreme Court clarified fundamental foundation law questions that are particularly important for any restructuring of foundations.

The decision was based on a transfer of the entire assets of a foundation to a new foundation structure in the year 2010, in which the same board members were active for the transferring and receiving foundations. After the transfer of the assets, the transferring foundation was terminated. In the relevant case, the transferring foundation, represented by a Curator, sued for reversal of the transaction and asserted that the entire transfer was invalid, as the newly established foundation would not pursue the same purpose as the transferring foundation.

The Liechtenstein Supreme Court ruled in favour of complaint. The Supreme Court clarified that the regulations of the Persons and Companies Act (PGR) regarding the limitation of representation effects, in particular Art. 187 para. 2 PGR, also apply to foundations. According to the Supreme Court, acts of representation therefore do not bind the foundation if the acts exceed the purpose of the foundation and if the third party was aware or should have been aware that the purpose of the foundation is exceeded.

The Supreme Court also clarified that the transfer of the foundation assets to another foundation does not per se constitute a change in the purpose of the foundation. Rather, it should be reviewed whether there is an empowerment to change the purpose of the foundation or whether the legal requirements for a change of purpose of the foundation are met. According to the Supreme Court, change from a charitable purpose to a private purpose foundation or reverse are undoubtedly considered as a change in the purpose of the foundation. The same also applies to a change from pure family foundations to mixed family foundations and vice versa.

In the relevant case, a pure family foundation was changed to a mixed family foundation and no right to change the purpose of the foundation was reserved. The Supreme Court thus ruled that the transfer of the foundation assets made in 2008 had violated the purpose of the foundation and was therefore void with retroactive effect (ex tunc). As a consequence, the Supreme Court ordered that the transferring foundation has a claim to reverse transaction and obtain interest.

The decision grants to purpose of a foundation, i.e. the core of each Foundation, a particularly high level of protection and importance as it reflects the founder’s will as determined by the founder and also points out the risks in particular in connection with restructuring of foundations. If a transfer does not take place in accordance with its purpose, there is a high risk that it will be reversed even after many years.

(Note: The author acted as the legal representative in the proceedings.)