Directors of a foundation or association must perform their duties properly. If they fail to do so, this may result in personal liability. The ruling handed down on 10 November 2020 in the Upper House The recently enacted Act on the Management and Supervision of Legal Entities (WBTR) tightens the rules.
Amend the Articles of Association
The introduction of the WBTR will mean that many foundations and associations will have to amend their articles of association. This must be done, at the very least, the next time the articles of association are amended following the entry into force of the WBTR. However, it may be advisable to bring the articles of association into line with the WBTR at an earlier stage.
Incidentally, the fact that the articles of association have not yet been amended does not mean that the rule set out in the WBTR does not have to be applied.
Performance of duties
Following the introduction of the WBTR, the text of the Act explicitly states that directors must act in the best interests of the foundation or association and any associated company or organisation when carrying out their duties.
Conflict of interest
This is in line with the tightening of the rules on conflicts of interest. This arises when a director has an interest that is at odds with the interests of the foundation or association.
Under the WBTR, a director with a conflict of interest may not take part in the board’s deliberations or decision-making. If this prevents a decision from being taken, the Supervisory Board shall take the decision. If there is no Supervisory Board, the General Meeting shall decide.
Absence or lack of a director
The WBTR requires that the articles of association of a foundation or association contain a provision dealing with the incapacity or absence of all directors. Incapacity refers to a situation in which a director is temporarily unable to perform their duties (for example, due to illness). In the case of cessation of office, the director has ceased to be a director (for example, due to death).
Multiple voting rights
Following the introduction of the WBTR, the articles of association may stipulate that a director has more than one vote. It is not permitted for a single director to cast more votes than all the other directors combined.
The latter is relevant to the provision included in many articles of association whereby, in the event of a tie, one director (often the chairperson) has the casting vote. Such a provision remains valid until the next amendment to the articles of association following the entry into force of the WBTR, but for no longer than five years after the entry into force of the WBTR.
Joint and several liability
The WBTR extends the liability of directors for the obligations of the foundation or association. In general, the tightening of the rules outlined above will mean that directors can be held jointly and severally liable in more cases.
Specifically in the context of bankruptcy, the joint and several liability of directors is being extended. Joint and several liability is then no longer limited, in part, to commercial foundations and associations. Under this scheme, a foundation or association is considered commercial if the entity is subject to corporation tax.
Entrance
The new rules will come into force on 1 July 2021 in force.