Private Foundations In The Common Law Caribbean: Variations On A Theme

Several other civil law systems adapted the Liechtenstein entity to their own needs, but its international use remained primarily based in Liechtenstein until St. Kitts and Liberia created comparable common law versions. Following St Kitts’ example, eight common law jurisdictions in the Caribbean transplanted versions of the civil law’s private foundation into their legal systems.

Prof. Andreas Rahmatian compares legal transplants to musical variations, an apt metaphor since it captures not just a shift in “key” (as from civil to common law) but also potential changes in “the intervals between the notes … the harmony, melody, and the rhythm” that may occur.[ii] Extending this metaphor, we can understand the Caribbean common law foundations as ‘cover versions’ of a composition created in Liechtenstein almost a hundred years ago.

Based On A Common Theme

The Caribbean private foundation statutes share some common elements which constitute the “theme” of private foundations: the foundation has its own legal personality; is established by filing a document with the regulator; has a governing body; can be dissolved under certain circumstances; can move in to the jurisdiction from outside; can move out of the jurisdiction to another; and cannot be challenged based on other jurisdictions’ lack of recognition of foundation entities or the assertion of foreign law-based forced heirship rights. Every jurisdiction provides for its regulators to investigate foundations suspected of misbehaviour and some provide significant powers explicitly to regulators or courts, although these vary in the degree of explicit authority granted regulators. For example, St. Kitts has among the strongest investigative provisions, explicitly authorising inspectors to look at council members’ bank accounts and to seek warrants for searches. Although there are minor differences among the statutes on these particulars, the jurisdictions are at least singing in close harmony on these themes.

Even here, however, there are interesting differences. For example, while all the statutes require the foundation name to include the word “foundation” or an abbreviation for it, some jurisdictions are open to the use of foreign language equivalents as a substitute, enhancing the attractiveness of these jurisdictions for the transfer of foundations from elsewhere and for non-English-speaking clients.[iii] While all jurisdictions retain the authority to bar particular names they consider misleading or otherwise problematic, the most restrictive is The Bahamas, which does not allow “limited,” “company,” “partnership,” or any abbreviation or translation of those terms in the foundation name. It also prohibits use of the words “Royal,” “Imperial,” “Empire,” “Windsor,” or “Crown” or any other word suggesting a connection to the royal family. Further, the registrar’s consent is necessary if the name includes the word “Bahamas” or any term suggesting a connection with the Bahamas government, “Municipal,” or “Chartered.” The Bahamas’ more detailed regulation of names is paralleled throughout its statute with dozens of provisions providing significantly more detail than many of the other Caribbean jurisdictions,  which captures a difference in approach. The statutes of The Bahamas (2004), Belize (2010), the Cayman Islands (2017), and Nevis (2004) provide, in general, more comprehensive frameworks than do the others, likely reflecting, in part, their ability to learn from the initial effort from St. Kitts and the other earlier adopters.

Building on the musical metaphor, the common law  ‘covers’ of the Liechtenstein tune also diverge significantly from the original and from each other in several areas and we turn now to some of the most important. The central lesson from the diversity of approaches to foundations throughout the Caribbean and the United States is that practitioners need to evaluate multiple jurisdictions’ statutes to find the best fit for each client’s needs.

Founder & Beneficiary Rights: Introducing New Rhythms

Two important areas of difference between foundations and trusts are the rights of founders/settlors and beneficiaries. Offering both products is useful for jurisdictions since it expands the menu of possible structures. Just as the rhythm section serves as the base upon which a song is often built, so founders’ and beneficiaries’ rights are fundamental to foundation structures. In general, foundation beneficiaries tend to have fewer rights than trust beneficiaries which can be an advantage as it reduces the chance of litigation by disgruntled beneficiaries. Founders’ rights offer a similar advantage; the extensive rights available to founders might, if equivalent powers were given to a settlor of a trust, result in a finding of a sham transaction.[iv]

Some jurisdictions have explicitly authorised broad rights for founders, either providing specific rights by default or by authorising founders to include broad rights in the foundation constitution. Cayman allows the constitution to grant “rights, powers and duties of any type” to founders (and others). Barbados also provides quite detailed provisions on founders’ rights, including provisions governing foundations with multiple founders and allowing the transfer of founders’ rights. The Bahamas explicitly allows the transfer of founder’s rights.

Some jurisdictions provide narrower ranges of rights, but either do not address or preclude the wider range of powers allowed by Cayman and Barbados. For example, Antigua and Barbuda allow founders together with current beneficiaries to request  the council to dissolve a foundation but precludes administration rights or retention of rights over the endowment property.[v] Belize explicitly precludes founders’ retention of powers to administer the foundation, to dissolve the foundation, or to control the endowment. Others are relatively silent on founders’ rights, such as Anguilla.

For beneficiaries, one key area of divergence is whether a jurisdiction explicitly addresses their rights and how it does so. Among those explicitly addressing information rights, Anguilla provides relatively strong beneficiary information rights, granting beneficiaries a right to information (although not to the council’s deliberations or reasons for decisions); The Bahamas do as well, albeit to a more clearly defined list of items.

Most of the other statutes are less explicit on beneficiaries’ rights, which will become clearer only after the courts begin to interpret these statutes. As court opinions on foundations have been slow to appear, such guidance is still some time away. While the default for civil law private foundations has been to severely limit or even bar beneficiaries’ rights, prudent common law foundation founders would be well advised to explicitly address the issue in the founding documents, since common law courts will inevitably read these statutes against the background of trust law.

As these examples suggest, there is considerable variation among these jurisdictions’ foundation laws on important aspects of founders’ and beneficiaries’ rights. Not only do the particulars differ across statutes, but the level of certainty each statute provides on various points varies significantly.

Foundation Councils And Protectors: New Harmonies

Councils and protectors are key foundation governance institutions. These jurisdictions take different approaches to who may serve in these roles, the duties imposed on those in the roles, and the powers of the institutions.

On council members, some jurisdictions allow founders to be members of the council (Belize, St. Kitts, Nevis (implicitly)) and some do not (Antigua and Barbuda). Others bar protectors from serving (Anguilla). Many bar those involved in companies being wound up or in proceedings that could lead to that (Barbados) while others bar those who serve as officers of the foundation or work for its auditors, as well as those related to such people (Bahamas). Several restrict the number of foundations on whose councils an unlicensed person can serve (Belize, one; Antigua and Barbuda, an unlicensed company may not serve on more than three). Similarly, different jurisdictions place different restrictions on who can serve as a protector. Some do not allow some or both of founders and council members to serve (Antigua and Barbuda (both) and Anguilla (council members)).

Some jurisdictions characterise the duty owed by councils and/or protectors as “fiduciary” (Antigua and Barbuda, Belize). Others define duties more narrowly. For example, Cayman and St. Kitts make explicit that the council’s duty is only to the foundation itself and must be stated in the governing documents; and The Bahamas describes officers’ duties as “primarily administrative”.

Jurisdictions also differ in the power they grant councils to vary the foundations’ core documents (at least by default, generally the founder may vary these when establishing the foundation). St. Kitts requires the agreement of the founder, the councillors, and the guardian; Nevis allows the board to amend the constitution by “ordinary resolution” if the absolute (vested) beneficiaries agree.

Roles For The Courts: Varying Roles For Guest Conductors

The courts’ role with trusts in common law jurisdictions is a key element to the success of the trust as a business planning and wealth management tool. For example, trustees’ ability to seek approval of actions from the courts in the four Public Trustee v Cooper categories helps reduce ex post litigation between beneficiaries and trustees and gives trustees the security necessary to act.[vi] Most common law foundation statutes provide for a similar procedure for foundation governing bodies. Some, such as Cayman, explicitly import the jurisdiction’s trust procedure into the foundation statute. Others, such as Anguilla and Antigua and Barbuda, simply provide that the council may apply to the court.

Several jurisdictions restrict courts’ powers in various ways. For example, Antigua and Barbuda forbids courts from entertaining any action or proceeding which seeks to disregard a foundation as a separate entity. Some jurisdictions, including Anguilla and Cayman, allow the foundation documents to restrict founders, members, and/or beneficiaries to arbitration, blocking suits entirely. At the same time, there are some expansions of court powers, such as Antigua and Barbuda’s grant to courts of the power to permit “any … person” to seek judicial review where the court deems it appropriate, presumably allowing beneficiaries to sue in at least some circumstances.

A few jurisdictions addressed the problem of interpretation head on in their statutes. Antigua and Barbuda provided a set of interpretative rules that order the interests courts must consider (beneficiary, purpose, founder, council, others), while Cayman explicitly referenced its Companies Law (and called its foundation entities “Foundation Companies”) in general and its trust law on several specific issues (e.g. forced heirship). But most of these jurisdictions simply left the interpretative framework to be created by the courts as future cases arise.

Courts will not directly intervene in every foundation’s affairs, but when they do take control of a situation, they, like a guest band leader, provide order and direction, shaping the ultimate interpretation of the founder’s composition. Trust law allows for ready resort to the courts and grants them broad authority. While many Caribbean foundation statutes seek to craft a similar role for the courts with respect to foundation entities, courts are used to performing in a different genre (trusts). It seems likely that the statutes that provide less direction for courts (e.g. Anguilla’s) are more likely to be influenced by that background that the statutes with more detailed descriptions of how their foundations are to operate (e.g. Cayman’s). Jurisdictions with clear interpretative rules provide clients and advisors with much greater confidence that they can predict how the courts will interpret this hybrid entity; this clarity  is especially welcome as much existing foundation jurisprudence and commentary is in German language sources from Liechtenstein and Austria.

Adding Additional ‘Harmonies’

Many of the Caribbean foundation statutes have provisions which add something new to the core of the foundation. Some of these are quite broad. For example, Nevis’ “Multiform Foundation” statute, which allows foundations to be created as LLCs, companies, trusts, partnerships, or limited partnerships, is a fundamental divergence from the traditional civil law conception of the foundation, mixing in existing business forms – and so, presumably, existing business organisations’ laws – to a far greater extent than others have attempted. What remains of foundation law for an “LLC Foundation” may be a difficult question to answer. Others are relatively narrow, restricting particular claims (e.g. Antigua and Barbuda’s strong language barring claims based on familial or personal relationships;) or granting regulators specific authority (e.g. St. Kitts’ provision that the government can bring actions on behalf of a foundation in certain circumstances).

While such provisions do not generally change the foundation’s essential nature (except, perhaps, in the case of Nevis), these additional ’harmonies’ to the basic tune may enrich or disrupt the overall performance. Whether they enhance or detract from the overall performance of the foundation entity will depend on the audience and provides another reason why foundation practitioners need an awareness of the differences among jurisdictions in finding the best fit for their clients.

Reimagined Classics Or Failed Covers?

Bob Dylan’s All Along the Watchtower is frequently covered by other musicians. It is a superb song, and Dylan’s original on the album John Wesley Harding is a high point of the album. But the Jimi Hendrix Experience’s cover on Electric Ladyland not only topped Dylan’s version on the charts but is often included in lists of all-time best recordings. By contrast, William Shatner (Star Trek’s Capt. James T. Kirk) released what is possibly the worst cover of all time on his 1968 album The Transformed Man, with what one critic termed a “near blasphemous” version of the Beatles’ Lucy in the Sky with Diamonds. Will the common law private foundation, in any of these variations, be seen in 20 years as being Hendrix or Shatner? While that remains to be seen, practitioners have a diverse collection of ‘covers’ from which to choose and need to exercise care in avoiding steering their clients in a ‘Shatneresque’ direction.

Footnotes:

[i] David Beattie, Liechtenstein: A Modern History 72 (London: I.B. Tauris, 2004).

[ii] Andreas Rahmatian, Alchemistic Metaphors in Comparative Law: Mixed Legal Systems, Reception of Law and Legal Transplants, 11(2) Journal of Civil Law (2018) available at https://digitalcommons.law.lsu.edu/jcls/vol11/iss2/2. 

[iii] St. Kitts and Nevis require the name to end in “Foundation”, although Nevis allows the abbreviation “FDN”. Wyoming requires the words “statutory foundation” or the abbreviations “SF” or “S.F.” to be in the name with no provision for other languages Anguilla, Antigua and Barbuda, and Belize allow any foreign language equivalent or its abbreviation.

[iv] For example, Antigua and Barbuda allow a founder to be the sole beneficiary of a foundation.

[v] Sec. 25 provides that a foundation council has the power to dissolve a foundation “on the written request of the founder, or if there is more than one founder, on the written request of all living founders and all persons who are beneficiaries at the time of the resolution.” Since founders are barred from dissolving a foundation themselves (sec. 28(5)), the council can presumably refuse to do so, but this is not explicitly addressed in the statute.

[vi] [2001] W.T.L.R. 901.

Andrew Morriss
Andrew Morriss is Professor of the Bush School of Government & Public Service and School of Law at Texas A&M University. Prior to this position, he was the Dean of the Texas A&M School of Innovation, the Dean of the Texas A&M School of Law, the D. Paul Jones & Charlene A. Jones Chairholder in Law at the University of Alabama, the Ross & Helen Workman Professor of Law at the University of Illinois, and the Galen J. Roush Chair in Law at Case Western Reserve University.