Members of the Hadef Corporate team were recently asked to join a working group commissioned by the Governor of the Dubai International Financial Centre (“DIFC”). The purpose of the Wealth Management Working Group (“Working Group”) was to consider the present status of the wealth management industry and the relevant legislation and regulation in the DIFC. The Working Group was requested to formulate and propose amendments, strategies, policies and objectives relating to the introduction of a foundations framework in the DIFC, and submit these to the DIFC Authority (“DIFCA”) by way of a white paper for consideration.
The Working Group opined that the introduction of a new foundations regime in the DIFC alongside the existing DIFC Companies Law and DIFC Foundations Law would provide a better framework for succession planning, charitable institutions, private wealth management and creditor protection.
The final recommendations of the Working Group have been approved and a new foundations law regime is expected to be published by the DIFC this year (“Foundations Law”), in which we expect the following key recommendations of the Working Group in relation to the Foundations Law to be reflected:
- Governing Law
The Working Group stated that it considered it to be of key importance that matters in relation to foundations established in the DIFC be governed exclusively by the laws of the DIFC. The Working Group suggested that limited exceptions be allowed where the original endowed property is outside the DIFC and the founder or contributor does not have power to dispose of it according to the law of the place where the property is situated.
- Categories of Foundations
The Working Group proposed that the Foundations Law should provide for four types of Foundations based on their objects, and that different governance requirements apply to each. The suggested categories are as follows:
- Those which benefit persons by name, class or category;
- Those which are exclusively charitable;
- Those which are not charitable; and
- A combination of two or more of the above.
- Governance Controls
The Working Group recommended that the duties of the council of a foundation to the foundation itself should include the following:
- to act within powers conferred by the foundation’s constituent documents;
- to promote the purpose of the foundation;
- to exercise reasonable care, skill and diligence;
- to exercise independent judgment; and
- to avoid conflicts of interests.
The Working Group further recommended that in the event of a breach of these duties, the foundation, its beneficiaries or creditors, its contributors or the Registrar should be able to initiate court proceedings against any defaulting council member. The courts then should have discretion to grant the appropriate relief.
- Powers of the Registrar
The Working Group recommended that, regarding the powers of the Registrar, the Foundations Law should align with the procedures applicable under the DIFC Companies Law.
- Disclosure of Information
The Working Group recommended that, in order to ensure the protection of information relating to beneficial ownership of private foundations, whilst also mitigating money laundering risks, relevant information in relation to a foundation to be provided to the Registrar or to a registered agent who would be able, on the request of the Registrar, to provide the same. Such information would not be placed on any public register, and would not be accessible to the public. The Registrar would only release such information to another body, such as a regulator, standard setter or law enforcement agency, for a legitimate purpose.
- Provision for Depository Receipts
The Working Group recommended that the Foundations Law should include provisions to allow for the foundation to issue securities, such as depository receipts or certificates to the contributor upon a contribution, representing the value of the contributed assets.
The Working Group proposed that this could be provided for through the issuance of certificates in exchange for the contribution of assets into the foundation by the contributor. The certificates would represent the economic entitlement to the assets only. Essentially, the certificates would serve as contracts issued by the foundation to the contributor, representing the value of the underlying assets that it owns. This, effectively, results in a separation of the ownership of the relevant assets from their economic value. The rights conferred on certificate holders could be determined by the provisions under which the certificates are issued.
By splitting the legal control from economic entitlement to the assets owned by the foundation, the Working Group considers that the following could be achieved:
- shares in the holding company may be contributed into the foundation in exchange for certificates. Only the certificates may be transferable, whilst the control over the holding company shares remain with the shareholder of the business, thus offering protection from a hostile takeover; and
- performance bonuses in the form of certificates (rather than shares) in the company may be granted, allowing for economic benefits for employees, without any dilution of control over the business by owners and management.
- Accounting Requirements
The Working Group suggested that the company accounts, reporting and audit requirements be substantially in the same form as applicable under the DIFC Companies law as it applies to private Companies. On this basis the Working Group proposed that foundations should be subject to the requirements to:
- prepare annual accounts in accordance with accepted international financial reporting standards prescribed or approved by the Registrar;
- have such accounts approved by its council within six months of the end of the company’s financial year;
- file a copy of the accounts with the Registrar or (if there is one) the registered agent; and
- keep accounting records.
The Working Group proposed that foundations should not be required an audit of the accounts, although it should be an option of those foundations which wish to do this.