CROSS BORDER CONVERSION AND MERGER (part 7)

The conversion of or into a foundation

If a foreign legal entity wants to be converted into a Curacao foundation (inbound) the Court in Curacao must grant consent (Section 2:303 subsection 2 of the Civil Code). I was unable to find any explanation of this in the Explanatory Memorandums of Book 2 of the Civil Code of 2003 and 2010.

That authorization by the court is required for the conversion of a foundation into another – whether or not foreign – legal form, can certainly be explained (Section 2:306 subsection 2 in conjunction with Section 2:300 subsection 4 of the Civil Code). After all, foundations are special bodies. They do not have any members or shareholders but they often have a capital that – if it relates to an ordinary foundation – can only be appropriated with due observance of the prohibition on making payments as laid down in Section 2:50 subsection 4 of the Civil Code. With a knowing wink to the concept of ‘restricted reserves‘, this capital could be considered as ‘restricted‘. It should not be simple to circumvent this legal provision by converting the foundation into a different legal form. That is why it has been provided that upon a conversion of a foundation, the deed of conversion must show what capital the foundation has and how it is composed.

After the (domestic) conversion the articles should demonstrate that the net capital that the foundation had on the conversion, should not without the consent of the court be reduced by payments to shareholders, members or third parties (Section 2:300 subsection 8 of the Civil Code). That capital can obviously decrease after the conversion on other grounds, for instance by payment of claims or by losses suffered by the legal entity in its new chosen legal form. The court can give consent for payment to the debit of the previous capital of the foundation, provided these payments are not to shareholders or members of the new legal form. So in this respect the legal entity in its new legal form will be restricted in its freedom because in the past it had been a foundation.

In the case discussed here the rationale of the court authorization is evident: the court checks whether the restricted capital is used for the purpose for which it was intended (the capital restriction ‘vermogensklem‘). So this involves the protection of the capital for the corporate purpose. But I was unable to find what the idea is behind the requirement of court authorization in connection with cross-border conversion into a Curacao foundation (so upon immigration) and what exactly the court would then have to review. I would think that as a foreign legal entity with restricted capital wants to be converted into a Curacao legal entity, it would have to suffice for us if it appears from the statement of the expert that all the conditions of the country of emigration have been complied with. As far as I am concerned the requirement of authorization by the court could therefore in this case be removed. (To be continued)

Karel Frielink
Attorney (Lawyer) / Partner

(22 March 2013)

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