Drafting Bylaws And Charters: A Founders’ Guide To Effective Foundation Governance

Foundations have emerged as a significant component of the UAE’s evolving legal landscape, gaining increasing traction among individuals, corporate bodies, and families seeking effective mechanisms for asset protection, seamless succession planning, and enhanced confidentiality.

The true strength of a Foundation lies in the meticulous drafting of its Charter and By-Laws—the core instruments that define its governance, objectives, and operational framework. Well-drafted governing documents not only reflect the Founder’s intent with clarity but also ensure adherence to the UAE’s legal and regulatory requirements, thereby enhancing the Foundation’s effectiveness and long-term stability.

What is a Foundation?

By establishing a Foundation, a ‘Founder’ transfers assets enabling the Foundation to own, hold and manage such assets independently under its name, most times, for specific purposes. The Founder shall then constitute a ‘Foundation Council’, who shall manage the Foundation and its activities in accordance with the ‘Foundation Charter’ and its By-laws. The Foundation shall also identify its beneficiaries, for whose benefit the Foundation was created.

In recent years, Financial free zones such as the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC) have emerged as global hubs for establishing structures like Foundations and Trusts. These jurisdictions offer significant advantages, including the application of common law principles, a transparent and internationally recognised legal framework, and certain tax efficiencies, among other benefits.

Understanding Foundation Charter and By-laws

The Foundation charter is one of the key legal requirements for establishing a Foundation.  The charter shall set forth fundamental aspects such as its name, objectives, duration, initial assets, and the duties, powers, functions and rights of all parties to such foundation, making it a constitutional instrument for the sole purpose of its internal governance. Hence, it acts as the Memorandum of Establishment, and must be registered with the relevant regulatory authority.

The By-laws are legal instruments that set out the provisions governing the internal management and operation of the foundation. Although not publicly accessible, they provide detailed guidance on the powers of the council, decision-making procedures, rules for appointing and removing members, and other administrative and governance matters.

Both the Charter and the By-laws shall comply with the regulatory framework of their respective jurisdictions. In ADGM, the primary framework for regulating the foundation is the 2017 Foundations Regulations, wherein lay a clear and comprehensive legal framework outlining every aspect of its establishment and functioning. In the DIFC, Foundation structures are governed by the Foundations Law DIFC Law No. 3 of 2018.

Key elements of a Foundation Charter and the By-Laws

Although the mandatory provisions for a Foundation’s charter may vary with the jurisdictions, they shall primarily contain the following details and information

• Foundation’s Name and the Address of its registered office
• Name and Address of each Founder(s)
• Objects and the Specific Purpose for which the Foundation has been established
• Description of the Initial Assets or Capital transferred to the Foundation by the Founder
• Provision for establishing the Foundation Council to manage its activities.
• Name of the Beneficiary, who can be either a legal or a natural person
• Name of the Designee in cases where a Foundation has no Beneficiary
• The duration for which the Foundation is established, if any.
• The potential contingent events that shall lead to the dissolution of the Foundation.

The By-Laws may envisage (but not limited to):

• Functions of the Council & the Councillors, including their powers & responsibilities
• The procedures for the appointment, registration and removal of Councillors and the Guardian, if any.
• Detail the procedures for how the decisions of the Council shall be taken
• Circumstances in which the assets of a Foundation may be distributed or accumulated
• Status of the Foundation’s properties in case of winding up or dissolution
• How further property may be endowed upon the Foundation

Core Drafting Principles: A Short Checklist for Founders

• Clarity of purpose and objects: The Charter and the By-Laws shall, with utmost clarity, explain in detail the objects and the purposes for which the Foundation has been established, leaving no room for multiple interpretations of its objectives.
• Clear Allocation of Powers: The key documents shall clearly allocate powers, duties and responsibilities of each party to the Foundation to mitigate future ambiguities and scope for disputes. Identification and clearly listing the beneficiaries of the Foundation are important.
• Include provisions for amendment: The charter and the by-laws shall include provisions enabling future amendment. However, such provisions shall comprehensively outline aspects such as who shall and how to undertake such an amendment process.
• Use plain and unambiguous language: These documents are crucial to the efficient functioning of the Foundations. Therefore, drafting them in a plain, unambiguous language is important for easy understanding, seamless interpretation and effective implementation.
• Compliance with the Prevailing Legal Framework: The Charter and the By-laws serve as the governing documents for a Foundation, however, they shall not be inconsistent with the prevailing legal frameworks of their respective jurisdictions. Ensuring compliance with the prevailing laws enables the structure’s smooth functioning.

In addition to the considerations outlined above, a Founder must also ensure that the Foundation’s governing documents include clear provisions addressing key contingencies, such as the Founder’s incapacity or death. These provisions should outline the process for the management and disposition of the Foundation’s assets in such events, as well as the treatment of any future assets that may be contributed to the Foundation. Properly addressing these scenarios is essential to safeguard the Founder’s intentions, maintain continuity in governance, and ensure the long-term stability and purpose of the Foundation.

Why Precision in Drafting the Charter and the By-Laws Matters?

Precision in drafting bylaws and charters is crucial to ensure effective Foundation governance. These governing documents serve as the backbone of the Foundation’s framework, clearly defining the rights, responsibilities, and powers of the Founder, council members, guardians, and beneficiaries.

Ambiguities or poorly drafted provisions can result in governance deadlocks, disagreements among councillors, or beneficiaries, and difficulties in enforcing decisions, potentially undermining the foundation’s objectives.

In conclusion, meticulous drafting of a Foundation’s Charter and By-Laws is essential not only for seamless governance and long-term stability but also for safeguarding the Founder’s intentions, ensuring accountability, and achieving full compliance with applicable legal and regulatory frameworks. Proper attention to detail at the drafting stage lays the foundation for a resilient, well-governed, and legally sound entity capable of fulfilling its intended purposes effectively.