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Recently, many associations have a continuity committee. What is a continuity committee and why is setting up a continuity committee recommended for foundations and especially for Public Benefit Organisations (PBOs)?
On 1 July 2021, the Act on Management and Supervision of Legal Entities came into force. This Act requires foundations and associations to have an arrangement for absence and inability to act of directors and supervisory directors. Foundations and associations, including charities, have to include this arrangement in their articles of association the next time the articles of associations are amended. The arrangement includes the manner in which the exercise of duties and powers will be (provisionally) provided for in the event of absence and inability to act of all directors. The same applies if there is a Supervisory Board (SB).
In the event of inability to act, a director is no longer able to fulfil their function, e.g. in the event of death or dismissal. In the event of absence, a director is temporarily unable to fulfil their function, e.g. due to long-term illness or suspension. In which cases there is an inability to act may be specified in the articles of association.
If all directors, either temporarily or permanently, are unable to perform their duties, the association is de facto without a board. The arrangement for absence or inability to act is a temporary measure. In the event of a long-term period of absence or inability to act, new directors have to be appointed.
One of the possibilities to realize an arrangement for absence and inability to act is a continuity committee. A continuity committee consists of one person or a group of people appointed to substitute the board temporarily in the event of absence or inability to act of all directors. As a result, the decision-making and thus the continuity of the foundation or association will not be delayed.
The continuity committee has to be laid down in the articles of association. A notary is required to record an amendment to the articles of association. Therefore, to avoid having to follow this procedure frequently, the formulation of an arrangement for absence and inability to act, such as a continuity committee, must be future-proof. In such a provision, you mainly regulate that the committee exists and that it has the same powers as the directors.
How many members the committee has and how these are appointed can be laid down in the articles of association, but it can also be included in the by-laws. If matters are not regulated in the articles of association but in regulations or by-laws, it is recommended to refer to the particular part of the regulations or by-laws in the articles of association.
In the event of an association, the general membership meeting (GMM) will appoint the members of the committee. A foundation has no GMM, here the board will appoint the committee. When it comes to the composition, you may want to consider certain skills or familiarity with the affairs of a foundation. For example, a continuity committee could consist of the chairmen of several existing committees. In an association with members administrative skills may be an important thing to consider, while in a charitable fund, experience in financial management may be more important. It is therefore a good option to agree with the board of a similar fund that the boards will be each other’s continuity committee.
It is important to ensure that the continuity committee can quickly take up affairs. The board thus is well-advised to inform the committee of important developments within the organisation. It is also wise to consider whether the committee members are still suitable to temporarily substitute the board. This can be done, for example, by scheduling an annual evaluation. Also, do not forget to include an arrangement for the substitution and dismissal of board members. This can be laid down in the articles of association or in regulations.
In addition to the continuity committee, numerous other arrangements for absence and inability to act are possible. The law provides a lot of freedom in this respect. For example, different regulations for absence and inability to act can be chosen for each director or supervisory director. However, there are limits to this. For example, the board of PBO foundations and associations must consist of at least three directors.
For example, an arrangement for appointing temporary directors can be chosen. In an association, the GMM is the body to take a decision on this. The disadvantage is, however, that it often takes a lot of time to appoint deputy directors, while it is necessary to take up the board duties as soon as possible. Especially in a foundation this is a difficult route, as the board is the body to decide on this, but that body is precisely what has been eliminated in this situation.
Another possibility for regulation for absence or inability to act is for the Supervisory Board to take over the management. The supervisory duties of the SB will then have to be resigned by the supervisory directors to avoid conflicts of interest. Please note, this arrangement will cause the supervisory directors to be prevented from acting as supervisory directors, thus shifting the problem. One advantage of this arrangement is, however, that the supervisory directors will quickly be able to take up affairs because of their familiarity with the organisation.
It is important to think carefully about an arrangement for absence or inability to act. There are many possibilities and it thus requires a careful weighing to ensure an arrangement that best suits the needs and interests of your organisation.
Are you a director or supervisor of an association or a foundation and would you like to get advice on an arrangement for absence or inability to act? Are you a member of a continuity committee and do you want to learn about your powers and possible liability? We will be happy to assist you, including with other questions or disputes in the governance of an association or foundation. Please contact us:
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