Is an NPO allowed to own shares in a commercial company these days? And what will the future bring?

1. Under the present law

Despite slight reluctance to an NPO having an equity holding in a commercial company, today this is possible, provided specific rules of thumb are respected.

1.  An NPO can only own shares in a limited liability company. The  NPO cannot be a shareholder of an unlimited liability company, as this would mean it acquiring the capacity of trader, which would fundamentally conflict with the  NPO status.

2.  The articles of association of the  NPO are intended to make it possible to have an equity holding in a commercial company.

3.  Only the competent body within the  NPO can decide whether to acquire, retain or reject such an equity holding, or not. If the articles of association mention nothing concerning it, this authority falls to the Board of Directors. Depending on the significance of the equity holding, it may be advisable to consult with the General Meeting.

4.  The equity holding must form part of the achievement of the  NPO’s aim. Any payments received on the basis of this equity holding (e.g. dividends) must remain within the  NPO, and be used in order to realise its statutory aim. Purely speculative equity holdings are not permitted. If the  NPO makes profit and distributes it amongst its members, it can be categorised as a partnership, which means the members are jointly liable for the debts of the  NPO, even after departure (for up to 5 years).

5.  A more delicate question is whether an NPO can take a majority equity holding in a commercial company. If you do not wish to take any risks, it is best to make do with a minority equity holding. If an NPO has a controlling equity holding, which is completely in line with the statutory activity of the  NPO, we see no fundamental objections to this. AN NPO which controls company policy via a controlling equity holding, does not perform deeds outside the description of its aim. The company in which the  NPO has a controlling holding is and remains the company which performs commercial activities.

6.  It is difficult to justify an NPO investing the majority of its assets in one or more equity holdings in companies. A commercial company can go bankrupt, and in the given circumstances, this could prove fatal for the  NPO in question.

2. Under the future law – Upcoming reforms in association law

In December 2016, Minister of Justice Geens presented his ambitious reforms in “De sprong naar het recht van morgen” (The leap towards the law of tomorrow). The aim is to modernise all of the basic codes of Belgian law. This includes legal persons law, companies and associations.

What are the key aspects of the reform so far?

The basic principle, in addition to a simplification of the number of company forms, is  the focus  of the different types of legal persons. The following amendments are proposed:

1.  Distribution of profits becomes the distinguishing criterion be-tween companies and associations. The ‘non-profit’ principle disappears and is replaced by the new, sole difference between association and company: ‘no distribution of profits’.

Meanwhile, associations and social-profit organisations have added a condition to this ban on the distribution of profits, i.e. payment of profit to members or third parties – whether financial or material, direct or indirect – shall be forbidden, unless the members or third parties form part of the beneficiaries of the altruistic aim of the  NPO. This addition was accepted by the Minister.

2.  The opening-up of association law, or the unrestricted admission of economic activities for associations, however, in the service of specific altruistic aims (see Point 3 below). The restriction to secondary economic activities disappears.

3.  In addition to the ban on paying-out profits, a second, positive criterion is added to the definition of an  NPO: each  NPO must have one or more well-defined “altruistic” aims.

4.  Associations will fall under bankruptcy law, subject to certain adjustments. They will therefore be able to seek protection from their creditors too.

3. What might this mean for an NPO holding equity in a commercial company now?

The reform is still in a preparatory phase, so there are no final texts yet.

On the basis of the documents available now, an NPO will also be able to have equity holdings in a commercial company in the future.

The rules of thumb mentioned under 1 and 2 disappear, subject to Rule of Thumb No. 4. Rule of Thumb No. 3 remains fully applicable.

Rule of Thumb No. 4 must therefore be read in the sense that an equity holding in a commercial company must serve an altruistic aim, as defined in the articles of association of the  NPO in question. Any payments received on the basis of this equity holding (e.g. dividends) must remain in the  NPO and be used for the achievement of its altruistic aims, unless this ‘profit’ is distributed to members or third parties, in as much as this fits in with the context of the altruistic aim of the  NPO. 

The same applies for Rule of Thumb No. 5. 

As  NPOs will fall under bankruptcy law just like companies, Rule of Thumb No. 6 articulates a general rule of thumb which applies to all (natural person, or legal person (company and/or association)).