Contracts between an Austrian private foundation and a board member often need two approvals. Section 17(5) PSG, arm’s length review and court application explained.
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Foundation law team, Salzburg and throughout Austria
Your matter is handled by a team combining corporate law, asset succession, real estate law and dispute resolution. We review the foundation declaration, board resolutions, information rights and liability issues and set out clear next steps. Mag. Bernhard Brandauer is responsible for the legal advice, supported by further specialised lawyers of the firm where the matter requires it.
A contract between an Austrian private foundation and a member of its foundation board is not merely an ordinary transaction with a related person. If the foundation has no supervisory board, section 17(5) of the Austrian Private Foundations Act requires two approvals: approval by all other foundation board members and approval by the court.
In practice this can affect consultancy agreements, leases, loans, purchases or sales of assets and other arrangements in which a board member is personally the counterparty. If the approval issue is examined only after performance and payment, the foundation creates avoidable risks concerning effectiveness, recovery and board liability.
The statutory starting point is narrow and clear. The private foundation is the contracting party on one side and a member of its foundation board is the contracting party on the other. If the foundation has no supervisory board, the general rules on representation by the foundation board are not sufficient. All other board members must approve the transaction and the court must approve it as well.
The board member who is the counterparty does not approve their own transaction. The other members must examine the terms independently. This includes performance, consideration, duration, termination, liability, security and whether an unrelated third party would enter into the same arrangement on comparable terms.
The overview on foundation board duties and liability explains the general organ duties. A specific transaction with a board member is also subject to the additional approval requirement in section 17(5) PSG.
Not every economic benefit for a board member automatically constitutes self dealing that requires court approval. The actual contractual structure is decisive.
| Situation | Approval position | Review focus |
|---|---|---|
| Direct contract The foundation enters into a consultancy, lease, loan or purchase agreement directly with a board member. | Section 17(5) PSG applies directly | Approval by all other board members and approval by the court. |
| Indirect benefit The foundation contracts with a third party and a board member receives only an indirect benefit. | Not automatically covered | Examine the counterparty, influence, economic interest and other conflicts of interest in detail. |
| D&O insurance The foundation takes out D&O insurance for board members and pays the premium. | Not self dealing solely for that reason | The Supreme Court generally assigns payment of the premium to board remuneration under section 19 PSG. |
According to the case law, an agreement may be approved only if it is in the interests of the private foundation and consistent with its welfare. The court examines whether the foundation purpose and the founder’s intention can continue to be pursued with sufficient certainty, whether the functioning of the foundation is impaired and whether there is a risk of abuse or damage.
This does not mean that a board member can never provide paid services to the foundation. The Austrian Supreme Court also does not require an excessively strict standard. The foundation must, however, explain convincingly why the transaction makes commercial sense and why its terms are appropriate.
A brief assertion that the service is needed is not a reliable basis. Useful material includes a precise service description, an arm’s length comparison, reasons for choosing the counterparty, the economic effects and minutes showing that the unconflicted board members made an independent decision.
For consultancy and service agreements, the contract must identify the services that go beyond the member’s duties as part of the foundation board. A flat fee without a clear description of the additional service makes an arm’s length comparison difficult. The same applies to success fees, long commitments or termination clauses that protect only the counterparty.
For leases, purchases and loans, valuation and commercial terms are central. Market information, a plausible price or interest rate, clear due dates and an explanation of how the transaction serves the foundation purpose are normally required. Real estate and corporate interests may trigger additional formalities and approval requirements.
Existing contractual relationships also require review if a counterparty later joins the foundation board or if an existing contract is materially amended. Whether a specific amendment requires a new approval depends on its content and on the scope of any earlier approval.
A clear sequence prevents performance, payment and the court application from moving in conflicting directions.
Record the board member’s role, economic benefits and connected persons in full.
First identify the formal counterparty and everyone who benefits economically. Without that inventory the approval requirement cannot be classified reliably.
Set out performance, consideration, duration, termination and alternatives in writing.
Comparable offers, valuations or traceable market parameters help demonstrate that the terms are appropriate.
The unconflicted members discuss and approve the transaction with complete minutes.
The minutes should record the conflict, decision materials, discussion and voting result clearly.
Submit the contract, board approval and economic justification in non contentious proceedings.
Completing the full approval route creates the basis for implementing the transaction without avoidable organ and effectiveness risks.
The basic file includes the complete draft contract, the current foundation declaration, proof of board appointments, the minutes and the approval of all other foundation board members. Depending on the transaction, valuations, comparable offers, calculations, land register extracts, financing documents or a description of the existing commercial relationship may also be needed.
The reasoning should not describe only the board member’s interest. It must explain from the foundation’s perspective which service is required, which alternative was considered, why the terms are appropriate and how the foundation purpose remains protected.
For internal preparation, see the article on the foundation board’s duties of care and the board liability self check. Neither replaces a review of the specific agreement.
If a running contract lacks a required approval, the foundation should not respond with a blanket confirmation or further payments. Secure the contract, board resolutions, performance records and payment flows first. Then determine whether section 17(5) PSG applies directly, whether approval can be obtained and what consequences follow from performance to date.
The legal classification depends on the individual case. Relevant factors include the counterparty, the timing of the board appointment, the actual service and any performance already rendered. A structured legal review is safer than trying to dispose of the conflict afterwards in a brief set of minutes.
Answer two short questions. The result identifies the documents and decisions that should be examined next.
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Review approval by all other board members and prepare the application for court approval under section 17(5) PSG. Before implementation, check the contract, arm’s length comparison and foundation interest together once more.
Do not implement the transaction prematurely. Secure the draft contract, foundation declaration, comparison data and previous resolutions. Internal approval and the court application can then be prepared in an orderly manner.
Examine the actual parties and influence relationships to determine whether section 17(5) PSG or other conflict rules apply. An indirect benefit alone does not support a blanket classification.
First record interests, powers of representation, economic benefits and connected persons. Without that information, an approval requirement cannot safely be excluded and the correct decision route cannot be set.
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