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Charity law update: members of charitable companies owe fiduciary duties and can be directed how to vote on resolutions

  • United Kingdom
  • Corporate
  • Education - Briefings

21-09-2020

The Supreme Court released its eagerly awaited judgment in Lehtimäki and others v Cooper [2020] UKSC 33 at the end of July, confirming that the members of charitable companies owe fiduciary duties to the charitable purposes of the company; the duties are to the charitable purposes rather than the charitable company itself.  The judgment also confirmed that, in some circumstances, the court has jurisdiction to direct a member how to vote on a resolution.

Background

The case concerned the Children’s Investment Fund Foundation (UK) (“CIFF”), a charitable company limited by guarantee.  CIFF was founded in 2002 by Sir Christopher Horn and his then wife Ms Jamie Cooper to improve the lives of children in developing countries.  Following the breakdown of their marriage, they agreed that Ms Cooper would resign as a trustee and cease to be a member of CIFF in exchange for the payment of a $360 million grant to Big Win Philanthropy (“BWP”), a charity founded by Ms Cooper.

As the grant to BWP constituted a payment for loss of office to a director (directors of charitable companies being charity trustees), the members of CIFF were required to resolve to approve the grant pursuant to section 217 of the Companies Act 2006.  CIFF applied to the High Court (on the instructions of the Charity Commission pursuant to section 115 of the Charities Act 2011) for directions that (i) the grant was in the best interests of the charity; and (ii) the sole unconflicted member, Dr Mark Lehtimäki, vote in favour of the resolution of the members to approve the grant.  Both applications were approved by the High Court, which also held that the members of CIFF owe fiduciary duties.  Dr Lehtimäki appealed to the Court of Appeal, which held that the court was not entitled to direct a member to vote in favour of a particular resolution in the absence of a breach of fiduciary duty.  Ms Cooper appealed the decision of the Court of Appeal to the Supreme Court.

The Supreme Court’s decision

Ms Cooper’s appeal was successful and the decision of the Court of Appeal was set aside by the Supreme Court, which held that:

  1. The members of a charitable company owe fiduciary duties to the charitable purposes of the company, such as the passing of the section 217 resolution in this case. These duties are tailored by the memorandum and articles of association of the company and take effect subject to the restrictions imposed by the nature of the corporate form of the charity.
  1. The court had jurisdiction to direct Dr Lehtimäki to vote in favour of the section 217 resolution. The trustees of CIFF had surrendered their discretion to the court, and the court’s priority was to see that the fiduciaries for the charity perform their duties in the way most likely to achieve its continued existence, notwithstanding what had been held to be in effect an existential threat to the proper governance of the charity.  The reasoning of the majority was that, once the trustees had surrendered their discretion to the court, to go against the court’s decision as to the merits of the transaction would be a breach of fiduciary duty.
  1. The court was not prevented from directing a member as to the manner in which he should vote on a section 217 resolution and the Companies Act 2006 did not prevent the court from making such an order.

Considerations for charitable companies

The judgment highlights a number of practical difficulties and uncertainties for charitable companies.  Perhaps most concerning is the unclear extent of the fiduciary duties owed by members, and the exact circumstances in which the court may intervene with members’ exercise of their judgment.  Potential issues raised by counsel for CIFF included (i) whether there ought to be declarations of interest before meetings of members; (ii) whether a member with a conflict of interest can vote; and (iii) whether a member has a duty to attend and vote at meetings.

The Supreme Court also distinguished between charities with smaller membership bases and larger “mass membership” charities, acknowledging that the treatment of these charities may differ when it comes to determining the fiduciary duties owed by their members.  The Supreme Court deferred any substantive consideration of such charities until a relevant case arises.

The judgment may lead to guidance form the Charity Commission on the duties of members of charitable companies in due course.

Many practitioners have long held the view that members of charitable companies owe fiduciary duties given the nature of charitable companies and this judgment would appear to confirm that view.