The UK Supreme Court has held that members of charitable companies have fiduciary duties and that the court has jurisdiction to direct members of a charitable company on how to exercise their powers: Lehtimäki and others (Respondents) v Cooper (Appellant) [2020] UKSC 33.

We consider the judgment and its implications for charitable companies below.

Background

In 2002, Sir Christopher Hohn and Ms Jamie Cooper, who were then married, set up The Children’s Investment Fund Foundation (UK) (“CIFF”), a charitable company limited by guarantee.

Governance issues emerged as a result of the breakdown of the relationship between Sir Christopher and Ms Cooper. The parties agreed that Ms Cooper should resign as a member and trustee of CIFF, and that CIFF should make a grant of $360 million (the “Grant”) to Ms Cooper’s new charity, Big Win Philanthropy (“BWP”). At the relevant time, CIFF had assets in the region of $4billion.

Pursuant to section 217 of the Companies Act 2006 (“CA 2006”), payments by a company in connection with the loss of office of a director (in this case, Ms Cooper) must be approved by the members of the company and further to section 201 of the Charities Act 2011 (“ChA 2011”), such payments must also be approved by the Charity Commission. The members of CIFF were Sir Christopher, Ms Cooper and Dr Marko Lehtimäki. As the sole non-conflicted member, only Dr Lehtimäki could vote on the resolution approving the Grant, but he did not surrender his discretion or make his voting intentions clear.

The trustees of CIFF sought guidance from the Charity Commission. The Commission authorised the trustees of CIFF to seek the court’s approval for the Grant. The High Court held that (1) it was in CIFF’s best interests for the Grant to be approved, (2) a member of a company limited by guarantee with exclusively charitable objects owed fiduciary duties and had an obligation to use their rights and exercise their votes in the best interests of the charitable company and (3) the Charity Commission and trustees of CIFF had relinquished their discretion in respect of the Grant to the court and as a consequence, it was not open to any member of CIFF to vote against the resolution approving the Grant.

The High Court accordingly ordered Dr Lehtimäki to vote in favour of the resolution approving the Grant: Children’s Investment Fund Foundation (UK) v Attorney General and others [2017] EWHC 1379 (Ch). He appealed the decision.

Court of Appeal decision

The Court of Appeal agreed that Dr Lehtimäki was a fiduciary but held that the court did not have jurisdiction to order a member to exercise a discretion in a particular way absent a breach of duty: Lehtimäki v Children’s Investment Trust Foundation (UK) [2018] EWCA Civ 1605.

Pursuant to section 217 CA 2006 and section 201 ChA 2011, the Grant needed to be approved by a resolution of the members with the prior written consent of the Charity Commission. The Court of Appeal held that Parliament had expressly and specifically conferred that responsibility to members for charitable companies, in addition to companies without charitable objects. Partly for that reason, it would be inappropriate for the court to order a member to exercise such discretion in a particular way.

The Court of Appeal discharged the order against Dr Lehtimäki. Ms Cooper appealed to the Supreme Court.

Supreme Court decision

There were three issues for the Supreme Court’s consideration.

Issue 1: Fiduciary duties when acting as a member of a charity

The Respondents argued that Dr Lehtimäki did not owe fiduciary duties as a member of CIFF.

The Supreme Court found that a charitable company itself is analogous to a charitable trustee, in the sense that it holds its assets subject to a binding obligation to apply them for charitable purposes only. On that basis, it was held that members of a charitable company have fiduciary duties and owe a single-minded duty of loyalty in matters covered by that duty in the same way as charitable trustees.

The Supreme Court further held that fiduciary duties of members of a charitable company are shaped by the company’s constitution, as well as relevant legislation. The court made clear that the finding that a member is a fiduciary does not mean that there may not be matters on which a member can vote which only concern him personally and not the charity. It should also be noted that the court acknowledged that there may be a different outcome as regards members of mass-membership charities.

On this issue, the Supreme Court held that Dr Lehtimäki owed fiduciary duties which meant that he had to consider the best interests of CIFF’s charitable objects.

Issue 2: Court’s jurisdiction to intervene in the exercise of a fiduciary’s discretion

The Respondents contended that, even if Dr Lehtimäki was a fiduciary, he should not be directed to vote on the resolution approving the Grant as the court does not generally intervene in the exercise of a fiduciary’s discretion, absent a breach of duty.

A majority of the Supreme Court held that, once the trustees of CIFF had surrendered the exercise of their discretion to the court and the court had exercised the surrendered discretion in accordance with what would best further CIFF’s charitable purposes, the matter was resolved. The majority rationalised that, the concept that a fiduciary is entitled to form his own subjective judgment about a matter assumes that there are different conclusions about the matter which might reasonably be reached, but this is no longer the case where a court has decided the issue. Accordingly, it was held that as a fiduciary Dr Lehtimäki had to use his powers to implement the court’s decision and it would be a breach of duty for him not to do so.

Issue 3: Court’s ability to direct a member to vote on a section 217 CA 2006 resolution

The Respondents argued that section 217 CA 2006 precluded the court from directing Dr Lehtimäki to vote. The Supreme Court held that in the circumstances, where the court had found that the approval of a section 217 CA 2006 resolution would be in the best interests of the charitable company, the court could compel members to vote in a particular way.

On the basis of the above findings, the Supreme Court allowed the appeal and made an order requiring Dr Lehtimäki to vote in favour of the resolution approving the Grant. 

Comment

The Supreme Court has ruled that members of charitable companies have a duty to act in the best interests of the charity, although the precise scope of the duty owed can be limited by the company’s constitution and relevant law. The judgment implies that members of charitable companies limited by shares or by guarantee may owe the same duties to their charity as members of a Charitable Incorporated Organisation (CIO) pursuant to section 220 of the Charities Act 2011.

Further to the Supreme Court’s decision, it is clear that members of charitable companies fall within the court’s jurisdiction in the same way as charitable trustees. In this case, the trustees of the charity sought the court’s guidance on a transaction which required approval of the charity’s sole non-conflicted member, pursuant to company and charity law. In circumstances where the trustees surrendered their discretion to the court and the court found it was in the best interests of the charitable company to approve the transaction, it would have been a breach of duty for the member to fail to use his powers to implement the court’s decision. Accordingly, the court of first instance had acted within its power in directing the member to vote in favour of the transaction.

This landmark judgment will have significant implications for the role of members of charitable companies, although it should be noted that the court acknowledged that there may be a different outcome as regards members of mass-membership charities. It will be interesting to see how the Charity Commission responds to the Supreme Court’s ruling.

 

Richard Norridge
Richard Norridge
Partner
+44 20 7466 2686
Sarah Boyle
Sarah Boyle
Associate
+44 20 7466 7591