Do members of a charitable company owe fiduciary duties?


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Whilst it has long been established that trustees and directors owe fiduciary duties to a charity, it has not previously been considered or confirmed by the Court whether members of a charitable company owe fiduciary duties.

The Charity Commission's published view (in Guidance RS7) has been that "members have an obligation to use their rights and exercise their vote in the best interest of the charity for which they are a member", but it has never gone as far as to frame this as a fiduciary duty.

The case of Lehtimaki v Cooper [2020] UKSC 33 considered this point specifically and has a number of implications for the charitable sector.

Background

The Children's Investment Fund Foundation (UK) (CIFF) was established in 2002 by Sir Christopher Hohn and Ms Jamie Cooper. They were married at that time, but the relationship later broke down. Governance issues arose within CIFF as a result, and it was agreed that Ms Cooper should resign as a member and trustee of CIFF, and that CIFF should grant $360 million to a new charity established by Ms Cooper. CIFF's assets were valued in the region of $4 billion.

Section 217 of the Companies Act 2006 (CA 2006) provides that payments made by a company to a director in connection with a loss of office must be approved by the members. In accordance with section 201 of the Charities Act 2011, any such payments must also be approved by the Charity Commission. The trustees of CIFF agreed unanimously that the grant to Ms Cooper should be made, subject to the approval of the Charity Commission or the Court. The Charity Commission authorised the trustees to seek the Court's approval for the Grant. While there were eight trustees, there were only three members: Sir Christopher, Ms Cooper and Dr Lehtimaki, a friend of Sir Christopher's from university. Since Sir Christopher and Ms Cooper were conflicted, Dr Lehtimaki was the only member able to vote on the making of the Grant.

Journey through the courts

Various points of law were considered in the initial High Court case, which went to the Court of Appeal and eventually the Supreme Court. The factual circumstances of the case are unusual and (given the sums involved) unlikely to be repeated, but there are important ramifications for the wider charity sector in the Supreme Court's judgment.

The Court held that Dr Lehtimaki owed fiduciary duties to the company and had to consider the best interests of CIFF's charitable purposes when exercising his voting rights to approve the payment of the grant. It found that members of charitable companies have fiduciary duties and owe a "duty of single minded loyalty" to the company's charitable purposes.

Counsel for CIFF raised a number of practical difficulties this conclusion posed for members of charitable companies, including:

  • Whether members ought to declare interests before meetings
  • Whether a member with a conflict of interest can vote (particularly if they are members of more than one charity in the same field)
  • Whether a member has a duty to vote and attend meetings
  • Whether members can receive benefits from the company
  • Whether a member would have to investigate a matter before they could vote on it, and what information they could require from the company
  • Whether a member is entitled to be indemnified for the cost of attending a meeting of the company or for the cost of taking legal advice

Comment

The Supreme Court judgment did not consider each of these points in turn, but found that the exercise of fiduciary duties by members must be considered in the "full context of the potential exercise of discretion". The Court was clear that the general principle that members are fiduciaries applied equally to all charitable companies, including those with large memberships.

Members of charitable companies may now, understandably, want to think more carefully about how they exercise those rights when voting on common matters such as changes to the articles of association and the appointment or removal of trustees. Members will want to consider any conflicts they may have, whether the issue they are considering might confer a benefit on them and ultimately, what is in the best interests of the company's charitable purposes.

Given the high profile nature of this case, the Charity Commission is expected to produce guidance on the nature of the fiduciary duties owed by members of charitable companies.

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