Amending governing documents – coming changes

The last edition of Essentials reported on the Government response to the Law Commission’s recommendations on charity law. The Law Commission’s focus was on technical issues in charity law which hamper charities, chief amongst these being the assorted rules for amendment of governing documents. Against the backdrop of the last 12 months, the Law Commission’s words in its 2017 report have a prophetic quality, “with the passage of time, new needs will arise and unforeseen eventualities will occur, requiring charities to amend their governing documents to ensure their continuing effectiveness.”

Following the Government’s acceptance of the key recommendations, the Law Commission is revising its draft Bill, so there are hopeful signs of progress. For many charities, particularly unincorporated charities, these changes will be welcome, providing greater flexibility to respond to changes in demand, different financial conditions and to governance strains brought into sharp relief by the pandemic.

The changes in outline

One of the guiding principles behind the changes to amendment of governing documents is, insofar as possible, to align rules applying to different types of charity so that the ability to make changes and the basic procedural requirements no longer depend on the charity’s legal form. The main changes are:

• a new power for all unincorporated charities to amend provisions in their governing document, re-casting and clarifying the various statutory powers which currently exist;
• a standardised test for the Charity Commission to apply when considering whether or not to consent to a proposed change of purposes irrespective of the legal form the charity has;
• closer alignment of the rules governing changes to the constitutions of charitable incorporated organisations (CIOs) and the Articles of Association of charitable companies; and
• a statutory power for Royal Charter charities to amend their governing documents with the consent of the Privy Council, and easing of the requirements for amendment of some statutory charities.

 

Unincorporated charities - changes to governing documents

In the absence of express powers of amendment, unincorporated charities can currently amend their powers or procedures using the power in s.280 Charities Act 2011 but can amend their charitable purposes only under the so-called “small charities” power if they have gross income below £10,000 or if the necessary conditions are met for the Charity Commission to amend the purposes “cy-près". For a change to be made cy-près one or other of the specified cy-près “occasions” have to have arisen. There are often situations in which trustees consider a change would be helpful but it is not possible to establish that a cy-près occasion exists and so unincorporated charities do not have the same flexibility to amend purposes enjoyed by charitable companies or CIOs.

The Law Commission has taken a root and branch approach to amendment of the existing provisions. The Charities Bill will therefore introduce a new power to amend any provision of an unincorporated charity’s governing document (subject to requirements for the Charity Commission’s consent similar to those for charitable companies). This will replace the existing power for small unincorporated charities to alter purposes or transfer property to another charity and for all unincorporated charities to amend their administrative provisions. It will supplement, not replace, the Charity Commission’s cy-près powers, but given the new power will be less restrictive, and does not require the charity to establish that a cy-près occasion exists, it is likely that cy-près will wither on the vine.

The new power is to apply where the charity trustees are satisfied that it is “expedient in the interests of the charity”. Any provision in the charity’s governing document may be altered but the Charity Commission must approve the following types of amendments:

• amendments that would require the Charity Commission’s consent if they were made by a charitable company, that is amendments to charitable purposes, trustee benefit provisions or the dissolution provisions;
• amendments to permanent endowment restrictions;
• amendments that (aside from the statutory power) require the consent of a third party, unless that person consents or has died or (if an institution) is no longer in existence;
• amendments that would affect rights conferred by the governing document on any named person or office holder (other than that of a trustee or member) unless consent is obtained or that person has died or (if an institution) is no longer in existence; and
• any amendment that would confer power on the charity trustees to alter these restrictions.

The test the Commission must apply when deciding on changes to purposes will be the same test as will apply for all other types of charity (see below).

So far as the mechanics are concerned, for a charitable trust the power requires a 75% majority resolution of the trustees. In the case of unincorporated charities with a membership body, the requirement is for a simple majority resolution of trustees and a 75% majority resolution passed by the members. Alternatively, the members may give approval at a meeting without a vote but with no dissent on the matter. This is a helpful backup but most charities will wish to have the clarity and certainty of a formal resolution. If no meeting is held a unanimous written resolution is required.

The resolution can specify a date on which the resolution takes effect (subject to the Charity Commission having given prior consent) but if no date is specified, the resolution will take effect on the later of the date of the resolution and the Charity Commission’s consent.

The new power will replace the cumbersome wording in the current power to make changes to administrative powers and procedures and remove the uncertainties that grew from it. It will be clear that all provisions of a governing document can be amended, subject to the Charity Commission’s consent for certain specific categories of amendments. Of greatest significance, however, is that under the proposed new power, a cy-près occasion does not have to have arisen for an unincorporated charity to amend its charitable purposes (subject to the Charity Commission’s consent based on the new standard test).

These proposed changes will be useful, not least in providing additional flexibility to help charities to adapt to the ongoing impact of conditions over the last year, facilitating charity collaborations and mergers, as well as helping charities deal efficiently with more routine updating of governance provisions. Some may lament the disappearance of the “small charities’” powers to alter purposes and transfer funds (without the Commission’s consent in advance, but subject to the Commission having a power to object) but in practice this is more than matched by the overall liberalising effect of the proposed new provisions.

A new standard test for approval of changes to charitable purposes

Under the Charities Bill, the Charity Commission will be required to apply a new test when considering changes of charitable purposes by charitable companies, CIOs or unincorporated charities using the new powers of amendment (rather than the cy-près regime).

The Commission will in each case have regard to:

• the purposes of the charity when it was established;
• the desirability of securing that the purposes are, so far as reasonably practicable, similar to the purposes being altered; and
• the need for the charity to have purposes which are suitable and effective in the light of current social and economic circumstances.

The implications for trusts and other unincorporated charities

For unincorporated charities the new test bears clear similarities to the factors the Commission must take into account when assessing how charitable purposes might be changed cy-près. The reference to the purposes of the original gift reflects, to an extent, the cy-près assessment of the “spirit of the original gift” albeit without capturing the context and founding motivation behind the original gift. The small difference that assessment be made of the desirability of securing that the new purposes are “similar” to the existing purposes rather than “close” to those purposes under the cy-près regime is unlikely to be significant in practice. For unincorporated charities, therefore, the assessment of the new purposes under the new power will be similar to the cy-près assessment (but without the need to first establish that a cy-près occasion has arisen).

Implications for charitable companies and CIOs

For charitable companies, however, the new test is markedly different and potentially more restrictive than the policy the Charity Commission currently applies which has become more liberal over recent years. In its operational guidance, the Commission states that when considering changes in charitable purposes requiring consent, it applies three essential “tests”:

• whether the proposed new objects are exclusively charitable;
• whether the trustees’ decision to make the changes is a rational one in the circumstances of the charity; and
• whether the new objects undermine or work against the previous objects.

The Commission’s operational guidance also states that “as long as the trustees have given us a convincing explanation as to why their proposed changes are in the charity’s best interests, we should not reject their proposals simply because the revised objects are significantly different from existing objects”. There is a caveat to this which is that objects which are significantly different should not undermine or work against the original objects (the Commission refers to the 1907 case of the Cyclist Touring Club, where the company wanted to extend its cyclists protection object to include motorists and consent was refused on the basis that this could adversely affect the original objects as it was motorists that cyclists needed to be protected from!).

Concerns have been expressed, therefore, that whilst the new provisions will be liberalising for unincorporated charities, the similarity requirement in particular will be more restrictive for charitable companies and CIOs than the existing regime. The Law Commission took account of this but concluded that the reference to similarity between the proposed new purposes and original purposes would best achieve a suitable balance between the wishes of the settlor or founders of a charity and what is expedient in the interests of the charity in changed conditions.

The change may also be less significant than feared. The Commission does already take some account “similarity” of purposes when assessing whether a decision to change a charitable company’s objects is reasonable. The operational guidance says that the Commission expects trustees to consider whether the proposals seem broadly consistent with what the charity was set up to do, taking into account modern social and economic conditions. In addition, although the test will require the Commission to consider the desirability of securing that the property is  held on trusts similar to the existing trusts, this should not be restrictively applied in a way that presupposes similar trusts are desirable – they may not be. This point is likely to be considered by the Court shortly when a ruling is made as to how the National Fund’s property should be applied cy- près – whether in a way which is very similar to the existing objects (to repay the National Debt) or for some other charitable purpose, where the funds might have greater impact.

It is not yet clear, therefore, to what extent the Commission’s approach to object changes for incorporated charities will change as a uniform approach is applied to incorporated and unincorporated charities alike, in particular as the assessment of “similarity” of the old and new purposes is applied

The Commission will no doubt issue guidance once the proposed new provisions are in force but charitable companies and CIOs considering changes in their charitable purposes will wish to consider whether these changes might be more readily introduced now, with the benefit of the existing practices other than under the new test.

Other changes for charitable companies and CIOs

In a further move to align the law across all different charitable forms, the Charities Bill will change the definition of “a regulated alteration” so far as concerns changes in objects of a charitable company to match that applying to a CIO. Reference to an amendment “adding, removing or altering a statement of the charity’s objects” will be replaced by reference to amendment “which alters the charitable purposes of the company”. Helpfully, this will ensure that changes in a statement of a company’s objects that are not material to the charitable purposes are not treated as regulated alterations. It also makes it clear that regulated alterations cover changes to provisions (such as a definition or a restriction on a power) which affect the substance of a charitable purpose but which are not contained in the company’s statement of purposes.

There are also proposed changes in procedural “mechanics” for CIOs making amendments to their constitutions. Under the new provisions in the Charities Bill, changes in a CIOs constitution (other than changes to purposes) take effect on the date of the relevant resolution, or a later date set out in the resolution, rather than the date the change is registered by the Charity Commission. Changes to a CIO’s charitable purposes will, however, still take effect only once registered by the Charity Commission and all regulated alterations will continue to be valid only if prior consent of the Charity Commission has been obtained.

This change will be helpful for CIOs to avoid unnecessary confusion over the timing of introduction of constitutional changes, as well as allowing CIOs like companies, to determine when changes should come into effect.

Constitutional change for Royal Charter Corporations and statutory charities

Last but not least the Law Commission recommended some limited changes in relation to amendment of the governing documents of Royal Charter and statutory charities.

Under the proposed Charities Bill, Royal Charter charities would be given a statutory power to amend their Royal Charters, subject to the amendment being approved by the Privy Council. The Privy Council in practice deals with such applications by consulting its relevant advisers, including the Charity Commission in relation to changes which would be “regulated alterations”. This change will, however, be significant for the many Royal Charter charities, typically those established many years, or even centuries, ago which have no power of amendment written into their original charters. It will mean that changes to a charter can be made without the need for a supplemental charter to be granted; instead it will be possible to follow the simpler procedure for an Order in Council approving the change.

Royal Charter charities without a membership other than their trustees, will be able to approve a change in the charter under the new procedure on a resolution on a 75% majority of its trustees. Otherwise a resolution of a majority of the trustees and a further resolution at a General Meeting of members passed on a 75% majority will be required. Failing that, a decision of a General Meeting without a vote and without any dissenting voices will suffice or, if a decision is not made at a meeting, a unanimous resolution will be required. The amendments take effect only on the date on which the Privy Council grants consent.

Amendment of statutory charities is complex, lengthy and not for the faint-hearted. The new Charities Bill will afford a modicum of comfort. An amendment of all statutory charities, irrespective of whether they are established under private or public general Acts, will be subject to the simpler negative resolution procedure. This would still allow for Parliamentary oversight of the measure but would not require Parliamentary time for debate, so easing the process for charities established under public general Acts.

And the timing?

The Law Commission is currently revising its draft Charities Bill to take account of the Government’s response to the various proposed changes it covers.

We do not yet know when parliamentary time will allow the introduction of the Bill and whether it might be dealt with under the fast track procedure. It is, however, encouraging to see in Baroness Barran’s Ministerial foreword to the Government’s response, the view that the Law Commission’s proposals have broad support, which suggests that the fast track procedure is likely to be adopted. We will be maintaining a watchful eye.