What are the duties of a charitable company’s members?

Summary

On 29 July 2020 the Supreme Court published a significant judgment on whether members of a charitable company limited by guarantee owe fiduciary duties to the company’s objects. The Court found that they do and confirmed that it applies to members of all charities, from mass membership charities to small charities.

The case involved the Children’s Investment Fund Foundation (CIFF); Lehtimaki & Ors v Cooper [2020] UKSC 33 (29 July 2020) and can be read in full here.

The provisions of the Companies Act 2006 that allows companies, including charitable companies, to dispense with AGMs (unless their Articles of Association require one to be held) has reduced member involvement in routine constitutional business in recent years. This case provides further encouragement for charitable companies to review their membership structure with a view to tailoring governance to deal as effectively as possible with the formal business of the charity, whilst engaging more meaningfully with stakeholders and supporters.

Ann Phillips provides commentary on the background to the case and the Supreme Court’s judgment.

The background to the case

The Children’s Investment Fund Foundation is a charitable company with more than $4bn in assets which helps children in developing countries. It was founded by Sir Christopher Hohn and Ms Jamie Cooper in 2002. Difficulties in management arose when their marriage broke down and, in conjunction with their divorce, steps were taken to resolve the difficulties in the charity. Specifically, they agreed that in exchange for a grant of $360 million to Big Win Philanthropy, a charity founded by Ms Cooper, she would resign as a member and trustee of CIFF.

CIFF’s members had to approve this grant. CIFF has only three members, two of whom, Sir Christopher and Ms Cooper, had to recuse themselves from the vote. The third member, Dr Marko Lehtimaki, was therefore the only member who could vote on the proposal.

The Chancellor of the High Court held that the grant would be in CIFF’s best interests and ordered Dr Lehtimaki to vote for the resolution approving the grant.

Dr Lehtimaki appealed against that order, and the Court of Appeal allowed the appeal holding that, in the absence of a breach of fiduciary duty, the court could not direct Dr Lehtimaki on how he should exercise his powers. Ms Cooper then appealed that decision.

The issue before the Supreme Court and the Supreme Court’s decision

The issue before the Supreme Court was therefore whether Dr Lehtimaki could be directed by the court to vote in favour of the proposed grant. The Supreme Court has now held that he was a fiduciary when acting as a member of CIFF; that circumstances have arisen such that the court could direct him to vote in favour of resolution approving the grant, overriding the usual ‘non-intervention’ principle, and that this was not precluded by s.217 Companies Act (which requires a payment to a director for loss of office to be approved by the members and the Charity Commission).

The Charity Commission’s view and duties of members of CIOs

It is surprising that the nature of membership in a company limited by guarantee has not previously come before the courts, especially given that, as the judgment notes, some 33,000 guarantee companies are registered charities.

The Charity Commission has long held the view that members of a charitable company are required to exercise their powers in the best interests of the charity, so are effectively in a fiduciary position. The opportunity was taken to deal with this point in relation to Charitable Incorporated Organisations (CIOs) when they were introduced in 2006, with a provision that “Each member of a CIO must exercise the powers that the member has in that capacity in the way that the member decides, in good faith, would be most likely to further the purposes of the CIO” (now s.220 Charities Act 2011). Doubts have been expressed, however, as to legal basis for the Commission’s position on the nature of a member’s role in a guarantee company. The Supreme Court judgment puts this matter beyond doubt.

The nature of a member’s fiduciary duties

The Supreme Court judgment concludes that a member of CIFF owes a fiduciary duty to the charitable purposes, and that duty is one of single-minded loyalty. In the CIFF case, the duty requires that Dr Lehtimaki considers whether the resolution should be passed and that he do so only by considering the best interests of the objects of the charity because the grant involves a disposition of assets that would otherwise be available for those objects. Unlike the Court of Appeal, which reached the same conclusion but chose not to consider whether this was a principle that applied more widely, the Supreme Court judgment states that the same principle applies to members of all charitable guarantee companies which have (as will be usual) provisions which restrict member benefit. It will therefore apply not only to those with a small and “closed” membership, such as CIFF, but also to charities with a wide public membership.

Motivations for becoming a member of a charity are of course many and varied: from allegiance to the charity’s purposes or mission, to being able to vote in electing trustees and having a say in decision-making, through to securing nominal membership benefits – and often a combination of these factors. Does the finding that members owe a fiduciary duty to their charities’ objects cause difficulties for members in the standard interactions they may have with their charities? And what does a fiduciary duty mean in practice for charity members?

A number of different scenarios were raised. For example, how should conflicts of interest be managed, say where a member is a member also of a ‘competing’ charity? Does the member’s fiduciary duty carry with it an obligation to attend general meetings as, if so, this will require members to be considerably more attentive to a charity’s affairs than is usually the case.

Can a proxy general properly be appointed? Does the duty require members to inform themselves on issues they are to decide and what level of information can they require to be given by the company? Can members require to be indemnified against the costs of attending meetings and taking any legal advice? If a member acts in breach of his or her fiduciary duty, can the company seek compensation? There is guidance on some but not all of these matters in the judgment, with the court indicating that these matters should be determined as and when they arise.

The judgment states that the law “allows the duties of a fiduciary to be fashioned to a certain extent by the arrangements between the parties” that is by the contents of the company’s Articles of Association as well as by company legislation and the general law. So, there is no problem, for example, in a member delegating voting rights by granting a general proxy if that is what the articles and the Companies Act permit. Articles of Association can be amended to reduce a member’s obligations, so long as there remains an “irreducible core” of duties to act honestly and in good faith for the benefit of the beneficiaries. So, the judgment states, “there must be some fiduciary duty which the court can enforce but it need not extend to the full range of fiduciary duties which a fiduciary might owe”.

How does this affect rules around members receiving benefits from their charity?

In considering benefits and conflict situations, the judgment refers to the fact that, under charity law, the rule that members should not receive benefits from their charity is tempered by allowing incidental benefit provided that this is authorised by the Articles of Association. The judgment notes that this does not, however, entitle a member to vote on any resolution allowing him a benefit, even one authorised by the Articles of Association, nor does it of itself disapply the duty to declare an interest in a matter. It would seem that difficulties could arise therefore in passing a resolution altering articles where the potential member benefits are to be extended, even within limits permitted under charity law.

In relation to rights to information where a member who is acting in a fiduciary position, the judgment states that there is no entitlement to any further information than that to which members of a company registered under the Companies Acts are entitled under those Acts or the general law. Of course, Companies Act provisions will have been developed primarily with non-charitable companies in mind – where members have a proprietary interest not a fiduciary role and the checks and balances of having membership have a very different dynamic. The judgment acknowledges that the absence of entitlement to information is a limit on the fiduciary role, but that this is not inconsistent with the member having a fiduciary position because it is imposed by the structure which has been adopted for the administration of the charity: “essentially a contract-and-statute-based model of fiduciary duty”.

On the basis of the contract-and statute-based model, the judgment states that the fiduciary duty of a member of a charitable company must be drawn more narrowly than a duty to act in the way that would be most likely to further the purposes of that company, as the Court of Appeal had suggested. The argument that the duty should be the same as the duty of a CIO member was also rejected on the basis it would subject the member to the duty in all circumstances and that it is not necessarily an exhaustive statement of the relevant duty nor, contrary to common assumption, is it clearly a fiduciary duty. Instead, the judgment draws a distinction between duties of a member which involve a duty of single-minded loyalty and those which do not, “on which only the members qua private individuals have an interest”. Examples are given of member benefits provided at no cost to the charity, which have nothing to do with the member’s constitutional role in the charity’s affairs.

As the judgment states, the precise circumstances in which the member of a charitable company has fiduciary duties in relation to the charitable purposes and the content of those duties will have to be worked out when they arise. The judgment therefore sets out a nuanced position in relation to members’ fiduciary duties which is less rigid than a uniform standard and duty and is potentially more suitable to charity membership. However, whilst in many cases the powers being exercised by members will fall clearly into the constitutional category, with concomitant fiduciary duties, there will be cases which are not easy to classify. Guidance from the Charity Commission would certainly be welcome.

Relevance to membership charities which are, in fact, support groups

These difficulties do not apply to charity “memberships” which are in fact purely support groups, although their members are often called “members” of the charity. Such members are not members under the Companies Act and sit outside the company’s constitutional structure. To many charity supporters, this type of membership has all the advantages that they are looking for: they usually receive regular updates and communications from the charity; may have opportunities to meet or involve themselves in the charity’s operational work, and may receive other nominal benefits.

Companies Act provisions regarding AGMs

The Companies Act 2006 removed the requirement to deal with specific items of business at AGMs and with that the requirement to hold an AGM every year unless the company’s Articles of Association require it. Many companies, charities amongst them, have taken advantage of this and so, in practise, the involvement of members in routine constitutional business has been greatly reduced. The CIFF case provides further encouragement for charitable companies to review their membership structure with a view to tailoring governance to deal as effectively as possible with the formal business of the charity whilst engaging more meaningfully with stakeholders and supporters.

Further questions that the Supreme Court considered

Having decided on the question of whether Dr Lehtimaki is a fiduciary, the Supreme Court went on to consider whether the circumstances were such that he could be directed by the court as to how he should exercise his powers. Whilst it was held that the court could do so, there was a divergence of opinion as to the basis for this (and Lord Reed expressed a contrary view although not formally dissenting). The majority view was based on the fact that once the court had determined the matter, following the surrender of discretion to the court by the Trustees, it would bind the members and not be open to a member to exercise powers in a way which would not give effect to the court’s determination. The minority view was based on exception to the principle that courts would not intervene in the exercise of a fiduciary’s discretion, short of breach of trust, where there was an existential threat to the operation of the charity. The court’s jurisdiction in this respect was held not to be displaced by statute conferring the power on members.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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