Court of Appeal decision about the duties of members of charitable companies

29 August, 2018

It all started with a …..divorce.

 

In 2013, hedge fund billionaire, Sir Christopher Hohn and his then wife, Ms Jamie Cooper were the subject of a high profile divorce

 

Following their divorce they both continued as members and trustees of the charity they created: The Children’s Investment Fund Foundation (UK) (CIFF). CIFF was set up to improve the lives of children in developing countries and, crucially in the context of what happened next, is a charitable company limited by guarantee.

 

Predictably perhaps, the differences between the couple gave rise to “real difficulties in the management of CIFF” and in April 2015 an agreement was reached which it was hoped would resolve the problems.

 

The crux of the proposal was for CIFF to make a grant of £280 million to a new charitable foundation (Big Win Philanthropy) set up by Ms Cooper. This grant was subject to approval by either the Charity Commission or the court and once the payment of the grant was approved, Ms Cooper agreed to remove herself from all further involvement with CIFF.

 

On paper it sounded pretty straightforward. However, the Charity Commission decided this was a matter for the courts and before the court could approve (or not) the making of the grant, it had to grapple with a long running debate, namely the potential conflict between company law and charity law in relation to charitable companies.

 

In April this year the case reached the Court of Appeal and the key questions for the court were these:

Question 1

Do members of a charitable company owe fiduciary duties in connection with their functions? In other words, is a member required to exercise their voting rights for the benefit of the charity.

Or are the voting rights of a member of a charitable company proprietary (as with a limited company) meaning, they can exercise their voting rights for their own selfish interests even if these potentially conflict with the interests of the company.

Question 2

If members of a charitable company do owe fiduciary duties to the charity, does the court have jurisdiction to direct members how to act in the absence of a breach of that duty?

 

The Court of Appeal decided that ‘Yes’, members of a charitable company do owe fiduciary duties in connection with their functions.

 

Unfortunately, the judgment did not give any detailed guidance on the extent of the duty other than to equate the duty with that of members of charitable incorporated organisations (CIOs) which doesn’t take us much further as s220 Charities Act 2011 simply says:

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.

However, the Court did stress that the duty is subjective – what matters is the member’s state of mind, as long as the decision is made in good faith.

 

Furthermore, the judgment did not consider the extent to which those same duties apply to other types of charitable companies such as charitable community benefit societies, charitable unincorporated associations, or Royal Charter or Act of Parliament charities.

 

The decision did consider briefly whether members of charities with very large memberships would also owe fiduciary duties to the charity suggesting (but not deciding) that it would be unrealistic for members of say the National Trust to be regarded as fiduciaries. What would happen for example if members were asked to vote on whether free parking for National Trust Members should be removed? (One way round this issue is to offer non-voting membership often described as ‘supporters’ or ‘friends’ of the charity)

 

Finally, the Court decided that it did not have jurisdiction to direct a member to exercise their discretion in a particular way (unless there is evidence of breach of duty).

 

In the present case, the only voting member is Dr Marko Lehtimaki as Sir Christopher and Ms Cooper accept that they are conflicted on this issue. Dr Lehtimaki indicated in evidence that he will vote against the grant and the Court of Appeal did not consider this to be a breach of duty. Interestingly, the High Court (who decided they did have jurisdiction to direct Dr Lehtimaki to vote in a certain way) directed Dr Lehtimaki to vote in favour of the grant partly it seems to avoid the costs and disruptive effect of further litigation. However, even the High Court recognised that the decision is not straightforward and said “it is not entirely clear why disposing of assets of US$360 million should be regarded as being in the best interests of CIFF

 

This decision has been long awaited and still begs a number of questions. However, we do at least now have some clarity regarding the nature of charitable company membership.

 

If you require advice on the appropriate vehicle for your charity, please contact Kate Arnold.

 

Link to judgment: Lehtimaki v Children’s Investment Fund Foundation (UK) and others [2018] EWCA Civ 1605 (6 July 2018)