Court compels charitable company member to vote under fiduciary duty

Lehtimäki and ors v Cooper marks a turning point in which the Supreme Court has attempted to clarify some of the practical issues about the governance of charitable companies. It ruled that members of charitable companies (not just directors) owe fiduciary duties to make decisions in accordance with their charitable objects and purposes, and that the law does not prevent the court from directing members to vote in a certain way.

The duties of charitable trustees, which in the context of charitable companies are its directors, can be complex with the potential exposure to liabilities. The Lehtimäki case considered whether members of charitable companies also owed certain duties; for a non-charitable company, members or shareholders usually exercise their own discretion as to how to vote and act in their own interest.

Background of the case

• Children’s Investment Fund Foundation (UK) (CIFF), a company limited by guarantee without a share capital and a registered charity, was founded by a married couple, Sir Christopher Hohn and Ms Jamie Cooper.
• After the breakdown of their marriage, the couple agreed that in exchange of a $360m grant to Big Win Philanthropy, also founded by Ms Cooper, Ms Cooper would resign as a member and trustee of CIFF.
• The grant/payment was subject to approval from the Charity Commission or the court. In this case the Charity Commission authorised the court to decide in accordance with the Charities Act 2011 (ChA 2011).
• As the approval of the grant caused a conflict of interest, it was proposed that only one member, Dr Lehtimäki, would vote on any resolution required for the grant to be made. Mr Hohn and Ms Cooper surrendered their discretion to vote on the transaction to the court.
• Dr Lehtimäki was named in the court proceedings and it was assumed that as he was not conflicted he would be entitled to exercise his discretion as to how to vote under section 217 of the Companies Act 2006 (CA 2006).
• The Court of Appeal agreed with the High Court’s decision in part, that members of a charitable company owed a fiduciary relationship and that the requirement under CA 2006, s 217 was relevant. However, the Court of Appeal held that the courts could not compel a member to vote in favour of a resolution as to do so might be contrary to the legislative intention of CA 2006. The matter was then appealed to the Supreme Court.

What did the Supreme Court decide?

The Supreme Court considered whether:

• Dr Lehtimäki, in his capacity as a member of the charitable company limited by guarantee, owed a fiduciary duty to act and vote in accordance with the company’s charitable purposes and objects
• the facts of the case engaged CA 2006, s 217 which states a company may not make a payment for loss of office to a director of the company unless approved by the members, and if Dr Lehtimäki is a fiduciary, whether the court can exercise its jurisdiction over fiduciaries in relation to Dr Lehtimäki
• the court had the power to direct a member of a company (in this case Dr Lehtimäki) on how to exercise his discretion in which way to vote.

The court concluded that members of a charitable company had a fiduciary relationship, CA 2006, s 217 and the court’s jurisdiction was engaged and the court had the power to direct members how to vote, ordering Dr Lehtimäki to vote in favour of the CA 2006, s 217 resolution to approve the grant/payment.

Fiduciary relationship

The Supreme Court decided that all members of charitable companies limited by guarantee owe a fiduciary duty of single-minded loyalty to the company’s charitable purposes. Judge Lady Arden held that fiduciary duties are:

• “tailored to fit within the corporate vehicle”, i.e. in accordance with the company’s constitution and applicable law
• not owed in all circumstances in which the member has powers to act and therefore each case needs to be reviewed individually.

The court’s influence on members’ decisions

The Supreme Court held that it can direct members of charitable companies how to vote as they are part of the administrative machinery of a charitable institution that is subject to the court’s inherent jurisdiction concerning charities. In this case, Lady Arden explained that the “unchallenged conclusion” of the court was to direct the member to vote in favour of the resolution because it was in the best interests of the charity.

Whilst all five Supreme Court judges hearing the case agreed on the outcome of the three points, there were some points of difference as to what gave rise to the court’s power to intervene and direct members on which way to vote.  Lord Briggs, one of the Supreme Court judges hearing the appeal, suggested that just as CA 2006, s 217 provides for members to veto director decisions on the use of company funds, the motivation behind ChA 2011, s 201, which requires the consent of the Charity Commission to approve the use of charity funds, is to ensure that decisions are made in accordance with the charity’s objects. Therefore, it was the view of the majority of the judges in this case that the court can direct members, if fiduciaries, to vote in accordance with their fiduciary duties “if they are minded to do otherwise.” Lord Briggs explained that “that the court’s jurisdiction to intervene in the affairs of charities extends beyond its trusts jurisdiction more widely than just in relation to schemes” going on to say:

“when the very question in issue [whether to approve the proposed grant to Big Win Philanthropy] has been finally decided by the court in proceedings in which the fiduciary [Dr Lehtimäki] has been joined as a party and been heard, then there is no longer any legitimate debate. The duty of the fiduciary is then to use his powers so as to give effect to the court’s decision about the company’s best interests, however much he may disagree with it. If he finds that he cannot in conscience do so, then he should resign.”

The impact of the Lehtimäki case on the charity sector

The Supreme Court confirming that a fiduciary relationship extends to members of charitable companies seems in line with the purposes of charity law but we will need to monitor (a) how such principle applies to mass member charities and (b) the apparent extension of the court’s interventionist authority to direct member decisions, both of which may well be finessed in years to come. Indeed, the court reserved judgment in respect of mass member charities.