The High Court has ruled that the members of a charitable company owe the charity fiduciary duties to act in its best interests and avoid conflicts of interest when deciding on resolutions that are put to them by the charity trustees.
This is the first time that the question of duties owed by members of a charitable company has been considered by the courts, and has significant implications for decision-making by members of charitable companies. It is likely to be particularly relevant where the membership comprises key stakeholders who have an important governance role, such as in academy trust companies. But, it will also be relevant whenever the members of a charitable company are required to consider a resolution put to them by the trustees.
The decision was made in the case The Children’s Investment Fund Foundation (UK) v HM Attorney General and others  EWHC 1379 (Ch), which related to the high profile divorce of Sir Christopher Hohn and Ms Jamie Cooper.
In 2002 the couple founded a charitable company called The Children’s Investment Fund Foundation (UK) (CIFF). The most recent published annual report and accounts for the charity show net assets of more than US$4 billion. After the couple's divorce in 2013, it was agreed that Ms Cooper would set up another charitable company – Big Win Philanthropy (BWP) – and CIFF would make a grant of US$360 million to BWP, provided that approval was obtained from the Charity Commission or the court. Ms Cooper agreed to retire as a member and trustee of CIFF once the court made its decision on whether or not to approve the proposed grant.
The case raised a number of technical charity law, company law and governance issues that required determination by the court. One of those issues was whether it was necessary to obtain approval of the grant from the members of CIFF under s217 Companies Act 2006, which would be the case if the grant was a payment to Ms Cooper for loss of office, within the meaning of s215 Companies Act 2006. The court’s conclusion was that member approval would be required, because the grant payment constituted a payment to a body corporate with which Ms Cooper was connected and was clearly being made in connection with her retirement from office as charity trustee of CIFF. This conclusion necessitated a consideration of the jurisdiction of the court over members of a charitable company, in order to determine whether or not the court could direct the members as to how they must vote on the resolution.
In considering this issue it was necessary for the court to also consider the nature of the interests of the members. The court began by stating the general, uncontested legal principle that “a member of a commercial trading company may vote his shares at general meeting in accordance with his own interests or wishes” and “a member of a commercial trading company does not, therefore, owe any fiduciary duties in respect of his voting rights”. However, in the case of charitable companies, the members “do not generally have a personal proprietary interest in their shares, as they cannot benefit personally from their membership”. So, there is a question as to whether or not the members of a charitable company owe a duty to exercise their votes in the best interests of the charity, which the court noted was a question that had “never been authoritatively determined”.
The Charity Commission has long held the view that the members of a charitable company owe it fiduciary duties. In its guidance on membership charities (RS7, published in 2004), it states that “the Charity Commission takes the view 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” because if “administrative rights can be exercised otherwise than in the interests of the institution, without a breach of trust or duty being committed, then the question arises whether the institution is in fact established for exclusively charitable purposes”. However, the Commission does acknowledge in the guidance that there is ‘uncertainty’ about this position as a matter of law, and that it has been argued that the members of a charitable company are in the same position as shareholders of a commercial trading company.
After a careful consideration of previous relevant case law and the development of charity law in general, the court concluded that the members of a charitable company do owe fiduciary duties to the charity. The reasons given were that “unlike the member of a trading company who has a proprietary interest in his shares, the member of the charitable company has powers that are all directed at aspects of the management and administration of the charity designed to achieve the charity's exclusively charitable objects”, so members “do not stand outside the charity; they are part of the administration of the charity, and they cannot lay claim to any private interest”. The court expressly concurred with the passages from the Charity Commission's RS7 guidance regarding the duties of members when exercising their votes, and stated that “it would be contrary to the whole regime established by the increasingly prescriptive legislative regime reflected in the Charities Act 2011 if the member of a company such as CIFF could vote in his own interest or in a manner detrimental to the charitable objects of the company”.
The decision of the court on the question of fiduciary duties being owed by members of charitable companies is very clear. However, it is interesting to note the context in which the decision was made.
The members of CIFF at the time of the case were Sir Christopher, Ms Cooper and Dr Lehtimaki. The court had already concluded that Sir Christopher and Ms Cooper were contractually prohibited from voting on the members’ resolution, as they had entered into agreements confirming that they would not vote. Therefore, this left only Dr Lehtimaki entitled to vote on the resolution, and it was noted by the court that, given the evidence he had submitted during the proceedings, it was “perhaps more likely than not that, if he were required to vote on a members’ resolution under section 217 of the Companies Act 2006, he would vote against the making of the Grant”.
The court's decision on the central question of whether or not to approve the grant was that it should be approved. This decision was reached, in part, due to a desire to "bring a conclusion to this incredibly hostile dispute and the governance problems that it has created for CIFF" and "avoid further legal and other expenses being incurred". It might therefore seem unsurprising that the court concluded that members owe fiduciary duties and that it had jurisdiction to direct them as to how to exercise their votes. If the court had concluded otherwise and Dr Lehtimaki had subsequently voted against the making of the grant, this would, in the court's view have been ‘remarkable’, as it would mean that the High Court, "having reached a reasoned and considered decision… had to defer to the eccentric, if good faith, decision made by a single member".
It will be interesting to see whether or not this decision is challenged in future cases, particularly if a situation arises where the facts do not result in it being desirable for the court to find that fiduciary duties exist for the members of a charitable company. In the meantime, given the clear decision of the High Court in this case, and its endorsement of the guidance set out in the Charity Commission's RS7 guidance, charities should ensure that members understand that they need to exercise their votes in the best interests of the charity and should not vote on matters where they have a conflict of interests. This might result in the need for changes to governance structures within some charities, particularly where the trustees and the members are identical.