Can charitable members be compelled to vote in favour of a resolution? This was the question that the Court of Appeal had to answer in the recent case of Lehtimãki v The Children’s Investment Fund Foundation (UK) and Others .
The charity's background
Dr Lehtimãki was a member of The Children’s Investment Fund Foundation (UK) (CIFF), a company limited by guarantee without a share capital, a common method of incorporation for charities in today’s society.
CIFF was incorporated on 8 February 2002. Its aim is to improve the lives of children in developing countries. CIFF was founded by Sir Christopher Hohn and his then wife, Ms Jamie Cooper. It has only ever had a few members, in July 2018 these were Sir Hohn, Ms Cooper and Dr Lehtimãki. There have also been numerous trustees, including Sir Hohn, Ms Cooper and Dr Lehtimãki, until he resigned in 2009. At the time of the hearing, Dr Lehtimãki was, therefore, a member but not a trustee.
The background to court proceedings
The origins for the court proceedings arose from the breakdown of Sir Hohn’s relationship with Ms Cooper. As part of the divorce proceedings, an agreement was reached wherein it was agreed that CIFF would make a grant of some $360m to a new charity set up by Ms Cooper, known at the time as the New Foundation, subject to approval by the Charity Commission or order of the court. It was further agreed that upon determination of the grant application, Ms Cooper would resign as a member and trustee of CIFF, regardless of the outcome of the grant application.
Lastly, it was agreed, again regardless of the outcome of the grant application that following Ms Cooper’s resignation Sir Hohn would arrange for the New Foundation to benefit from a further $40m from monies which he or an entity he controlled would otherwise be entitled to. At that stage, Ms Cooper was also to arrange for the New Foundation to benefit from a yet further sum of $40m from monies which she or an entity she controlled would otherwise be entitled to, although these monies were only to be paid if the grant application was successful and following payment of the further £40m from Sir Hohn.
Unfortunately, when agreeing on the above, no consideration had been given to the provisions of the Companies Act 2006 (“the Act”) as regards the making of payments to past directors.
Section 215 of the Act defines “payment for loss of office” as including a payment to a director or past director of a company “as consideration for or in connection with his retirement from his office as director of the company”.
For the purposes of Sections 217 to 221 “payment to a person connected with a director...is treated as a payment to the director”. Section 217(1) provides that a company “may not make a payment for loss of office to a director of the company unless the payment has been approved by a resolution of the members of the company”.
High Court decision
As a result of these provisions, the question for the court to determine was whether the grant would amount to a payment for loss of office (in light of Ms Cooper’s resignation) within the meaning of Section 215 of the Act so as to require the approval of CIFF’s members under Section 217.
As Sir Hohn and Ms Cooper had a conflict of interest in relation to the proposed grant it had been agreed that neither of them would vote on the application for the grant. This, therefore, left the matter to be determined by Dr Lehtimãki.
The court concluded that members of CIFF owed “fiduciary duties to act in the best interests of CIFF and not to act under a conflict of interest in considering a Section 217 resolution”. In this case, both the Charities Commission and CIFF’s trustees had decided that their discretion to approve the grant should be exercised by the court. That discretion had now been exercised.
CIFF’s management is divided between trustees and members for specific purposes. However, the trustees, in relinquishing their discretion (as regards the application for the grant) to the court and the court order, now bound CIFF in deciding that the grant should be made. As a result, whilst the members must pass a resolution under Section 217 to approve the grant, it was not open to any member to vote against that resolution. The member does not have a free vote because he has fiduciary duties to act in the best interests of CIFF and not to act in a conflict of interest when considering a Section 217 resolution. The court has approved the grant as being in the best interests of CIFF and exercised its discretion and that discretion must be respected.
Whilst the court found the decision to be a difficult one, in the end, it ordered Dr Lehtimãki to vote in favour of the resolution, therefore, approving the grant under Section 217. Dr Lehtimãki appealed the decision.
Court of Appeal decision
On appeal, Dr Lehtimãki argued that the court had no jurisdiction to direct him to vote in favour of a resolution to approve the grant. He stated that CIFF’s members were not fiduciaries and even if they were, the court would not be entitled to intervene. Far from having fiduciary obligations, as a member, he was entitled to vote in his own interest, without regard to the interests of the charity.
Dr Lehtimãki had a role assigned to him by Section 217 and the court could only interfere with the exercise of his discretion if he were acting in breach of duty, which he was not. Dr Lehtimãki was supported in his position by Sir Hohn. However, Ms Cooper sought to agree with the court’s findings in the first instance, contending that the court was right to conclude that Dr Lehtimãki had fiduciary duties. She further stated that the court had an inherent jurisdiction to supervise, control and give directions for the regulation of the administration of a charity where the court considered it expedient. Dr Lehtimãki, she said, remained subject to this jurisdiction whether or not he was regarded as a fiduciary and, as a consequence, the court was entitled to order him to approve the grant so as to prevent him from frustrating the court’s determination that it was in the best interests of the CIFF.
Members’ fiduciary duties
The appeal court agreed with the judge’s considerations at first instance, namely that it was not necessary to decide in detail the nature and extent of the members’ fiduciary duties. The judge upheld that members of CIFF had an obligation to use their rights and exercise their vote in the best interests of the charity. It was sufficient, said the appeal court, to say that a member of CIFF owes a duty corresponding to that imposed on members of charitable incorporated organisations by Section 220 of the Charities Act 2011.
The court’s inherent jurisdiction
The appeal court observed that in general, it was slow to interfere with the exercise of discretion by fiduciaries. Furthermore, it found that, apart from its scheme-making powers, the court had no wider discretion to control the action of fiduciaries in the context of charities than, say, private trusts. The court could not, therefore, direct a fiduciary on how to exercise his powers unless he was acting in breach of duty.
Though the court’s role is important in relation to charities it is not entitled, absent a breach of duty, to substitute its views for that of the fiduciary. Accordingly, the court did not consider that its inherent jurisdiction in relation to charities was extensive enough to allow it to order a member to exercise its discretion in a particular way, regardless of whether there is evidence of a breach of duty on the part of the member.
The appeal court added that it considered the fact that both Section 217 of the Act and Section 201 of the Charities Act 2011 require a payment such as the grant to “be approved by a resolution of the members of the company” with “the prior written consent of the [Charity] Commission” to be significant. At first instance, the court had considered that the Charity Commission should be afforded “its statutory opportunity...to consider whether to approve the making of a members’ resolution under Section 217” but had made an order denying Dr Lehtimãki any choice as to whether to approve the transaction in accordance with Section 217. In effect preventing him from playing the part that, in the circumstances, Parliament had assigned to him.
In light of the above, the appeal court determined that the lower court was not entitled to order Dr Lehtimãki to vote for a resolution under Section 217 unless there was evidence that he was acting in breach of fiduciary duty. In this regard, the appeal court did not consider there was any significant evidence that Dr Lehtimãki was acting (or proposing to act) in breach of duty. In the circumstances, the appeal was allowed.