The Significance of the CIFF Ruling: Do Members Owe Fiduciary Duties to Charitable Companies?

The Court of Appeal has confirmed a first instance decision of the High Court that a member of a charitable company owed fiduciary duties to that charity (The Children’s Investment Fund Foundation (UK) v HM Attorney General and others [2017] EWHC 1379 (Ch)).

1. What did the court decide?

The Court of Appeal was asked to decide whether a member of a charitable company has a duty to act in the best interests of that charity, and if so whether they could be required to act under the direction of the Court.

For a person to owe “fiduciary duties” to an organisation broadly means that they have a duty of care to that organisation, i.e. to act in its best interests.  Until this case, there was no legal precedent to suggest that membership of a charitable company (i.e. the equivalent of shareholders, being a role distinct from that of the directors/trustees) is a fiduciary position.

The Court of Appeal held that, on the facts of this case, the member in question did owe a fiduciary duty and was permitted to use his own discretion in exercising his powers as member.  Whilst the High Court had originally determined that it could direct the member how to act, the Court of Appeal decided that a member could only be ordered to vote in a particular way if the member was acting in breach of that duty.

2. What is the significance of the decision?

Whilst the decision is limited to the facts of this case (summarised below), it nonetheless sets a precedent, even if it is not yet clear how widely this principle will be applied.  For example, the judgment casts doubt on whether fiduciary duties might extend to corporate charities with a broader membership (the National Trust was used as an example), but does not rule it out.  It is implicit that the duty will be more likely to apply where charitable companies have smaller memberships.

The Court of Appeal stated that the scope of the members’ duty is equivalent to the statutory duty owed by members of CIOs, which is to say that they must exercise their powers in the way that they decide, in good faith, is most likely to further the purposes of that organisation.  The duty closely reflects the duties owed to charities by their trustees.

The decision has practical implications for the management of a charity’s membership.  If a member has fiduciary duties to the charity, it follows that these should not conflict with any external interests.  This brings in to question whether it will be necessary for corporate charities to keep a register of members’ interests, and to introduce procedures for the identification and management of conflicts of interest at general meetings (which would be complex for charities with broader memberships, which is why the point was distinguished in the judgment).

An element of the fiduciary duty is to exercise independent judgement, which could not usually be delegated, yet company members have a statutory right to appoint proxies to vote on their behalf, so the two rights would have the potential to clash.  Where a proxy is directed how to act by the member, there is arguably no delegation – but the point may be open to challenge if members grant a discretionary right to their proxies.

Where a charity is a wholly owned subsidiary of another organisation, that organisation will need to take steps to record how its decisions in relation to its membership the charity have been determined to be in the best interests of the charity.  Where one charity is subsidiary by another, this could give rise to a conflicting interest for the parent charity, depending on the extent to which their objects are aligned.

These implications may impact the approach some charities take when deciding whether to maintain or introduce a broad membership for their organisation as opposed to limiting membership to those who have the capacity to take on the fiduciary responsibility (e.g. by restricting membership to the trustees).

3. What were the facts?

The question arose further to litigation brought by The Children’s Investment Fund Foundation (CIFF) to seek the court’s approval to the making by CIFF of a $360m grant to a new charity established by a retiring CIFF trustee, Ms Cooper.  The arrangement was intended to resolve governance difficulties in the management of CIFF following the divorce of its founders, Sir Christopher Hohn and Ms Cooper. A series of agreements were entered into relating to arrangement, further to which Sir Christopher would contribute a further $40m to the new charity, as would Ms Cooper (her payment being subject to resolution of the application for approval by the court).

The High Court approved the grant, deciding that it was in the best interests of CIFF that it should be made, given the exceptional circumstances of the case.

The High Court also confirmed that the grant would constitute a payment to a director for loss of office under s215 and 217 of the Companies Act 2006, meaning it would require a resolution of the company’s members under those sections, and the resolution would be subject to the approval of the Charity Commission (further to s201 Charities Act 2011).

CIFF had three members, Ms Cooper and Sir Christopher (who were also trustees), and Dr Marko Lehtimäki.  As part of the series of agreements relating to the grant, Ms Cooper and Sir Christopher had agreed not to vote on any decision relating to the grant (i.e. including the s217 resolution).

This left the decision to be approved by the remaining member, Dr Lehtimäki, which brought into question whether he owed fiduciary duties to the charity, and if so whether he could be bound to vote as the Court directed (to bring into effect the Court’s determination that the grant should be made).

The High Court decided both that fiduciary duties were owed and that Dr Lehtimäki could be ordered how to vote, and it was these points that were appealed by Dr Lehtimäki.

As the Court of Appeal has confirmed that Dr Lehtimäki has discretion in how to exercise his fiduciary duty as a member, this leaves open the possibility that he may determine for his own reasons not to pass the s217 resolution, meaning that the grant would not be paid to Ms Cooper’s new charity, notwithstanding the High Court’s un-appealed determination that the grant would be in the best interests of the charity.

The decision may yet be appealed for consideration by the Supreme Court, so the position may change.  We may also hope for guidance from the Charity Commission on the point in future.

If you would like more information in relation to any of the above issues, please do get in touch with the Charities team.