Do members of charitable companies have fiduciary duties?

26th August 2020

The question of whether members of a charitable company have fiduciary duties, and whether the court has jurisdiction to direct these members on how to exercise their duty, were central to the Children’s Investment Fund Foundation UK (“CIFF”) case, in which the Supreme Court handed down its judgment on 29 July 2020.

1. Background

CIFF is a large charitable company with more than £4bn in assets, which helps poor and vulnerable children in developing countries. The charitable company was founded by Sir Christopher Hohn and Ms Jamie Cooper in 2002 during their marriage, and was largely funded by the proceeds of the hedge fund, the Children’s Investment Fund. There were eight trustees, but only three members: Sir Christopher, Ms Cooper, and their friend, Dr Marko Lehtimäki.

The couple divorced in 2014, and the difficulties in their relationship led to issues managing CIFF. To resolve these issues, the unconflicted trustees put forward a proposal that Ms Cooper should resign as a member and trustee in exchange for a grant of $360 million to her new charity, Big Win Philanthropy, and a commitment from each of Ms Cooper and Sir Christopher to contribute US$40m to Big Win Philanthropy, to which Ms Cooper and Sir Christopher agreed.  The unconflicted trustees held that approval to the arrangement should be conditional on either Charity Commission or Court approval.  Ultimately, the matter was passed to the court.

2. Initial judgment and appeal

The High Court held in June 2017 that the under company law, the grant was a payment to Ms Cooper for loss of office, and therefore required approval from members, and that the members owed the charitable company fiduciary duties in exercising their decision to approve.  Due to the conflict of interest between them, both Sir Christopher and Ms Cooper had agreed to recuse themselves from the vote, and therefore Dr Lehtimäki held the sole deciding vote.  The judgment held that the grant would be in CIFF’s best interests and ordered Dr Lehtimäki to vote for the resolution approving it.

Dr Lehtimäki appealed against the order, and the Court of Appeal agreed that the members of CIFF owed the charitable company fiduciary duties, but allowed the appeal, holding that the Court did not have authority to direct Dr Lehtimäki on how he should vote.

3. Supreme Court judgment

The Court of Appeal’s decision was appealed to the Supreme Court in 2020, and the Court held that a member in principle holds a fiduciary duty towards the purpose of the charitable company on a “contract-and-statute-based model”, based on charity law, company law and the Articles of Association. The Court also held that by asking the Court to decide whether the grant was in CIFF’s best interests, the trustees had surrendered the members’ right to a free vote. Once a court has decided whether a transaction is in the charity’s best interests, not following the court’s decision would amount to “a plain breach of fiduciary duty“, thus, in exceptional circumstances the Court does have the power to direct a member in how to vote. Therefore, in this case, the Court ordered Dr Lehtimäki to approve the grant being made.

While the decision confirms that members of charitable companies owe fiduciary duties in the exercise of their decision making, the practical impact of the decision on the sector remains unclear.  The judgment holds that fiduciary duties “apply to charitable companies large or small” so those with a broad membership in particular will be concerned to understand how this might affect the management of their general meetings (e.g. will declarations and conflicts of interest need to be managed at them, and might members be liable to make good any loss to a charitable company if their decisions are made in breach of the fiduciary duty?).  The judgment does suggest that some distinctions may be made between fiduciary duties and other third party member rights, so it may be useful to make such distinctions clear within the Articles of Association, where appropriate.  Lady Ardern suggested that other consequent issues should be dealt with by the court when appropriate cases arise, so there remains scope for further development and clarifications to be introduced.

This article has been co-written by Ben Brice and Rachel Knight.

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