7: Charity members, duties and the court’s jurisdiction – the Supreme Court decision in Lehtimӓki v Cooper

The Supreme Court handed down its judgment on 29 July 2020 in the case of Lehtimӓki v Cooper. The central question for the court was whether it could direct a member of a charitable company to act in a certain way in respect of a company process laid down by parliament. The court’s decision has significant implications for charitable companies, and potentially any membership charity, and reaches important conclusions on the role of the court when charity law and company law collide.

Background

Dr Lehtimӓki was the only independent member of a charity (CIFF) which was established as a charitable company limited by guarantee by Sir Christopher Hohn and his then wife Ms Jamie Cooper. Sir Christopher and Ms Cooper subsequently divorced, following which they both remained as charity trustees/directors and as the only other members of CIFF alongside Dr Lehtimӓki.

The management of CIFF was ‘gravely threatened’ by the situation. To address the threat, it was agreed, among other things, that CIFF would make a grant (the Grant) of US$360 million to a charity established and controlled by Ms Cooper and that Ms Cooper would stand down as a charity trustee and member of CIFF. Making the Grant was subject to the approval of the Charity Commission (the Commission) or the court.

The court process

The Commission gave permission for the charity trustees of CIFF to seek court approval to make the Grant. In the High Court, the Chancellor Sir Geoffrey Vos (as he then was) found that the Grant amounted to payment for loss of Ms Cooper’s office of director under company legislation, meaning that company law (s217 Companies Act 2006) would make the payment subject to approval by a resolution of CIFF’s members, while charity law (s201 Charities Act 2011) provided that the members’ resolution would be ineffective without the prior written consent of the Commission.

That decision also meant that, if the court determined that it was in the best interests of CIFF to make the Grant and the Commission gave consent to the members’ resolution, the trustees’ and the court’s decisions could be defeated by the vote of the members of CIFF, or in this case the single independent member, Dr Lehtimäki.

The Chancellor decided that payment of the Grant ‘is and will be’ in the best interests of CIFF, that members of CIFF owe fiduciary duties to act in the best interests of CIFF and not to act under a conflict of interests, and that the charity and its members were bound by that decision. In those circumstances, a member would not be acting in the charity’s best interests if he voted against that decision, so the court would direct Dr Lehtimäki to vote in favour of the members’ resolution.  Dr Lehtimäki appealed.

The Court of Appeal agreed that the members of CIFF owed fiduciary duties, which they considered corresponded to the CIO members’ duty (in s220 Charities Act 2011) to exercise the powers that they have in that capacity in the way that the member decides, in good faith, would be most likely to further the purposes of the charity. However, it decided that the court did not have inherent jurisdiction to order Dr Lehtimäki to vote in a particular way absent a breach of duty. Ms Cooper appealed.

The Supreme Court decision

The question before the Supreme Court was whether the court had jurisdiction to direct members of a charitable company on how to exercise their powers absent a breach of fiduciary duty. The court decided that it did have jurisdiction and would order Dr Lehtimäki to vote in favour of the resolution.

In coming to that conclusion, the court considered 3 issues:

• Issue 1: Is Dr Lehtimäki a fiduciary in his role as a member of CIFF?
• Issue 2: If the answer to Issue 1 is yes, does the court’s jurisdiction over fiduciaries permit it to intervene here in relation to Dr Lehtimäki and the s217 resolution?
• Issue 3: Given that parliament has provided for members to pass the s217 resolution, does s217 nevertheless allow the court to direct a member to exercise his discretion in a particular way?

The answer in each case was ‘yes’, although the court split in its reasoning on Issue 2 and Lord Reed, the President of the Supreme Court, gave a ‘dubitante’ judgment, expressing doubts (in favour of the Court of Appeal’s decision) but not going so far as to dissent.

Are charity members fiduciaries?

The answer from the judgment seems to be that some of them are some of the time. The court is clear that Dr Lehtimäki is a fiduciary with respect to his decision on the s217 resolution; beyond that it becomes murkier, with the court not being definitive but preferring ‘to leave these issues to a case where they might affect the outcome’.

• Members of charitable guarantee companies? Probably yes. The judgment refers to this applying to ‘all other members of charitable guarantee companies which, like CIFF, contain restrictions which in general prevent members receiving profits from the company’ (which a charitable guarantee company would generally do).
• Members of CIOs? Members of CIOs owe a statutory duty, as noted above, but the judgment notes that the statute does not expressly make the duty fiduciary (unlike, say, the directors’ duties set out in the Companies Act 2006).
• Members of other forms of charity? Many other forms of charities, such as Royal Charter corporations or unincorporated associations, have members who have a role in the charity’s constitution. The judgment does not expressly bring such members within the fiduciary rule, but the rationale offered in the judgment for treating Dr Lehtimäki as a fiduciary would apply equally to other charities, eg the ‘special’ and ‘beneficent’ treatment which the law gives to charities, the fact that charities must be established for the public benefit and the acknowledgement, in the judges’ view, that signing up to a constitution that provides that the assets of the (in the case) company may only be applied for its objects equates with accepting fiduciary obligations to the company. It cannot, therefore, be ruled out that any constitutional member of a charity may now be treated as a fiduciary, at least for certain purposes.

Where charity members are fiduciaries, what does this mean in practice?

This is the harder question. Some guidance is offered throughout the judgment but, beyond the immediate issue before them, the approach overall of the court was that the ‘precise circumstances in which the member of a charitable company has fiduciary duties in relation to the charitable purposes and the content of those duties will have to be worked out when they arise’.

In terms of what we can discern:

• The duty is not (as the Court of Appeal found) akin to the statutory duty on CIO members, but is more narrowly drawn.
• In particular, it does not apply in all circumstances.
• Little guidance is offered on the circumstances which activate the duty:
  • there is some suggestion that it is triggered where the member has an element of control over the disposition of charitable assets (in the CIFF case, an effective veto over making the Grant); and
  • however, the court also cites examples of choosing charitable objects or beneficiaries to benefit as not activating the fiduciary duty.
• Where the duty does arise, it is owed to the charitable purposes, rather than the charity itself.
• It is a duty of ‘single minded loyalty’ and is subjective.
• The duty is fashioned to an extent by the charity’s constitution so, for example, in the case of a charitable company:
  • the articles of association could provide for members’ conflicts of interests, although it seems doubtful that the member could vote if they have a conflict of interests or loyalties; the court included in this a member voting for their own appointment as charity trustee;
  • a fiduciary member could still appoint a general proxy (leaving the decisions on resolutions to the proxy); and
  • a fiduciary member would have no greater right to information (to enable them to decide on a resolution) than they would be entitled to under company law or the general law.
• The duty cannot, it seems, be limited so far that the duties are reduced below an ‘irreducible core’, which is not defined in this context but analogy is drawn with the equivalent for trustees of a private trust where it is the duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries.
• Where the duty applies, it seems that the member would be expected to disclose any interest. The court recognised that this is not required under company law for members and that CIFF (and indeed most charities) has no mechanism to receive such declarations, but the court went no further on this point because the ‘problem does not require to be resolved in the present case’.

The court’s jurisdiction with respect to charities

The court also had cause to consider the breadth of the court’s jurisdiction regarding charities. In general, the court rarely intervenes in the exercise of discretionary judgment in the absence of a breach of duty. In this case, the majority took the view that there was a breach of duty (in a fiduciary seeking to do anything other than give effect to the court’s order on a question which has been decided finally by the court).

However, the majority also agreed with the rationale offered by the minority view that the court has a special jurisdiction with respect to charities which is of ancient origin, wider than the normal jurisdiction applicable to trusts and which would permit the court to intervene, as an exception to the usual non-intervention principle, where it is ‘necessary or expedient’ to see that the charitable trusts are performed. Where it does so, the court intervention is not limited to making schemes, but may also give effect to the charitable purposes by giving a direction.

The decision here confirms that the court’s charity jurisdiction is extraordinarily broad. It may prove helpful in circumstances, such as those presented in this case, where charity law and company law collide. It is, though, perhaps less clear that parliament necessarily intended that charity trustees’ only recourse, in a situation where the members may override a decision of the charity’s trustees that a particular course is in the best interests of the charity, should be an application to court.

Areas of doubt

It was hoped that a Supreme Court judgment would bring some much-needed clarity in this area, but the decision risks raising more questions than it answers.

Charity members may be confused as to whether they are fiduciaries at all and, if so, for what decisions and what that means in practice. Membership charities may wonder about the practical implications for members’ meetings and written resolutions and whether they now need to consider amending their constitutions and introducing new conflicts policies and procedures for members.

As an illustration of the sort of questions that can arise, the judgment contains a (non-exhaustive) list of 10 questions which arise if members of a charitable company are fiduciaries:

1. whether there ought to be declarations of interest before meetings of members;
2. whether a member with a conflict of interest can vote (particularly where a member is a member of more than one charity in the same field);
3. whether a member has a duty to attend and vote at meetings;
4. whether a member can appoint a general proxy (as permitted by company law);
5. whether a member can receive a benefit from the company;
6. whether a member can fetter their discretion by making a voting agreement;
7. whether a member would have to investigate a matter before they could vote on it;
8. what information a member could require from the company;
9. whether a member is entitled to be indemnified for the cost of attending a meeting of the company or for the cost of taking legal advice; and
10. whether a member would be liable to compensate the company if they exercised their right to vote in breach of duty.

As noted above, the judgment offers guidance on some of these, but most are left tantalisingly unanswered.

What next?

In principle, as the judgment notes, the sort of problems identified above might be thought not to be new. Similar questions arise in respect of the s220 CIO members’ duty, which has been in place since 2013, and the judgment also references the Commission’s 2004 guidance, RS7 – Membership  charities, which expresses the Commission view that members of a charitable company have an obligation to use their rights and exercise their vote in the best interests of the charity of which they are a member.

However, the judgment draws out some of the associated practicalities in relation to making the sort of governance provision (in constitution amendments, policies, interest registers and the like) for interests of members usually applied only to charity trustees. The court suggested that the Charity Commission could issue guidance on these points and it would be helpful if the Commission produced guidance for consultation on the extent of the duty and what practical steps charities can and should take to manage the members’ duties.

Although we are living in far from ideal times, ideally there should be parliamentary consideration of the proper interaction of charity law and company law. In what circumstances, if any, should members be able to overrule decisions of the charity trustees and should the trustees’ only recourse then be to the courts?