Can charitable members be compelled to vote - part 2

Back in August 2018 we looked at the question of whether charitable members could be compelled to vote in favour of a resolution which was a question the Court of Appeal had to answer in the case of Lehtimäki V The Children’s Investment Fund Foundation (UK) & others [2018]. The Court of Appeal upheld Dr Lehtimäki’s appeal finding that the lower court was not entitled to order him to vote for a resolution unless there was evidence that he was acting in breach of fiduciary duty which the appeal court did not consider he was. Fast forward two years and the matter has now come before the Supreme Court.

Overview

The Children Investment Fund Foundation (UK) (“CIFF”) is a charitable company limited by guarantee with more than $4billion in assets helping children in developing countries. It was founded by Sir Christopher Hohn and Ms Jamie Cooper in 2002. On incorporation they, together with Dr Lehtimäki were subscribers to CIFF’s memorandum and therefore were (and remained) its only members. Sir Christopher and Ms Cooper were also trustees (i.e. directors) of CIFF.

CIFF became difficult to manage when the marriage of Sir Christopher and Ms Cooper broke down. To resolve those difficulties they agreed that in exchange for a grant of $360million (“the Grant”) to be paid over five years to Big Win Philanthropy (“BWP”), a charity founded by Ms Cooper, she would resign as a member and trustee of CIFF. They and CIFF entered into a grant agreement for this purpose on 25 July 2015.

The trustees considered it appropriate to surrender to the court their discretion whether to commit CIFF to the making of the Grant and the Charity Commission deferred to the court by authorising the proceedings. But the Grant included what was, strictly, a payment for loss of office within Section 217 of the Companies Act 2006 (“the 2006 Act”) and therefore required the approval of the members. Understandably, Sir Christopher and Ms Cooper declined to participate in voting as members as regards whether or not to vote in favour of the making of the Grant and so this fell upon the shoulders of Dr Lethtimäki.

The main legal issues

The main legal issues in the case stemmed from the special combination of three factors. Firstly, the relevant arrangements came about with a view to resolving the governance issues resulting from the breakdown of the marriage between Sir Christopher and Ms Cooper and not for any reason derived from the activities of the charity.

Secondly, CIFF is both a charity and company limited by guarantee (not having a share capital) formed and registered on 8 February 2002 under the Companies Act 1985. As a guarantee company, CIFF has a two-tier governance structure, namely members and directors, the latter being called trustees and the 2006 Act applies to it.

Thirdly, the recipient of the Grant under the arrangements is a new charity established and already endowed by a $40million payment made by TCI Fund Management Ltd pursuant to a Deed of Covenant made by Sir Christopher on 25 July 2015.

The court proceedings to date

In short, Sir Geoffrey Vos, the Chancellor of the High Court decided on CIFF’s application for directions that the Grant was in the best interests of the charity and directed the sole unconflicted member of CIFF, Dr Lehtimäki to vote in favour of a resolution of the members of CIFF to approve it pursuant to Section 217 of the 2006 Act (“the Section 217 resolution). Dr Lehtimäki, however, preferred to be free to exercise his own judgment on how to vote as a member and he appealed to the Court of Appeal to set aside this part of the Chancellor’s order. The Court of Appeal acceded to his appeal on this issue. Ms Cooper appealed to the Supreme Court.

Issue on this appeal

On this appeal, there was no challenge to the Chancellor’s finding that CIFF’s trustees had surrendered to the court their discretion on the question whether to make the Grant or to his conclusion that the Grant was in the best interests of the charity. Dr Lehtimäki has not surrendered his discretion as a member of CIFF as to how to vote on the Section 217 resolution. The overarching question on this appeal was whether the Chancellor could in law make the direction that he did. This question involved resolving three issues:

1. Whether Dr Lehtimäki was a fiduciary in relation to the objects of the charity as a member of CIFF?
2. If Dr Lethtimäki is a fiduciary, have circumstances arisen with respect to the Section 217 resolution in which the court can exercise its jurisdiction over fiduciaries in relation to Dr Lehtimäki?
3. Does Section 217 of the 2006 Act allow the court to direct a member how to exercise his discretion when Parliament has provided for members to approve the resolution, subject to the prior written consent of the Charity Commission?

Is Dr Lehtimäki a fiduciary?

The general rule is that members of a company are not normally fiduciaries in relation to any of their powers. The share is a right of property and therefore a member can in general vote as they please, even if that is in his own interests rather than those of the company (save in relation to the amendment of a company’s articles of association). However, that principle is varied in relation to members of charitable guarantee companies where the duty members owe is one of single-minded loyalty to the charitable purposes or objects of the company.

Having regard to the above, Lady Arden giving the leading judgment found that Dr Lehtimäki is a fiduciary.

Can the court exercise its jurisdiction over fiduciaries?

The starting point is that the court does not seek to substitute its judgment for that of a fiduciary - the so-called “non-intervention principle”. Any departure from this rule, Lady Arden said, must be approached with considerable caution. However, in her judgment, this case was a rare exception to the principle. The trustees of CIFF have surrendered their discretion to the court and the court’s priority is to exercise the discretion with a view to furthering the charitable purposes of the company.

Can the court direct a member how to exercise his discretion?

On this issue, Lady Arden concluded that CIFF’s trustees, having surrendered their discretion to the court, and the court having reached the unchallenged conclusion that it is in the best interests of the charity for the Grant to be made, the court can give a direction to a fiduciary as to the manner in which he votes on the Section 217 resolution and that the 2006 Act does not, by implication, prevent the court from making such an order.

Judgment

In the circumstances, the court concluded that the court of appeal erred in not making the direction, although Lady Arden rejected the view, as had been held by the Court of Appeal, that the court could not direct a fiduciary to substitute its view for that of his own unless there was a breach of duty.

Accordingly, she allowed the appeal and the order made by the Chancellor was restored.

Practical consequences

There are a number of interesting points which come out of the court’s approach to the issues in this case. Two such examples are as follows:

1. Does the judgment applies to all charitable companies or just those limited by guarantee? This is a point that remains unclear and undecided.
2. Are members of so-called “mass-membership charities” fiduciaries? Lady Arden was clear that she considered the Court of Appeal had been wrong to suggest that the same principles referred to in the court’s judgment did not apply to mass-membership charities but she refused to be drawn into a discussion of the scope of any duties of such members, preferring to defer the opportunity to a later date when a defined issue arose. Accordingly, this leaves an area of uncertainty which will require clarification.

Whilst the question of how Dr Lehtimäki should vote in relation to the Section 217 resolution in this particular case may well be resolved, it seems likely that further questions will be raised in the future and that this may well not be the end of the road!