Charitable companies as fiduciaries
Stephen’s topic is a focus on charitable companies. His particular focus is on the members of charitable companies and the duties incumbent on them in light of the decision in Children’s Investment Fund Foundation (UK) v Attorney-General  AC 155 that a member of a charitable company, usually a company limited by guarantee and without any share capital, is a fiduciary.
Practice Area: Charities
The case from Stephen
I’m sure the facts of the CIFF case are familiar but just to recap and set the scene, the CIF was a substantial charity founded by Sir Christopher Hohn and his wife, Jamie Cooper. It was incorporated as a company limited by guarantee. They were both members of the company and directors of it or trustees, as its directors were called. But given the breakdown in their relationship it was proposed that Ms Cooper should cease to be involved in the CIF and that a new charity, Big Win Philanthropy, be set up with similar objects and that a substantial grant, $360M, be made by CIF to BWP. Making that grant required the approval of the Charity Commission but the Commission, rather than giving the approval, directed the company to seek the approval of the court. The company sought and obtained that approval which was granted by Vos C at first instance and not challenged on appeal. But a further question also arose concerning the approval of the grant by the company itself acting by its members in general meeting. That approval was required pursuant to section 217 of the CA 2006 because the grant was a payment for loss of office to a person connected with a director.
At the relevant time the company had three members: Sir Christopher, Ms Cooper and Dr Lehtimäki. Sir Christopher and Ms Cooper had agreed that they would not vote on the motion to approve the grant because of their conflict of interest; so, the decision whether to approve or not fell to be made by Dr Lehtimäki alone. Once the court had decided that making the grant was in the best interests of CIF, the nub of the remaining issues was whether Dr Lehtimäki should be left to decide what to do by himself or whether the court could and should compel him to vote in favour of approving the grant. Vos C held that Dr Lehtimäki, as a member of a charitable company, was a fiduciary and as the sole member of company eligible to vote, was obliged to and could and should be compelled to vote in favour. The motor for the appeals, first to the Court of Appeal and then to the Supreme Court, was Dr Lehtimäki’s desire to be left to make the decision himself, as the person on whom the power of making it was properly conferred by the corporate structure; and Ms Cooper’s corresponding concern that if left to himself, Dr Lehtimäki would maintain his position of “studied neutrality” and thereby thwart the intended establishment of BWP. On Dr Lehtimäki’s appeal, the Court of Appeal agreed with Vos C that Dr Lehtimäki, as a member of a charitable company, was a fiduciary but disagreed on whether the court should compel him to vote in favour of approving the grant and set aside the order compelling him to vote in favour. On Ms Cooper’s further appeal from that decision, the Supreme Court agreed that Dr Lehtimäki was a fiduciary and by a majority held that the court had jurisdiction to compel him to vote in favour of the grant on the basis that if he failed to do so in light of the court’s unchallenged decision that the grant was in the best interests of CIF, he would be acting in breach of duty. Accordingly the Supreme Court restored the order made by Vos C, directing Dr Lehtimäki to vote in favour of the grant.
The point of difference that arose between the justices concerned the basis on which the court could compel Dr Lehtimäki to act, namely, whether there was a breach or threatened breach of duty which justified the court’s intervention. The majority view was that there was. Lady Arden disagreed, justifying the intervention on the basis of an exception to the rule that the court will not intervene where the power to decide has been allocated to an identified decision-maker.
The previous understanding
But all the judges involved at every level were agreed that a member of a charitable company is a fiduciary, or at least that in the exercise of his power as a member to vote in respect of the grant, Dr Lehtimäki owed a fiduciary duty. Indeed, at first instance that seems to have been assumed as correct by all the parties. Nonetheless it was a decision that ran counter to the tentative textbook consensus. The previous basis for thinking that a member of a charitable company was not subject to any constraining fiduciary duty when exercising their right to vote was the decision of the Queen’s Bench Divisional Court in Bolton v Madden (1873) LR 9 QB 55, where the parties were both subscribers to a charity whose objects, i.e. the persons to be benefitted, were to be elected by the subscribers. The plaintiff and defendant agreed that if the plaintiff voted for the object proposed by the defendant, the defendant would later vote in favour of an object proposed by the plaintiff. The defendant reneged on this agreement and so the plaintiff sued for damages for breach of contract. In giving judgment, Blackburn J said,
The argument for the defendant was that the subscriber to a charity is under an obligation to give his votes for the best object, and that the plaintiff, if he gave his votes at the first election to what he thought the best candidate, incurred neither trouble nor prejudice, so that there was in that point of view no consideration; and if he gave his votes to the candidate whom he did not think the best, the whole agreement was void as against public policy. But though some of us, at least, much disapprove of this kind of traffic, we can find no legal principle to justify us in holding that the subscriber to a charity may not give his votes as he pleases, answering only to his own conscience and reputation for the way he exercises his power.
That might seem squarely, even if concisely expressed, on point. Voting as you please appears to indicate a free hand, unconstrained by any duty.
Moreover, an absence of duty is plainly in line with the position of members of commercial companies. In the case of a commercial company, limited by shares, as said by Jonathan Parker J in re Astec (BSR) plc  2 BCLC 556
The starting point is the proposition that in general the right of a shareholder to vote his shares is a right of property which the shareholder is free to exercise in what he regards as his own best interest. He is not obliged to cast his vote in what others may regard as the best interest of the general body of shareholders, or in the best interests of the company as an entity in its own right.
But even in the context of a commercial company there are limits on how a shareholder can exercise their voting rights. In particular, there are limits, not easy to define, on the circumstances in which a majority may vote to alter the articles of association so as to confer an advantage on themselves and a corresponding disadvantage on the minority. In Allen v Gold Reefs of West Africa  1 Ch 656 Lindley MR said, in a passage much puzzled over since,
Wide, however, as the language of s. 50 [enabling the members to alter the articles] is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bonâ fide for the benefit of the company as a whole, and it must not be exceeded.
And how the majority may cause the affairs of a commercial company to be conducted is also constrained by the availability of a petition pursuant to section 994 of the CA 2006 on the basis that that conduct is unfairly prejudicial to the interests of the members generally or some of them.
So, the rights of shareholders in commercial companies are not wholly unqualified. Nonetheless the constraints on how such shareholders may use their rights are limited, and those limited constraints exist because the basic position is that such shareholders may act as they see fit in their own interest and without regard to other shareholders.
But charitable companies differ from commercial ones in two related ways:
First, although a charitable company does not hold its property on trust; it does hold its property for its charitable purposes – and it cannot hold them for any other purpose if it is to maintain its charitable status. Hence, the members can have no property rights in the company. Looking at the matter from the perspective of incentives, the members of a charitable company do not have an economic incentive derived from any property interest of their own to see that the company is fairly or properly run. Yet, from a functional point of view, the role of the members is, amongst other things, to oversee the management of the company by its directors or trustees, and to decide those matters which are allocated to them by the company’s constitution and the general law; but they do so for the purpose of promoting the company’s charitable purposes. Their function is not to look after their own property interest, for they have none, but to play their allocated part in the governance of the charity.
Secondly, in the case of a commercial company – and assuming there are no solvency problems – what is in the best interests of the company will, in general, be decided by reference to the interests of the members as a whole. Other factors may be engaged but ultimately the purpose of a commercial company is to pursue its affairs for the benefit of the members as a whole. But in the case of a charitable company, the interests of the members are irrelevant. The purpose of a charitable company is its charitable purposes, and decisions about what is in the best interests of a charitable company are to be made by reference to what is most likely to promote and achieve those purposes.
In light of those considerations, it is intuitively attractive to see members of charitable companies as subject to constraint in how they may exercise the rights attaching to their membership. Jonathan Parker J’s words might be adapted in the context of a charitable company so as to say,
The starting point is the proposition that in general the power of a member of a charitable company to vote by virtue of his membership is a power which the member is obliged to exercise in what the member regards as the best interest of the company and its charitable purposes.
That proposition seems justified because of the role the members play in the governance of a charitable company and because their performance of that role is to be assessed by reference to the charitable purposes of the company, and cannot be regulated by themselves in their own interests.
In any event, whether we agree with it or not, the Supreme Court has decided that a member of a charitable company does owe fiduciary obligations with respect to the charitable purposes of the company. The recognition of the fiduciary nature of such membership raises two large questions: first, what is the content of the duty; and secondly, how is the duty to be enforced? I am going to address these questions in reverse order: enforcement and procedure first; and then some points about content. Since only Lady Arden addressed these issues in the Supreme Court in detail, her judgment provides the main source of the answers to the questions raised.
Returning briefly to members of commercial companies limited by shares, disputes between such members generally arise because some of the members consider that the others are acting so as to harm their property interest in the company. The wronged members are motivated to act in their own interest and have standing to do so, where the facts justify it, either by presenting a petition under section 994 or perhaps by action to enforce the statutory contract comprised in the company’s constitution by virtue of section 33 of the CA 2006 or to enforce a shareholders’ agreement if there is one. The essential points here are first, that the members have the incentive and means to enforce their rights, whatever they are, against other members; and secondly, that where there is a dispute involving shareholders, the company itself is not involved: the shareholders owe their obligations to each other and must litigate between themselves – the company itself stays out of the dispute and the litigating shareholders may not use its funds for the purpose of the litigation.
In the case of a charitable company, the members do not have the same incentive. Moreover, the situation where enforcement may most be needed will be where all or most of the members wish to take steps which run counter to the charitable purposes of the company. In her judgment, Lady Arden said,
I take the view that any fiduciary duty [on the part of a member of a charitable company] is owed not to the company … but to the charitable purposes or objects of the charity. The Attorney General or a duly qualified individual can bring charity proceedings to enforce this duty.
This is an important point – company law does not provide a ready route for the company, or its directors, to enforce duties owed by members. But on the basis that the duty is owed to the charitable purposes or objects, charity law provides the route. The Attorney General can act ex officio. The Charity Commission may exercise like powers pursuant to section 114 of the Charities Act 2011. And Lady Arden referred to section 115. It enables proceedings to be brought by the charity, any of the charity trustees or any person interested in the charity subject to their obtaining the Commission’s authorisation. Enforcement of the duty is thus a matter of charity law, not company law. Those with standing to enforce it principally include: first, the external and supervisory authorities, i.e. the Attorney and the Commission; secondly, the charity trustees, i.e. the company directors, who would not have any obvious means of enforcing duties against the members as a matter of company law. Persons interested in the charity would presumably include the other, non-wrong-doing, members of the company, as well as its objects.
The requirement that the proceedings (not brought by the Attorney or the Commission itself) be authorised by the Commission is a barrier against weak or frivolous claims.
Turning then to the content and implications of the duty incumbent on a member of a charitable company, a good place to start is the list of practical difficulties that counsel for the company sought to impress on the Supreme Court (set out in paragraph 75 of Lady Arden’s judgment) in an attempt perhaps to scare them from imposing the duty. He raised ten pertinent questions. I am not going to look at them all.
In her judgment at paragraphs 44 to 46, Lady Arden indicated an approach to these concerns in two stages. First, when defining a fiduciary, she said that the distinguishing obligation of a fiduciary is that they must act only for the benefit of another in matters covered by their fiduciary duty; they cannot exercise any power so as to benefit themselves. This may be labelled the duty of single-minded loyalty to the beneficiary. As part of this core responsibility, the fiduciary may not put themselves in a position where their interest and that of a beneficiary conflict (the no-conflict principle); and the fiduciary must not make a profit out of his trust (the no-profit principle). And the fiduciary is likely to be under a duty to act in the best interests of the beneficiary.
Secondly, when addressing the ten practical difficulties raised by counsel, she said,
The important point in my judgment is that the law allows the duties of a fiduciary to be fashioned to a certain extent by the arrangements between the parties. In the case of a member of a charitable company this means that the duties of a member can be fiduciary even if the memorandum and articles of association impose restrictions which mean that he cannot discharge all the obligations which a fiduciary would have under the general law.
Hence in deciding what the content is of the fiduciary duty to which a member of a charitable company is subject, one needs to consider first, what obligations would in general apply given that the member is subject to fiduciary duties; and secondly, how are those obligations affected by the particular legal context, principally the constitution of the company.
By way of illustration, one question raised was whether a member can appoint a proxy as permitted by the Companies Act and usually by the articles. In general, a trustee cannot delegate their responsibilities because they have been conferred and undertaken personally. Lady Arden answered that there was no difficulty in a member delegating the right to vote to a general proxy, i.e. one with discretion to vote as they themselves think fit, if that is what the Act and articles allow. But I wonder if the point is not a little more complicated. First, it must be right that the appointment by the member of a proxy by itself will not be a breach of duty because making such an appointment is expressly permitted. But, is a member nonetheless subject to any fiduciary constraints in the exercise of power to appoint a proxy? And, does the proxy come under constraints in the exercise of the discretion delegated to them? Suppose, on the facts of CIFF, the court had approved the proposed grant but that no order had been sought directing Dr Lehtimäki to vote in favour of its approval. Would it be open to him to appoint a general proxy at the meeting when it was called? Perhaps that he was the only member eligible to vote makes the situation exceptional. But what if there were five members, one of whom appointed proxy and at the meeting the others were split? Presumably, the answer is that the power to appoint is subject to the duty to act in the best interests of the charitable purposes, and therefore the proxy must be a suitable person and not appointed for some other purpose e.g. to vote in the interests of the member appointing the proxy. Secondly, the proxy must themselves be subject to a like fiduciary duty, including the no-conflict and no-profit principles both as regards the member appointing them and themselves. The justification for these answers is that first, the member is subject by virtue of his membership to those duties and secondly, although the member is entitled by the articles to appoint a proxy and does not breach the duties by making the appointment, equally the duties cannot be avoided or reduced by reason of the appointment and they continue to apply as they otherwise would both to the member appointing the proxy and to the proxy themselves.
Proxies are easier to deal with than other issues because the articles are likely to provide an express power to appoint them. More difficult to address, in the context of existing companies, is the question whether members may vote on a matter where they have a conflict of interest. That is because the articles will probably include express provision addressing whether directors may vote where there is a conflict, what steps a director may take to declare the conflict, and what the consequences are of making the declaration. But current articles are likely to be silent on conflicts relating to members. So, the question is whether to take the silence with respect to members’ conflicts, in contrast to the express provisions relating to directors, as implicitly permitting the members to vote irrespective of the conflict. I would think not. Prudence suggests that a member should not vote on a matter where there is a conflict because given that the member is subject to fiduciary obligations, observing the no-conflict principle is part of the member’s core responsibilities, and unless the articles expressly permit them to act notwithstanding a conflict, the better course must be to observe the principle. Moreover, it may be said that the articles, if drafted before CIFF was decided, are unlikely to have been drafted on the basis that members owed fiduciary duties.
Further, in the absence of some express provision, the fact that a member of a charitable company makes known at the meeting that they have a conflict will not affect the position. Although in a commercial company, informing the other members of a conflict and obtaining their agreement that it does not matter will negate the impact of the conflict, the position must be different where the other members are subject to fiduciary duties and do not hold their interest in the company as beneficial owners in the way that shareholders in a commercial company do. For that reason, the members of a charitable company themselves do not have an unqualified power to waive the impact of the conflict.
This is only to touch on some of the questions that arise, and I have not addressed the issues of mass membership charities or of obtaining and paying for insurance to cover members’ potential liability for breach of duty. But although questions can be multiplied and where a new form of duty is recognised, problems are bound to emerge, how likely is it that the problems will be serious or widespread? Charity law already contains much to prevent misuse of charity funds. For instance, section 198 of the 2011 Act prevents the members of a charitable company from altering its articles so as to authorise benefits to be obtained by the members without the consent of the Charity Commission, and section 201 requires that the approval of the Commission is also required where the approval of members is required in respect of a transaction involving a director – that is what brought CIFF to court in the first place. No doubt there will be puzzles about formalities – and secretaries of charitable companies, and those drafting their articles of association, will have more to do and think about – but I would think that any serious wrong-doing by members will already give rise to liability and that the recognition that members are subject to a fiduciary duty will not create real difficulty for members whose involvement is motivated by a conscientious desire to do the best for the charity which they have volunteered to help.