Do you know who the ‘members’ of your charitable company are and what obligations they owe to the charity?

The Supreme Court has passed judgement on Lehtimäki v The Children’s Investment Fund Foundation (UK), putting the responsibilities of members of charitable companies in the spotlight for the first time.  

Facts of the case

The Children's Investment Fund Foundation (UK) (CIFF) was set up by Sir Christopher Hohn and his wife Jamie Cooper in 2002. When their marriage broke down, the running of CIFF became unmanageable and Sir Chris and Jamie agreed that Jamie would resign as a trustee and member of CIFF in exchange of a grant of $360m to Big Win Philanthropy, a charity which Jamie had established. 

Under the Companies Act, the members of CIFF had to vote to approve the grant (it being regarded as a payment for loss of office). CIFF had three members: Sir Chris, Jamie and Mr Lehtimaki. As the sole unconflicted member, the decision fell on Mr Lehtimaki. The case revolved around the question of whether the court could direct Mr Lehtimaki on how he should exercise his voting power. 

The outcome of the case

The Supreme Court decided that it could direct how Mr Lehtimaki exercised his vote as a member of CIFF, for the following reasons:  

  • Members of charitable companies, like trustees, owe fiduciary duties to the charity. This applies to all membership charities, including large ones, but the nature of the fiduciary relationship is to be interpreted by the circumstances of the particular charity and its membership, so it will vary

  • Members must exercise these fiduciary duties in good faith and to further the purpose of the charity

  • The Court can direct how a member exercises their discretion (this will be a rare exception to the non-intervention principle). In this case the Court gave a direction before Mr Lehtimaki had exercised his discretion and so the Court had determined how the decision should be made, leaving no room for discretion. 

The consequences of the case:   

Members of charitable companies have certain important powers reserved to them in the charitable company’s articles of association, Charities Act 2011 and Companies Act 2006.  The judgement makes it clear that the exercise of these powers is subject to the jurisdiction of the Court. If a member makes a decision other than in the best interests of the charity, the member will be in breach of his or her fiduciary duty.  

What is not so clear from the judgement is what happens when a member acts in breach of a fiduciary duty. Might they have to repay any loss resulting from a breach of duty to the charity? The other big unanswered question is the extent of the fiduciary relationship. The Supreme Court said this would be interpreted by the circumstances of each charitable company. For example, does this include the same duties expected of trustees: to duty to attend and participate at meetings, declare conflicts and be well informed of matters to be determined?   

If you would like to discuss the implications of this judgement or would like a general governance review, please get in touch with our specialist Charities Team by clicking here.

 

 

 

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