Case Comment: Lehtimaki and Others v Cooper [2020] UKSC 33

Introduction

Does the court have jurisdiction to direct member of a charitable company on how they should exercise their powers absent a breach of fiduciary duty?

The judgment is interesting as not only does it reverse the decision of the Court of Appeal but essentially means that the court can direct a member to vote in favour of a resolution pursuant to s.217 of the Companies Act 2006 and that a member of a charity is a fiduciary.

Facts

Sir Christopher Hohn and Ms Jamie Cooper set up the Children’s Investment Fund Foundation (“the Foundation”) in 2002 and were married at the time. This was a charitable company limited by guarantee with the purpose of assisting children from developing countries. The Foundation comprised a board of trustees and members. The issue is due to the marriage breaking down between Ms Cooper and Sir Christopher Hohn. Consequently, it was agreed that Ms Cooper would resign as a members and trustee of the Foundation. As part of this severance from the Foundation, CIFF would make a grant of $360 million to Big Win Philanthropy over a five-year period. This was a new charity founded by Ms Cooper. This charity works with African leaders to achieve change in Africa by investing in areas which will foster economic growth.

The important legislation which must be looked at is s.217 of the Companies Act 2006 and s.201 of the Charities Act 2011. This stipulates that payments by a company which are to do with the loss of office of a director must be approved by the members of the company and the Charity Commission. In this context, the $360 million would be seen as a payment for loss of office of a director.

The Foundation applied to the charity commission for approval of the overall transaction. The Charity commission, however, did not give its approval but instead made an order under s.115 of the Charities Act 2011, which authorised the Foundation to instigate proceedings to obtain court approval of the Grant and for directions under s.217 of the Companies Act 2006.

Under s.217, the members of the Foundation were Sir Christopher Hohn, Ms Cooper and Dr Lehtimäki. Due to the fact that there was clearly a conflict of interests between Ms Cooper and Sir Christopher Hohn, only Dr Lehtimäki could vote on the resolution in order for the grant to be approved and made to Big Win Philanthropy. Dr Lehtimäki did not wish to surrender his discretion and did not make a vote.

Chancellor of the High Court Decision

Sir Geoffrey Vos (“the Chancellor”) decided that he should exercise the trustee’s discretion and approve the grant as this would be in the Foundation’s best interests pursuant to s.217, despite the case being “extremely unusual”. The Chancellor explained that the main reason why he made the decision was that the trustees should not be permitted to change the deal retrospectively on what they had originally agreed, which was made in good faith. Although, it was accepted by the Chancellor that he was not saying that “anyone who disagreed with his view would automatically be acting in bad faith” (para. 135). Dr Lehtimäki did not consider that he was bound to vote in favour – despite his intentions as to how he would vote not being revealed.

Additionally, it was held by the Chancellor that Dr Lehitmäki was a fiduciary. Dr Lehtimäki was a fiduciary as his power as a member of the Foundation was vested in him for the benefit of the Foundation and not him personally. Therefore, once the grant was accepted by the court, he would be in breach of his fiduciary duty if he voted against the resolution. Dr Lehtimäki was accordingly ordered to vote in favour of this resolution.

The Court of Appeal (“the CoA”)

Firstly, the CoA was in agreement with the Chancellor that members of the Foundation were fiduciaries. The CoA distinguished the decision of Bolton v Madden [1873] LR 9 QB 55. A member of charity would exercise the powers for the benefit of the charity. However, this isn’t meant to be interpreted as a broad-brush approach to all kinds of charities, including; “mass-charity memberships”.

“It does not necessarily follow that members of charities such as the National Trust also have fiduciary obligations”. (per Para 46 of judgment)

However, the CoA differed to the approach of the Chancellor and that he should not have made the direction against Dr Lehtimäki. In doing so, the CoA noted that it was the intention of parliament to put the responsibility of approving payments in the hands of the members, except if there was prior written consent given by the Charity Commission.

The Supreme Court

Ms. Cooper appealed to the Supreme Court and sought an order requiring Dr Lehtimaki to vote in favour of the resolution to allow the $360 million to be transferred to her new charity.

There were 3 issues therefore which needed to be decided by the Court:

1) Is Dr Lehtimäki a fiduciary when acting as a member of CIFF? (“The Fiduciary Issue”)

2) Can the Court direct Dr Lehtimaki to vote in favour of the resolution? (Court direction issue”)

3) Can s.217 prevent the court from directing a member to vote? (“the s.217 issue”)

The Fiduciary Issue

Lady Arden gave the sole judgment on this issue. It’s important to remember what the concept of a fiduciary is. This is a single-minded duty of loyalty in matters covered by his duty. It was rather important in this particular case to decide whether Dr Lehtimaki was a fiduciary as a member of the Foundation as it may be able to direct him on how he should vote with regards to the s.217 resolution.

Lady Arden noted that the role of a fiduciary had been extended to cover those who are directors, solicitors, agents and others.

Furthermore, Lady Arden describes the role of a fiduciary at para [44]:

“There has been considerable debate as to how to define a fiduciary, but it is generally accepted today that the key principle is that a fiduciary acts for and only for another. He owes essentially the duty of single-minded loyalty to his beneficiary, meaning that he cannot exercise any power so as to benefit himself”.

Essentially, the fiduciary must act for the benefit of another and should not do so for himself. The novel part of this case is that a decision on whether a member of a charitable company is a fiduciary has never been decided before the court before, despite there being over 33,000 guarantee companies which are registered charities. Per Lady Arden, there were three helpful guides which helped the court decide this issue:

1) There is a liberal interpretation taken to charities by the courts. For example, Mummery LJ in Gaudiya mission v Brahmachary [1998] Ch 341, 350 stated that “under English Law charity has always received special treatment’.

2) The recognition of charitable companies by Parliament.

3) The decision of Slade J in Liverpool and District Hospital for the Diseases of the Heart v AG [1981] Ch 193. Slade J concluded that a company’s relationship to its assets was analogous to that of a trustee.

Undoubtedly, the fiduciary duties which a member can owe are tailored by the memorandum, articles and legislation. Notwithstanding making a finding that a member is a fiduciary in this context, the outcome may not be the same for mass-membership charities.

Court Direction Issue

It was contested by the Respondents that even if Dr Lehtimäki were to be deemed a fiduciary, he should not be directed to vote on the resolution, which would approve the grant. This is because the court is not one to usually intervene on how a fiduciary should exercise his discretion if there hasn’t been a breach of his duty.

Lords Briggs, Lord Wilson and Lord Kitchin agreed that once a court has considered that a transaction is in the charity’s best interest, the question is resolved. Thus, the charity’s fiduciaries had to use their powers to implement the decision of the court. If, for example, Dr Lehtimäki were to do otherwise, he would be breaching his fiduciary duty.

Furthermore, although there is a subjective duty of a fiduciary, this would need to give way to what was in the charity’s best interests.

Lady Arden, in minority, stated this particular case was an exception to the non-intervention principle that allowed a direction to be given to a fiduciary absent any breach of duty, as if Dr Lehtimäki failed to vote in favour of a s.217 resolution there would a threat to the very existence of the Foundation. However, Lady Arden disagreed with the majorities decision that the order approving the grant gave jurisdiction to make an order directing Dr Lehtimäki to vote on the breach of duty basis as this took away the subjective duty of members which were placed within them and would place the power within the charitable trustees and the court.

S.217 issue

It was further argued by the Respondents that s.217 Companies Act 2006 meant that the court could not direct Dr Lehtimäki to vote on the resolution. Essentially the court found that in an appropriate case it can direct one of its members on how to vote. Moreover, there wasn’t any objection to charity law which enabled the court to direct a member on how to vote on a resolution under s.217 of the Companies Act 2006.

Comment

Members of charitable companies owe fiduciary duties to the charitable purposes of those companies. Indeed, these duties can be limited but the scope of the company’s constitution. Nonetheless, the members of the company must exercise the duties which have been placed within them to further the best interests of the charitable company.

The Supreme Court also found that once the High Court had decided what should be done in the best interests of a charity the member would not have a free vote. The judgment also clarifies how company law applies to charities.

The facts of the case ‘are unlikely to ever be replicated’ so are doubtful to have any direct application to a similar factual scenario. But what the judgment does do is provide welcome clarification on the role of members in charitable companies (amazingly not decided by the courts before) and whether the court has jurisdiction to direct a member vote in favour and the interplay between company law and charity law. Basically, s.217 does not prevent the court from directing a member to vote.

(This post has been authored by Callum Reid-Hutchings. Callum is a BPTC Student Lord Justice Holker Scholar. He is currently pursuing a masters degree in law from the prestigious Cambridge University. Callum obtained a first class degree in law from Swansea University)

Cite as: Callum Reid-Hutchings, ‘Case Comment: Lehtimaki and Others v Cooper’ (The Contemporary Law Forum, 8 October 2020) <https://tclf.in/2020/10/08/case-comment-lehtimaki-and-others-v-cooper-2020-uksc-33> date of access.  

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