This piece was first published in FromCounsel's Current Awareness service on 3 August 2018.
Michael Todd QC of Erskine Chambers considers the Court of Appeal’s decision in Lehtimäki v The Children’s Investment Fund Foundation (UK)
As a general rule, while a company’s directors are subject to fiduciary duties its members are not. Indeed, cases such as Pender v Lushington (1877) 6 Ch D 70 establish that, generally, a member may exercise his rights of property as he wishes.
However, there are exceptions to such an entitlement. Thus, there have been cases in which it has been held that members are required to exercise their votes ‘bona fide for the benefit of the company as a whole’ (notably Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656), or to vote in the interests of a class of which they form part (for example, British America Nickel Corporation Ltd v M J O’Brien Ltd [1927] AC 369).
The Court of Appeal’s decision in Lehtimäki v The Children’s Investment Fund Foundation (UK) [2018] EWCA Civ 1605 is an interesting development in the debate as to whether there are circumstances in which company members may be obliged to exercise their rights and powers in the interests of the company.
Allen v Gold Reefs was concerned with a resolution proposing amendments to articles of association. While important in that context, there is some debate as to whether the principle the case establishes is of wider application. Some commentators view the case as an illustration of a more general constraint on the exercise of majority power. In the context of class meetings, British America Nickel established that the power of the majority to bind the minority must be exercised for the purpose of benefiting the class as a whole. More recently, in the context of class meetings to consider a scheme of arrangement, the Chancellor of the High Court held, in Re Dee Valley Group plc [2017] EWHC 184 (Ch), that members voting at a class meeting directed by the court must exercise their power to vote for the purpose of benefiting the class as a whole.
In Lehtimäki v The Children’s Investment Fund Foundation (UK) the Court of Appeal has held that the members of CIFF were fiduciaries, requiring them to act in the interests of the company. However, the Court of Appeal was at pains to point out that its decision was confined to the facts of the case before it. While noting the decision in Allen v Gold Reefs, the court recognised that there were many authorities confirming that votes are proprietary rights that members may exercise in their own interests. The Court of Appeal also stressed that it did not necessarily follow that members of larger charities such as the National Trust had fiduciary obligations (although there was a suggestion that voting freedom in such cases might not be completely unfettered, the court commenting that it was “far from clear that it should be legitimate for members of, say, the National Trust to vote to obtain benefits for themselves from an entity with exclusively charitable objects”).
It would appear that clarification of the wider issue will require an appropriate case to come before the Supreme Court. In the meantime, it will be interesting to see whether the courts are asked to find that members owe fiduciary duties – or are at least required to exercise voting rights in the interests of the company – in other circumstances. One example which comes to mind is the arguably analogous situation of membership of a community interest company.
In Lehtimäki v The Children’s Investment Fund Foundation (UK), the Court of Appeal had to consider whether a member of a charitable company limited by guarantee (CIFF) owed fiduciary duties requiring him to act in the interests of the charity in voting on company resolutions.
Facts and first instance decision
Following the breakdown of the relationship between the founders of CIFF, it was proposed that CIFF make a substantial grant to a new charity set up by one of the founders who resigned as a trustee and member of CIFF as part of the arrangements. As well as requiring the consent of the Charity Commission under CIFF’s memorandum of association, the proposed grant triggered the application of s 217 CA 2006 (dealing with payments for loss of office to or for the benefit of current or former directors or persons connected with them), requiring members’ approval in addition to Charity Commission consent under the Charities Act 2011.
CIFF sought the court’s approval of the proposed arrangements and, at first instance, Sir Geoffrey Vos (Chancellor of the High Court) held that members of CIFF owed fiduciary duties to act in its best interests. Having determined that the proposed arrangements were in the interests of CIFF, Sir Geoffrey Vos went on to direct that the sole voting member must vote in favour of the s 217 resolution.
Court of Appeal decision
The Court of Appeal was asked to consider (a) whether a member of CIFF was subject to fiduciary duties; and if so (b) whether the court’s inherent jurisdiction in relation to charities permitted it to order a member to exercise a discretion in a particular way, regardless of whether there was evidence of breach of duty on that member’s part.
The court agreed with Sir Geoffrey Vos that members of CIFF owed fiduciary duties. They noted that a charitable company’s assets are devoted exclusively to charitable purposes and membership of a charitable company conferred no proprietary rights. The court considered that the members were part of the administration of the charity and drew an analogy with powers in relation to the administration of trusts, which had been held to have a fiduciary character. Nevertheless, the court made it clear that its decision related to CIFF and it did not necessarily follow that members of all charities had fiduciary obligations. In common with Sir Geoffrey Vos, the court did not think it necessary to rule on the precise scope of the fiduciary duties owed by members of CIFF, but considered that the members owed a duty corresponding to that specifically imposed on members of Charitable Incorporated Organisations by s 220 Charities Act 2011 (ie that the member must exercise the powers that he has in that capacity in the way that he decides, in good faith, would be most likely to further the purposes of CIFF).
The court however overturned the first instance decision to direct the voting member of CIFF to vote in favour of the s 217 resolution. The court confirmed that it is generally slow to interfere with the exercise of discretion by fiduciaries and concluded that, apart from powers to approve schemes in relation to charities, the court has no wider jurisdiction to control the actions of fiduciaries in the context of charities than in the case of (for example) private trusts. As such, the court cannot direct a fiduciary how to exercise his powers, unless he is acting in breach of duty. Further, Parliament had entrusted the responsibility for approving payments for loss of office under s 217 to members (subject to Charity Commission consent): to direct a member how to vote would prevent the member from playing the part that Parliament had assigned to him. The court considered that it would be inappropriate to interfere with the statutory scheme in such a way unless there was impropriety.
In this case there was no evidence that the member was acting (or proposing to act) in breach of duty and so there were no grounds for the court to order him to vote in favour of the proposed arrangements. For potential restrictions on members’ rights to vote see Resolutions and meetings Q&A here, Q&A here and Q&A here.