When will the Court override fiduciaries’ discretion? - Lehtimäki and others v Cooper [2020] UKSC 33


Reference:
Lehtimäki and others v Cooper [2020] UKSC 33

Date:
10th August 2020

Court:
Supreme Court

Facts:

In a wide-ranging decision on charitable companies, the Supreme Court has ruled that the court may substitute its own view for that of fiduciaries, even absent a breach of duty and where the fiduciary has not surrendered their discretion.

  

Facts. In 2002 billionaire fund manager Sir Chris Hohn and his wife Jamie Cooper established the Children’s Investment Fund Foundation (‘CIFF’), a charitable company limited by guarantee which received more than $4bn from Hohn’s fund management empire. Mr Hohn and Ms Cooper were the trustees and directors, and they along with Dr Lehtimaki, a prominent economist, were the members of the company.

 

Following Hohn and Cooper’s divorce it was agreed that CIFF would made a grant of $360m to a separate charity founded by Ms Cooper. This was a decision that required the approval of the Charity Commission and the Court, as well as a vote by the members under s.217 Companies Act 2006. Dr Lehtimaki, as the only unconflicted member, had an effective veto and was joined to the proceedings.

 

First Instance. Chancellor Sir Geoffrey Vos concluded the grant was in the interests of the charity, but crucially he said that he was “not saying that no reasonable trustee or fiduciary could disagree” with his view, nor that anyone who disagreed would be acting in bad faith.

 

The Chancellor nevertheless ordered Dr Lehtimaki to vote in favour of the grant, finding that he was a fiduciary and would be in breach of his duties if he failed to do so, being bound to exercise his voting rights in the best interests of the charity, and that the court would not allow its decisions to be overridden by ‘an unaccountable membership’.

 

Court of Appeal. The Court of Appeal agreed that Dr Lehtimaki was a fiduciary, but found that the court had no power to override a fiduciary’s discretion, absent a breach of trust. They drew a parallel with Charitable Incorporated Organisations (‘CIO’s), whose members are under a similar statutory duty under s.220, Charities Act 2011.

 

Issues for the Supreme Court

The three issues for the Supreme Court were:

  1. Do the members of charitable companies owe fiduciary duties when voting?
  2. Does the court have jurisdiction to direct such members how to vote?
  3. Was that jurisdiction affected by s.217 Companies Act 2006?

 

1. Fiduciary Duty

The Court unanimously agreed that members of a charitable company owe fiduciary duties to its charitable purposes. The general rule is that members of a company are free to exercise their voting rights as they choose (subject in some cases to a requirement of good faith). This rule, however, is varied in relation to charitable companies, where there is a restriction on the application of funds and no proprietary interest of members. Each member’s agreement to the Memorandum and Articles of Association gave rise to a fiduciary duty of single-minded loyalty to the charitable objects, albeit that the memorandum and articles might tailor the precise duties owed. A member must consider whether a proposed resolution is in the best interests of the charitable objects; the test is a subjective one.

 

2a. Breach of duty in disagreeing with the Court

 The majority (Lords Briggs, Wilson and Kitchin) considered it would be a breach of duty for Dr Lehtimaki to vote so as to frustrate what the court had found was in the best interests of the charitable objects:

“the concept that the fiduciary is entitled to form his own subjective judgment about a matter affecting … the company  assumes that there are different conclusions about the matter which may reasonably be reached. But when the very question in issue has been finally decided by the court in proceedings in which the fiduciary has been joined as a party and been heard, then there is no longer any legitimate debate”

 

2b. Jurisdiction absent a breach of duty

 Surprisingly, the Court was also unanimous (although the conclusion of the majority is strictly obiter) that it had jurisdiction to order Mr Lehtimaki to vote one way, even if a contrary vote would not constitute a breach of duty. It recognised the long-established ‘non-intervention principle’ that the Court would not interfere in an exercise of discretion absent a breach of duty (see Pitt v Holt), but held that an existential threat to a charitable company fell within an exception to that principle. Lady Arden considered that if, on the application of the trustees, the court determines that a particular transaction is in the interests of the charity, then the court may make consequential directions against ‘any other organ of the charity’ to put that decision into effect.

 

3. S.217 Companies Act

 Their lordships agreed that s.217 existed to protect the best interests of charities from directors making transactions in their own favour by ensuring adequate disclosure to, and approval by, the membership. Where the trustees’ decision had already been scrutinised by the Court, the membership’s role was effectively redundant and the court could direct them to vote in favour of the resolution.


Comment:

Comment. This case raises some very important questions for both Charity and Trust lawyers.

 

Charity Lawyers. There are 33,000 guarantee companies which are registered charities in England and Wales alone. Some larger charities, like the National Trust, have thousands of members. Members are frequently tasked with electing directors and voting on a range of issues; most of these would be surprised to hear they owe fiduciary duties, or can be ordered how to vote by the court.

 

The fiduciary obligations of members give rise to a long list of practical issues: are members obliged to vote? Can they bind themselves by agreement to vote in a particular way? What information can they require before voting? Are they entitled to advice at the expense of the company before voting? The Supreme Court gave limited or no guidance on such matters, and expressed a hope that the Charity Commission could, in relation to conflict of interest issues, provide guidance under s.15(2) of the Charities Act 2011 .

 

The court’s new-found power may prove harder to apply in other cases, such as those involving religious charities with disagreements amongst the membership. These disputes often go into deeply held theological differences. The High Court in Ethiopian Orthodox Tewahedo Church [2020] EWHC 1493 (Ch) recently followed the Court of Appeal decision, finding it would only interfere with members’ voting decisions where there was evidence of subjective bad faith. The correctness of that decision must now be questioned. The Courts may now be asked to determine which of two doctrinal options is in the best interest of the charitable objects, and to bind the membership unwillingly to their decision  – hardly an appetising prospect for judges.

 

Trust Lawyers. For trust lawyers, structures in which a third party (e.g. a protector) has a veto over trustees’ decisions are very common. Re Forster’s Settlement [1942] Ch. 199 decided the court has no general power to dispense with the requirement for a third party’s consent, and challenging protectors’ decisions (if they are fiduciaries) has always required a breach of trust, or an application under s.57 Trustee Act 1925 where the action is administrative, rather than dispositive.

 

This ruling approves the Jersey decision of Garnham v PC [2012] JRC 050, that the Court may interfere even if not all trustees surrender their discretion, in order to break deadlock. The key question may be whether the deadlock was positively intended by the trust instrument – i.e. that a power should remain unexercised until consent is forthcoming – or is frustrating the operation of the trust. In the latter case, it seems once the trustees have surrendered their discretion to the court, protectors will necessarily commit a breach of trust by frustrating the court’s chosen outcome. Lady Arden constrained her analysis to the special case of charities, but Lord Briggs placed no such restrictions on his judgment (quoted above).

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