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Farrer & Co | Trustee remuneration and members' duties – implications of a recent court decision

In the recent case of The Children's Investment Fund Foundation (UK) v Attorney General and others, the High Court had to decide whether to approve the making of a grant of US$360m (the Grant) by The Children's Investment Fund Foundation (CIFF) to another charity, Big Win Philanthropy (BWP). Although the circumstances of the case are unlikely ever to recur, it has some interesting implications, especially on trustee remuneration and the thorny question of whether the members of a charitable company have a duty to act in the charity's best interests. The lessons of the case, however, are potentially subject to change as leave to appeal was granted in September.

Background

CIFF is a charitable company co-founded in 2002 by Sir Christopher Hohn and his then wife Ms Jamie Cooper. The bulk of its funding came from companies operated by Sir Christopher; at the time the judgment was written, it had assets of over US$4bn.

BWP is another charitable company, incorporated by Ms Cooper in summer 2015. At the time of the hearing, Ms Cooper was BWP's President and sole member.

BWP was created at a time when Sir Christopher and Ms Cooper were both trustees of CIFF but their marriage had ended and relations between them were difficult. Since both were trustees of CIFF, this had an adverse impact on the ability of CIFF's board to function properly. The parties came up with a plan to end this undesirable state of affairs, which was (in essence) for (1) Ms Cooper to create BWP, (2) CIFF to make the Grant to BWP and (3) Ms Cooper to step down from CIFF. The making of the Grant was conditional on it being approved by either the Charity Commission or the court.

The Commission deferred to the court, which decided that the Grant should be made. Along the way, the judge had to answer several questions, including:

  1. Would the Grant confer a material benefit (whether directly or indirectly) on Ms Cooper, within the meaning of the trustee benefit provisions of CIFF's memorandum and articles of association, so as to require the prior written approval of the Commission?
  2. Do members of a charitable company limited by guarantee owe fiduciary duties?

1. Would the Grant confer a material benefit, whether directly or indirectly, on Ms Cooper?

Provided certain conditions are met, charity legislation allows a minority of a charity's trustees (and people/organisations connected to them) to be paid for providing services to the charity. Beyond that, trustee remuneration is only allowed if the charity's governing document permits it or if the Charity Commission authorises it.

CIFF's memorandum of association contained a standard trustee remuneration clause, which included the following provision:

"5.2 A Trustee must not receive any payment of money or other material benefit (whether directly or indirectly) from [CIFF], except: ...
5.2.5 in exceptional cases, other payments or benefits (but only with the written approval of the Commission in advance)."
"Material benefit" was defined in CIFF's articles as "a benefit which may not be financial but has a monetary value".

At first glance, it may seem ludicrous to suggest that a grant to a charitable organisation could constitute trustee remuneration. Nevertheless, the court held that the Grant would, since – indirectly – it would confer a material benefit on Ms Cooper. The judge's view on clause 5.2 generally was that it should not be construed in a narrow way, since any benefit caught by it would "only have to surmount the hurdle of Commission approval, which would allow proper independent scrutiny and transparency to protect the charity's assets".

Turning to the specific circumstances: although Ms Cooper would not receive the Grant personally, if made it would put significant funds at her disposal (in her capacity as founder and a trustee of BWP) to pursue charitable projects she supported, and the judge's view was that: "To a person whose life's work is in charity and philanthropy, that must be regarded in normal understanding as a 'benefit'". This is made more convincing when (as the judge said) you consider that Ms Cooper had actually offered to accept less from Sir Christopher in the divorce settlement if the Grant was made, meaning that this apparently intangible 'benefit' was one that, to her, had a monetary value, making it a "material benefit" as defined in CIFF's articles.

What isn't news to anyone is that (where the statutory power to pay trustees for services does not apply) a charity's power to provide material benefits to its trustees will depend on the terms of its governing document. However, the take-away from this case is that trustees may need to be more cautious than they thought - where a charity has a 'standard' trustee remuneration clause, the trustees should not be too quick to presume that a grant to another charity will not require prior Charity Commission authorisation. If the grant will enable a trustee to obtain a benefit that has a monetary value, then it will.

2. Do members of a charitable company limited by guarantee owe fiduciary duties?

This question arose because, under company law, the Grant would technically amount to a payment to Ms Cooper for loss of her office as director/trustee. As such, it could only be made if approved by CIFF's members. The members were Sir Christopher, Ms Cooper, and a Dr Marko Lehtimaki. Sir Christopher and Ms Cooper were precluded from voting, so approval of the Grant rested solely on Dr Lehtimaki's shoulders – and he had said that, whilst he would take the court's conclusion into consideration when voting, he would not feel bound by it.

Case law is clear that when shareholders of a commercial company vote on a resolution, they owe no duties to the company – they are exercising their own right of property as they think fit. Was Dr Lehtimaki in a similar position, or did he – as a member of a charitable company – have a duty to vote in CIFF's best interests?

The judge quoted from an earlier case, on the circumstances in which a person will have fiduciary duties: "...a person will be in a fiduciary relationship with another when and insofar as that person has undertaken to perform such a function for, or has assumed such a responsibility to, another as would thereby reasonably entitle that other to expect that he or she will act in that other's interest to the exclusion of his or her own or a third party's interest."

The judge found that members of charitable companies are in a different position from commercial company shareholders. They have no proprietary interest in the charity's assets; all their powers are directed at aspects of the management and administration of the charity, designed to help achieve its charitable purposes. The judge felt it relevant that charity legislation has been strengthened over time to control charities, and he stated: "In my judgment, a member of a company limited by guarantee without a share capital with exclusively charitable objects is bound in to the regime now contained in the Charities Act 2011, the whole thrust of which is to ensure that the assets of the company are used for its exclusively charitable objects and for no other purpose..."

Applying the quote about fiduciary duties from the earlier case, he concluded:

"...the members of CIFF are people who assumed by their membership 'a responsibility to [CIFF] as would thereby reasonably entitle [CIFF] to expect that [the members would] act in [CIFF's] interest to the exclusion of [the members'] own or a third party's interest'. It is not necessary for the purpose of this case to decide in detail the nature and extent of the members' fiduciary duties...It would be contrary to the whole regime established by the increasingly prescriptive legislative regime reflected in the Charities Act 2011 if the member of a company such as CIFF could vote in his own interests or in a manner detrimental to the charitable objects of the company." (emphasis added).

So, in the court's judgment, members of charitable companies limited by guarantee (and, following the court's reasoning, probably members of unincorporated charities and of charitable companies limited by shares) do have a duty to exercise their membership powers in the charity's interests, even if the scope of that duty is (unfortunately) still unclear. This is in line with a view the Commission has taken in the past but we are not aware of any previous cases in which a court has expressly concluded that members of charitable companies owe fiduciary duties.

Final thought

Obviously all of this is very interesting... but as leave to appeal has been granted, it remains to be seen how many of these lessons from the High Court CIFF case will survive.

If you require further information on anything covered in this briefing please contact Philip Reed or Rachel Holmes at the firm on 020 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2017

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