The existing duties
A key principle of company law and charity law says that Directors/Trustees of a charitable company have a fiduciary duty to act in the best interests of their charity. This means that they must act out of loyalty to their charity and its beneficiaries, rather than acting in their own interests (similar to, for example, an agent acting for their principal or a solicitor acting for their client).
By contrast, members of a company can vote however they like in their own interests unless they do something that no reasonable person would think was in the interests of their company. Until now, there has been no clear legal precedent saying that members of a charitable company are any different. (This can be contrasted with the members of a Charitable Incorporated Organisation (CIO), who have always been required by law to act in a way that they consider, in good faith, is most likely to further the purposes of their CIO.)
In the recent case of Lehtimäki and others v Cooper, the Supreme Court ruled that members of a charitable company do have a fiduciary duty: they must act in the best interests of their charity's objects. This duty applies when they are carrying out their role as a member (i.e. voting on resolutions) and it includes not making a profit from their position and not acting where they have a conflict of interest.
The test is subjective: Did the member do what they thought (in good faith) would be in the best interests of the objects of the charity? However, it also seems to be relevant what the charity's beneficiaries and the public would expect the member to do.
The Court said that the duty will not apply to every decision of a member but unfortunately didn't provide any general guidelines on this, just saying that it must be "worked out as and when [circumstances] arise". However, it did mention the following:
- Members should not vote on something where they have a conflict of interest or would be receiving a benefit, including their own appointment as a Trustee
- Members have an obligation to disclose conflicts of interest
- The duty is likely to be triggered where the members are making a decision which involves a transfer of charitable assets
- 'Minor incidental benefits' or benefits authorised by the Articles will not cause a member to breach the duty
Particularly interesting were some of the reasons the Court gave for making its decision:
- the duty is consistent with the 'special treatment' the law gives to charities
- well-known rules on fiduciary duties would make it easier for the courts to consider cases
- and charity law would be more 'internally coherent'
What's the impact on charitable companies?
In practice, the only time this duty will become relevant is if someone (for example a member, a beneficiary or the Charity Commission) objects to something a member has done. Even then, it would be very unusual for the matter to end up in court.
The courts have the power to intervene to make sure that charities and charitable funds are being administered properly, but they can only interfere with a member's actions if the member has acted improperly or unreasonably, or there are 'exceptional circumstances'. In this case the Court decided there were exceptional circumstances, which allowed them to force a member to vote on a resolution in a certain way.
What should you do now?
Unfortunately the Court provided limited guidance on what charitable companies should do now, and one of the legal representatives in the case raised a number of practical issues including:
- Will there need to be declarations of interest before meetings of members?
- Can a member with a conflict of interest vote?
- Do members have a duty to attend and vote at meetings?
- Does this affect the ability of members to receive benefits from the charity?
- Will members have to investigate matters before voting?
- Would a member be liable to compensate the company if he exercised his right to vote in breach of duty?
The Court acknowledged that no mechanism for resolving members' conflicts of interests exists, but determined that this was not a matter for the Court to resolve. The solutions the Court suggested mostly involve seeking help from the Charity Commission, which will not be practical or desirable in many cases.
Hopefully the Charity Commission will provide some guidance on how to navigate this new issue, but until then charitable companies will have to make do with the limited guidance from the Court.
Charitable companies will need to consider whether they should develop policies and procedures to help members comply with their fiduciary duty.