Sept 2018 Charity & NFP Law Update
On July 6, 2018, the England and Wales Court of Appeal released its decision in Lehtimäki v The Children’s Investment Fund Foundation (UK) & Ors, which was an appeal of the decision in The Children’s Investment Fund Foundation v AG et al (“CIFF Decision”) that was reported on in the September 2017 Charity & NFP Law Update. While the courts’ decisions in the above matters involve consideration of legislation and case law in England and Wales, given the shared common law jurisprudence, charities in Canada may find the English appeal court’s comments regarding the fiduciary duties of members of charities to be of interest.
In the CIFF Decision, the English High Court of Justice considered a request by The Children’s Investment Fund Foundation (UK) (“CIFF”), a registered charity, for direction concerning the proposed payment of a US$360 million grant (the “Grant”) to another English registered charity. It is beyond the scope of this article to provide a complete overview of the background facts to the CIFF Decision and reference can be made to the September 2017 Charity & NFP Law Update for a summary. However, in general terms, in the CIFF Decision, the question before the court was whether the only member with a right to vote on approving the payment of the Grant could use his discretion to vote for or against the Grant. The court stated that since the payment of the Grant was approved by the Charity Commission (which governs registered charities in England and Wales) and was also approved by the court as being expressly in the best interests of CIFF, the particular member in question did not have the discretion to vote against the Grant. Instead, the court stated that the member was “bound by the fiduciary duties” owed to CIFF and subject to the court’s inherent jurisdiction over the administration of charities in that regard.
In the appeal, the member in question, Lehtimäki, challenged the lower court’s decision, arguing that members of an organization are not fiduciaries and that even if they were, courts do not have jurisdiction to intervene in directing their votes. The appeal court rejected Lehtimäki’s argument that members of a charitable organization are similar to that of corporate shareholders and stated that “membership of a charitable company… is very different from ownership of shares in a non-charitable company. … a share is property and the right to vote attached to it ‘an incident of property to be enjoyed and exercised for the owner’s personal advantage’, membership of a charitable company confers no proprietary rights.” Instead, the appeal court held that votes of a member function “in connection with assets appropriated to charity in which the member has no personal stake.”
In its decision, the appeal court upheld the trial court’s determination that members of CIFF were fiduciaries, but further held that courts could not direct a fiduciary in the exercise of their powers unless the fiduciary was breaching his or her duty.
In rejecting the lower court’s order to direct Lehtimäki to vote in favour of the Grant, the appeal court noted that the UK Charities Act 2011 requirement for member approval in relation to such a grant indicated that Parliament intended these matters to be handled internally rather than by the courts. On that basis, the appeal court confirmed that it would only intervene in the event that the member breached his or her fiduciary duties. The appeal court also stated as follows:
Powers relating to the administration of trusts have thus been held to have a fiduciary character. An analogy can be drawn with the powers that members of CIFF have in connection with its administration. It is noteworthy, too, that the Charity Commission has said as regards ‘Members’ voting obligations’ that it ‘considers that the rights that exist in relation to the administration of a charitable institution are fiduciary, regardless of the identity of the person or persons on whom the rights are conferred’ (see “RS7 – Membership Charities”).
For comparison purposes, in Canada, members of charitable not-for-profit corporations have not been found to be fiduciaries by the Canadian courts. While an interesting case, the appeal decision in the CIFF case is limited to its unique facts and applicable English law. Whether or not this decision might have application in Canada is not clear.