Charities can take a variety of legal forms. Many charities (including those which are unincorporated associations, charitable companies and charitable incorporated organisations) have a two tier governance structure. This means that the charity has both members and trustees. The charity's membership is its ‘sovereign body’ which has the right to appoint and remove trustees and amend the charity’s constitution.

In an interesting development earlier this year the High Court found in the case of The Children's Investment Fund Foundation (UK) v HM Attorney General and Others (2017) EWHC 1379 [CH]  that members of a charitable company have a fiduciary duty to act in the interests of the charity. 

The Children’s Investment Fund Foundation v HM Attorney General and Others

The case involved the divorce of Sir Christopher Hohn and Miss Jamie Cooper who had jointly set up the The Children’s Investment Fund in 2002  which had net assets of more than US$4 billion.  As part of the couple’s divorce it was agreed that Miss Cooper would set up another charitable company and that part of the Children's Investment Fund endowment would be transferred to it. The case was decided on its particular facts and circumstances but the Court supported a contention, long held by the Charity Commission that members of a charitable company when exercising their powers, owe a duty to act in a fiduciary manner in the interests of the charity. 

In 2004, the Charity Commission issued its guidance RS7 in which the Commission stated its view that members have an obligation to use their rights and exercise their vote in the best interests of the charity for which they are a member. Whilst some commentators supported this, there was a question as to whether this type of duty would be upheld by a court.

Now however, this case has confirmed that as the member’s powers are all directed at aspects of the management and administration of the charity, they must be used to achieve the charity’s exclusively charitable objectives. The Court agreed with the Commission’s guidance that "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 interest or in a manner detrimental to the charitable objectives of the company".

Whilst this case applied to charitable companies, it is also worth noting that the members of charitable incorporated organisations (CIOs) have an express duty under section 220 of the Charities Act 2011 to "exercise the powers that the member has in that capacity in the way that the member decides, in good faith, would be most likely to further purposes of the CIO".

Questions raised

It is helpful that the Court has cleared up this core question of whether company members owe a fiduciary duty as the ruling puts membership of a charitable company on a clearer footing. However, the decision raises further questions charities need to consider when deciding how to manage decision making and their membership.

We have often cautioned against admitting employees of a charitable company as company law members of the charity with voting rights, especially as members have the right to appoint and remove the trustee board. This can cause particular difficulty where the trustees determine the organisation needs to be restructured to become fit for the future or to undertake a merger. Similarly, some organisations have faced difficulties in the past where beneficiaries make up the membership, and the board determines that services should be delivered in a different way (or certain services discontinued), which may not immediately sit well with those beneficiaries.

As it is now clear that members hold fiduciary duties to the charity, so can the membership look to legitimately challenge or overturn a trustee decision on the grounds that the membership does not believe the decision to be in the best interests of the charity? On what basis could the trustees confidently reject such a challenge and pursue their preferred course of action? Will trustees look to challenge resolutions of the membership on the basis that the decision was made in contravention of the members’ fiduciary duties?

Conclusion

This extra dynamic to the trustee/member relationship has yet to be played out but it is something charities should be aware of. As ever, it is important for charities to carefully manage their membership and, where possible, to avoid confrontation between the board and the members.