This blog was co-written by Ryan Mitchell (Trainee Solicitor) and Michael Moore (Partner)

The recent High Court ruling in the case of Children’s Investment Fund Foundation (UK) [2017] EWHC 1379 provides some insight into whether members of charitable companies limited by guarantee owe a fiduciary duty to the company when exercising their rights.

Before the Children’s Investment Fund decision there were mixed opinions on whether members of charitable companies were required to exercise their rights (in particular, voting rights) to further the charity’s best interests. Charitable companies’ articles of association frequently contain restrictions which limit how members can exercise their rights. If drafted correctly, these restrictions serve to protect the best interests of the company. Where a charitable company’s articles lack such constraints, however, it was previously thought doubtful whether its members would be prevented from voting contrary to the company’s best interests.

Legal commentators were particularly sceptical of whether a fiduciary duty could be implied between charitable companies limited by shares and their members. Share voting rights are treated as property rights at law, much like the ownership of the shares themselves. The owners of those property rights were therefore thought free to exercise them as they pleased, provided they did so in accordance with the company’s constitution.

Contrastingly, the Charity Commission’s view has been that a company is not a charitable company if its members are allowed to vote in a manner contrary to the company’s best interests. This implies that members must be prevented from voting against the company’s best interests if the company is to have charitable status. If the company’s articles of association do not contain an express restriction then, following the Commission’s reasoning, one would have to be implied for that company to be charitable.

The Children’s Investment Fund case concerned a charitable company limited by guarantee and so is not directly relevant to charitable companies limited by shares. Nevertheless, the High Court’s judgement clarified that members of a charitable company limited by guarantee can owe a fiduciary duty towards the charity. Members of charitable companies limited by guarantee are therefore (in certain circumstances) legally obliged to vote in the company’s best interests, even if to do so is contrary to their own interests or the best interests of third parties. Unfortunately, the High Court was not required to examine the nature and extent of the members’ fiduciary obligations in detail and so the precise scope of the duty remains to be confirmed.

In practice, the precise facts of Children’s Investment Fund are not expected to crop up frequently. The case involved a multimillion pound payment to a director’s charity in consideration for their resignation from the board.

Nevertheless, members of charitable companies limited by guarantee should be mindful of their duty in certain circumstances to use their rights and exercise their votes in the best interests of the charity.

For further advice on charities, charitable companies and members rights, please contact Nick Vaughan or Michael Moore.

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