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The impact of Lehtimaki v Cooper: are you (now) a fiduciary?

Posted on 10 November 2020

What is a fiduciary? A fiduciary necessarily has some form of relationship with another party where duties arise due to the nature of that relationship. The fiduciary relationship is underpinned by absolute trust. Fiduciary duties are defined and developed through case law and, as a result, they are ever evolving and changing; specific obligations arise from different circumstances. A fiduciary is in a position of power and must act with honesty, integrity, loyalty, good faith and transparency in exercising that power in the best interests of the other person or principal. Trustees are fiduciaries and they owe fiduciary duties to the beneficiaries of the trust of which they are trustee.

The judgment in Lehtimaki and others v Cooper [2020] UKSC 33 was handed down in July by the Supreme Court. It was the only case concerning a charity to reach the Supreme Court in recent years and the full implications and scope of the judgment will take time to ascertain. The Lehtimaki judgment has particular consequences for members of charitable companies. For a number of years now, the Charity Commission's position was that members of charitable companies are also fiduciaries, a position which some practitioners disagreed with. The Lehtimaki judgment has confirmed that members of a charitable company who have rights under the articles of association (as opposed to members in name only) do owe fiduciary duties. In the judgment, Lady Arden stated that fiduciary duties are not owed to the charitable company but to the "the charitable purposes or objects of the charity" where a "duly qualified individual" (defined in section 115 Charities Act 2011) and authorised by the Charity Commission or the Attorney General is able to bring charity proceedings to enforce this duty.

If you are a member of a charitable company, have you considered whether you owe fiduciary duties and what these duties might be? The answer is likely to be 'no' and it is not surprising that questions have been raised about the consequences of the Lehtimaki judgment. For example, if members of a charitable company are faced with a vote, is it the case that a member has a fiduciary duty to vote and, in relation to that vote, to ensure that they take into account the information relevant to that vote? In relation to a member's right to receive information, the Court noted that a member may "not be able to obtain information relevant to the exercise of his fiduciary powers". It is unclear what the ramifications of this are in relation to a potential claim for breach of fiduciary duty against a member. Further, are members able to receive advice at the expense of the charity which will enable them to carry out their fiduciary duty? These questions are not just relevant for the members themselves but also for charity trustees who will need to consider whether any changes in their charity's constitution are needed in order to enable the members to carry out their fiduciary duties. This is particularly the case for charitable companies that have mass membership. Of course in respect of a charitable company, fiduciary duties which a member owes can be modified by the memorandum and articles of association of the company.

The Supreme Court also held that the court has discretion to direct members how to vote. Where the court has decided what would be in a charity's best interests, the fiduciaries (potentially both trustees and members) have an obligation to ensure that the court's decision is implemented, regardless of whether the trustees and members are joined to the proceedings. It was held that once the court has determined how the fiduciary should vote, the decision "ceases to be a question for debate". For a fiduciary to not vote in accordance with a decision of the court would be to act in breach of their fiduciary duties.

The decision in Lehtimaki could have particular ramifications for religious charities where the votes of members are influenced by their faith, belief and/or identity in relation to their religion. In Lehtimaki, the Court did acknowledge the "the non-intervention principle", that the court should not intervene in the exercise by a fiduciary of a discretion unless there has been a breach of a fiduciary duty. However, the Court held that the principle did not apply where there is "an existential threat to the proper governance of the charity". What actually constitutes an "existential threat" will remain to be seen – further litigation is required to provide clarity on this. However, given that it is common for trustees and members of religious charities to come with strongly held beliefs and therefore a greater potential for disagreement, the court may find itself in the uncomfortable position where it is required to decide what is in the best interests of a charity by considering options with differing theological ideology.

Whilst the implications of Lehtimaki will take time and further case law to unravel, in the meantime, trustees of charitable companies which have members should carefully consider whether they need to take advice.

 

 

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