45 St. Clair Ave. West, Suite 600
Toronto, Ontario, M4V 1K9
Tel: (416) 925-7400

Are Members (and Directors) of a Charitable Corporation Fiduciaries?

1. Introduction

The question whether charitable corporations and their directors are trustees has been discussed by the courts a number of occasions. Moreover, s. 1(2) of Ontario’s Charities Accounting Act[1] provides in part, “A corporation incorporated for a religious, educational, charitable or public purpose shall be deemed to be a trustee within the meaning of this Act.…” However, in a carefully reasoned judgment in Ontario (Public Trustee) v. Toronto Humane Society,[2] Anderson J. declined to hold that the Society “is in all respects and for all purposes a trustee”, but that “it is answerable in certain respects for its activities and the disposition of its property as though it were a trustee”, and  that the Society “is amenable to the ancient supervisory equitable jurisdiction of the court”. [3] The Society also argued that its directors were not trustees. Anderson J. did not decide the point, but said: “Whatever doubts may surround the status of directors of charitable corporations, I am satisfied that it partakes sufficiently of trust to make them amenable” to the supervision of the court, in particular because of the court’s inherent jurisdiction in charitable matters.[4] In contrast, in Re David Feldman Charitable Foundation,[5] the court said in dictum that not only was the Foundation a trustee because of the statute, its directors were also trustees.[6] However, the general case law does not appear to support this broad statement.[7] The case law does make it clear that a charitable corporation has corporate characteristics that it must adhere to it, but it may also be subject to the court’s supervision in respect of its charitable objects. Nonetheless, the court’s supervisory powers may be limited specifically by legislation.[8]

2. Lehtimäki v. Cooper

These issues were raised again in the important recent decision of the UK Supreme Court, Lehtimäki v. Cooper.[9] A married couple, Sir Christopher Hohn (“Hohn”) and Ms Jamie Cooper (“Cooper”) founded the Children’s Investment Fund Foundation (UK) (“CIFF”) as a charitable company in 2002. It held more than $4 billion in assets and its purpose was to help children in developing countries. When their marriage broke down, it became difficult to operate the charity and so in 2015 Hohn and Cooper agreed that in exchange for a Grant (“the Grant”) of $360 million by CIFF to Big Win Philanthropy (“BWP”), a charity founded by Cooper, she would resign as a member and trustee of CIFF.

In addition to being a charity, CIFF was a non-share capital company governed by the Companies Act 2006[10] (“the 2006 Act”) and as such it had a two-tier governance structure, namely, members and directors, the latter being called trustees. Hohn, Cooper, and Dr. Lehtimäki (“Lehtimäki”) were the only members of CIFF. Hohn and Cooper were two of its trustees. As part of the arrangements, Hohn and Cooper each agreed to endow BWP with $40 million, but Cooper’s agreement was conditional on the making of the Grant. In addition to the 2006 Act, as a charity, CIFF was also subject to the Charities Act 2011[11] (“the 2011Act”) and the general law that applies to charities, trustees and directors and members of companies. Section 217 of the 2006 Act provides that a company may not make a payment for loss of office to a director unless the payment is approved by a resolution of the members. In addition, a charitable company requires the approval of the Charity Commission to make the payment under s. 201 of the 2011 Act. CIFF applied to the Commission for approval. It did not give its approval, but authorized the bringing of proceedings to obtain the court’s approval of the Grant and directions regarding the s. 117 issue.

3. Decisions of the Lower Courts

Because Hohn and Cooper were clearly conflicted, CIFF then brought an application for directions that the Grant was in the best interests of CIFF and requiring Lehtimäki to vote in favour of a resolution of members to approve it under s. 217 of the 2006 Act. Sir Geoffrey Vos, C., ordered Lehtimäki to be joined as a party and gave him opportunity to make submissions. The Chancellor found that the trustees had surrendered their discretion to the court, but that Lehtimäki had not. He held that Lehtimäki was a fiduciary, because the power vested in him to vote on the section 217 resolution was vested in him for the benefit of CIFF and not in him personally He  granted the application in light of the exceptional circumstances of the case.[12] The Chancellor thought it important to direct Lehtimäki how to vote to prevent the court’s decision from being undermined, because there was a risk of expensive litigation if he voted against approving the Grant, and because he was a fiduciary and would not be acting in the best interests of CIFF if he came to a different conclusion than the court. Further, by making the order finality could be achieved.[13]

Lehtimäki appealed to the Court of Appeal on the ground that he was entitled to exercise his own judgment on how to vote as a member. The Court of Appeal agreed that Lehtimäki was a fiduciary, but that the Chancellor should not have directed him to vote in a particular way. Thus it allowed the appeal.[14]

4. Decision of the Supreme Court

4.1 Reasons of Lady Arden

Cooper then appealed to the Supreme Court. The issues as defined by Lady Arden, who delivered the main reasons of the court, were: (1) Is Lehtimäki in his capacity as a member of CIFF a fiduciary in relation to the objects of the charity? (2) Have circumstances arisen in respect of the section 217 resolution that permit the court to exercise its jurisdiction over fiduciaries in relation to Lehtimäki? (3) Does section 217 allow the court to direct a member how to exercise his discretion? The other members of the court, Lords Reed, Wilson, Briggs and Kitchin agreed that the appeal should be allowed, but Lord Briggs, with whom Lords Wilson and Kitchin agreed took a different approach to the second issue. Lord Reed preferred the judgment of the Court of Appeal, but concurred in the result in deference to the unanimity of the other members of the court.

4.1.1 First Issue

On the first issue Lady Arden held, as had the lower courts, that Lehtimäki was a fiduciary because of the duties imposed on him,[15] and the other members of the court agreed. Her Ladyship discussed the definition of a fiduciary in detail. In particular, she discussed the two principles that apply to fiduciaries, the no-conflict principle and the no-profit principle. I shall not discuss these matters in this blog, since the law on this issue is clear. However, it is well worth reading this part of her reasons, since this issue is litigated on a regular basis.[16] As Lady Arden notes, it is important to recognize that a fiduciary duty owed by a member of a charitable corporation is not owed to the company itself, but to the charitable objects of the charity.[17]

On the question whether a member of a charitable company is a fiduciary, a point that had never been decided, Lady Arden focused especially on Liverpool and District Hospital for the Diseases of the Heart v. Attorney General.[18] A charitable company founded the hospital, but it transferred the hospital to the National Health Service when it was formed. The company itself was then wound up and a question arose about the disposition of its assets. In the decision Slade J. held that the company’s relationship to its assets was analogous to that of a trustee, though not a trustee in the strict sense, since it retained a beneficial interest in the assets. The company’s memorandum of association had provided that on winding up its assets should be transferred to an organization with similar objects. Slade J. held that the court had jurisdiction to order that the assets be applied cy-près in accordance with the memorandum of association, rather than to the members. Lady Arden also quoted from the judgment of Buckley L.J. in Von Ernst & Cie. SA v. Inland Revenue Comrs.,[19] who described the broad role of the court in the supervision of charities. As already mentioned, Lady Arden held that Lehtimäki was a fiduciary and in that respect she stated the following:[20]

… in my judgment a member of CIFF owes a fiduciary duty to the charitable purposes, and that duty is one of single-minded loyalty. What does that involve in the present context? In my judgment, it requires that he considers [sic] whether the resolution should be passed and that he do so only by considering the best interests of the objects of the charity. That is because the resolution involves a disposition of assets that would otherwise be available for application by CIFF towards those objects.

She added:[21] “… to hold that a member is a fiduciary is consistent with the ‘special’ and ‘beneficent’ treatment which the law gives to charities”. Significantly, she held these principles apply to charitable companies large or small and that the Court of Appeal erred in suggesting that there might be a different outcome for members of mass membership charities.[22]

4.1.2 Second Issue

On the second issue Lady Arden held that in the special circumstances of this case the court ought to exercise its jurisdiction to direct Lehtimäki how to vote. She noted that in the case of private trusts the court rarely intervenes in the exercise of a trustee’s discretion unless the trustee acts improperly or unreasonably (the “non-intervention principle”).[23] The court will intervene in charitable trusts, for example, by curing defects in the machinery of the trust and to direct the administration of the trust, but it was argued that it should not do so for other reasons. However, Lady Arden held that “the court can take jurisdiction through an exception to the non-intervention principle”.[24] It is not restricted to making a scheme, but can also give effect to a charity’s purposes by giving a direction.[25] In this respect she emphasized the duty of the court to ensure that a trust is executed, that, as held by the Chancellor, it was in the best interests of CIFF to make the Grant, that the trustees had surrendered their discretion to the court, and that if Lehtimäki were to vote against the section 217 resolution, the best interests of CIFF would be defeated.[26] Although Lehtimäki had not (yet) breached any duty, in the circumstances of the case, the court can nonetheless intervene.[27]

Lady Arden concluded her discussion on the second issue by expressing her disagreement with Lord Briggs’ judgment on this point. I shall discuss the latter’s judgment below.

4.1.3 Third Issue

On the third issue Lady Arden concluded that since CIFF’s trustees had surrendered their discretion to the court, and since the Chancellor had reached the conclusion, which was not challenged, that it was in the best interests of CIFF that the Grant be made, the court can give direction to Lehtimäki about how he should vote.[28]

4.2 Reasons of Lord Briggs

In his judgment, Lord Briggs agreed with Lady Arden’s conclusions on the first and third issues, but took a different approach to the second issue. He concluded that the court could intervene and direct how Lehtimäki should vote on the basis of his threatened breach of fiduciary duty, rather than on the basis of an exception to the intervention principle as Lady Arden held. In Lord Briggs’ view, once the court has accepted the surrender by the trustees of the exercise of their discretion and once the court made a decision about the merits of the proposed transaction,

… the duty of the charity’s fiduciaries … is to use their powers to the end that [the transaction] is implemented, both generally and in accordance with any directions which the court may give for that purpose. It would in my view be a plain breach of fiduciary duty for a relevant fiduciary of the charity to do otherwise, a fortiori to exercise a fiduciary power so as in effect to veto the very transaction which the court has decided should proceed in furtherance of the charity’s purposes.[29]

His Lordship agreed that the court’s jurisdiction to intervene in the affairs of charities is wider than just in relation to schemes.[30] However, he did not accept the premise on which Lady Arden based her judgment on this issue, namely, that Lehtimäki did not commit and was not threatening to commit a breach of his fiduciary duty. In his view, once the court has decided that the proposed transaction is in the best interests of the charity, the subjective view of a fiduciary, such as Lehtimäki, has to yield when the court had come to a different conclusion than his own.[31]

Because of Lehtimäki’s threat to vote against the Grant, the Chancellor was right to order him to vote in favour of the Grant, for “Where the court has finally decided what is in the charity’s best interests there can be no reasonable basis for a fiduciary acting contrary to that decision and, here, actually vetoing the transaction which the court has decided best furthers the purposes of the charity”.[32]

Lady Arden interacted with Lord Briggs’ reasons in her judgment.[33] However, I believe that their respective views on the second issue are set out sufficiently above and it would be supererogatory on my part to restate their differences and thereby make this blog excessively long.

5. Conclusion

It is true that this is a very unusual case. The circumstances are unlikely to be repeated. But that does not mean that the case can be disregarded as insignificant. It contains a wealth of information and discussion about fiduciaries in general and about the status of members of charitable companies as fiduciaries. The case clarifies the extent to which a member (and a director) of a charitable company is a fiduciary. And it gives sound guidance on the question when and on what basis a court may intervene to ensure that the charitable purpose of a charitable company are carried out.

Therefore, tolle lege! (Take up and read!)

[1]    R.S.O. 1990, c. C.10.

[2]    1987 CarswellOnt 649, 60 O.R. (2d) 236 (H.C.).

[3]    Ibid., para. 19.

[4]    Ibid., para. 26.

[5]    (1987), 58 O.R. (2d) 626, 26 E.T.R. 88 (Surr. Ct.).

[6]    Ibid., p. 631 O.R.

[7]      See Maurice C. Cullity, “Trusts and Trustees – Charitable Trusts – Incorporated Charities – Whether Incorporated Charities and Their Directors Are Trustees” (1988-89), 9 E.T.J. 12, at 15-16.

[8]    See, e.g., Re Centenary Hospital Assn. (1989), 69 O.R. (2d) 1, 59 D.L.R. (4th) 449 (H.C.), in which the court held that the activities of public hospitals are not covered by the Charities Accounting Act, footnote 1, supra.

[9]    2020 UKSC 33. Pinpoint references hereafter refer to the reasons of the Supreme Court.

[10]   C. 46 (U.K.).

[11]   C. 25 (U.K.).

[12]   [2018] Ch. 371.

[13]   Lehtimäki v. Cooper, footnote 9, supra, para. 26.

[14]   [2019]  Ch. 139.

[15]   Lehtimäki, paras. 42, 78.

[16]   For a recent Canadian case, see Pirani v. Pirani, 2020 BCSC 974.

[17]   Para. 50.

[18]   [1981] Ch. 193.

[19]   [1980] 1 W.L.R. 468 at 479-80. It is interesting that in this excerpt Buckley L.J. states with respect to In re French Protestant Hospital, [1951] Ch. 567 (which Anderson J. relied on in the Toronto Humane Society case, footnote 2, supra): “it seems to me that it was assumed, rather than decided, that a corporate charity was in the position of trustee of its funds”.

[20]   Para. 90.

[21]   Para. 91.

[22]   Para. 105.

[23]   Para. 120, citing Pitt v. Holt, [2013] UKSC 26 as the leading modern authority for the non-intervention principle.

[24]   Para 119.

[25]   Para. 152.

[26]   Paras. 124, 130.

[27]   Para. 137.

[28]   Para. 202.

[29]   Para. 208.

[30]   Para. 216.

[31]   Para. 218.

[32]   Para. 232.

[33]   Paras. 174-199.

This paper is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This paper is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.


Previous Post:
Next Post:
Click here or on top Blog logo to return to Blog front page.

Search Blog by Keyword(s)

Site Search

Site Map