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Law for Business

Knowhow - guidance - precedents

13 SEP 2017

Fiduciary duties for shareholders?

Fiduciary duties for shareholders?

It is an elementary principle of company law that whereas directors must comply with a variety of fiduciary duties, as well as a duty to exercise reasonable care and skill, shareholders are subject to no such constraints. This principle was not challenged in the recent High Court decision in The Children’s Investment Fund Foundation (UK) v HM Attorney General [2017] EWHC 1379 (Ch), but the court’s conclusion that members of a charitable company limited by guarantee without a share capital are, in fact, subject to fiduciary duties was nevertheless eye-catching. The decision is clearly of direct relevance to members of such companies in particular, but the question also arises as to whether the court’s reasoning might be applicable to members or shareholders of any other types of company.

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English law takes the view that a share confers ownership rights which can normally be exercised as the holder sees fit, free from any duties of loyalty or care. Thus, in Re Astec (BSR) plc [1999] BCC 59, it was noted as follows:

“The starting point is the proposition that in general the right of a shareholder to vote his shares is a right of property which the shareholder is free to exercise in what he regards as his own best interests. He is not obliged to cast his vote in what others may regard as the best interests of the general body of shareholders, or in the best interests of the company as an entity in its own right.”

On the specific question of whether a shareholder owes the company fiduciary duties, the court in Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 1 WLR 1133 commented as follows:

“When a shareholder is voting for or against a particular resolution he is voting as a person owing no fiduciary duty to the company and who is exercising his own right of property, to vote as he thinks fit.”

And, finally, in Re Unisoft Group Ltd (No. 2) [1994] BCC 766, the judge went so far as to observe that “the law is that a shareholder may act with malice in voting his shares against a particular resolution”.

The notion that a shareholder is free to exercise his voting rights as he sees fit is, however, subject to various qualifications. For example:

  • the right to vote is, in some situations, removed altogether
Thus, on a resolution under section 239 to ratify a director’s breach of duty, a shareholder who is “connected” with the director is disenfranchised.

  • the courts have held that in a few, relatively narrow instances, a shareholder must look beyond his own interests in casting his vote
For example, a shareholder who is voting on a resolution to alter the company’s articles of association must be acting “bonâ fide for the benefit of the company as a whole” (Allen v Gold Reefs of West Africa, Ltd [1900] 1 Ch 656), and a shareholder who is voting on a resolution of a class to alter class rights must be acting in the interests of the class as a whole (Re Holders Investment Trust Ltd [1971] 1 WLR 583).

  • a shareholder can choose to restrict his freedom to vote as he pleases by entering into a shareholders’ agreement under which he is contractually bound to vote in a particular way
  • a shareholder may, by exercising his voting rights, cause the company to act in such a way as to give rise to an unfair prejudice petition under section 994.

The fact that qualifications exist, however, does not detract from the general rule. Indeed, in the case under consideration in this article the court was of the view that: “Generally a member of a commercial trading company may vote his shares at a general meeting in accordance with his own interests or wishes.”

The Children’s Investment Fund Foundation (UK) v HM Attorney General (2017)

The facts before the High Court in The Children’s Investment Fund Foundation gave rise to questions concerning the intersection between charity law and company law. The case concerned two charities: CIFF, which was founded by a husband and wife, and BWP, which was founded by the wife following the couple’s divorce. The main question for the court was whether to approve a very substantial grant from CIFF to BWP, but it also had to decide whether the grant would constitute a payment for the wife’s loss of office as a trustee of CIFF under section 215 of the Companies Act 2006 and, if it would, whether the only independent member of CIFF should be directed to vote in favour of a resolution to approve that payment under section 217. It was in connection with its consideration of the possible need for a resolution under section 217 that the court asked itself whether a member of a charitable company limited by guarantee owes the company any fiduciary duties.

The judge dealt with this point relatively briefly, but his analysis was careful and reasoned, and as such is worthy of serious attention. Earlier in his judgment he had noted that a shareholder of a commercial company does not owe the company fiduciary duties, but that the position in relation to a member of a charitable company limited by guarantee has never been decided one way or the other. There appear to have been two grounds – no doubt related - upon which he subsequently concluded that members of such companies do, in fact, stand in a fiduciary position in relation to the company. First, the regime governing charities under the Charities Act 2011 seeks to ensure that the charity’s assets are used only for charitable purposes, and do not benefit its members in their personal capacity. Secondly, whereas a shareholder of a commercial company is exercising an ownership right over his shares when he casts his vote, a member of a charitable company limited by guarantee does not have any private interest in the company, but rather is an integral part of the charitable structure, such that voting powers are conferred on him for use in furthering the company’s charitable purposes.

In the course of his decision on this point, the judge referred to judicial observations to the effect that a fiduciary relationship will arise where a person, A, has taken on a responsibility to another person, B, in circumstances in which B is entitled to expect A’s complete loyalty. In his view, the members of CIFF had, by virtue of their membership in the company, taken on a responsibility to it in circumstances which gave rise to a fiduciary relationship.

He did not, however, go on to examine the precise scope of the members’ fiduciary duties, contenting himself with holding that they were obliged to vote in the interests of the company.


It is possible that those who are immersed in the world of not-for-profit organisations will not be unduly surprised by the notion that members of a charitable company limited by guarantee owe the company fiduciary duties. Members of charitable companies may take it for granted that they owe it some degree of loyalty, and indeed the Charities Act 2011 provides expressly that members of a charitable incorporated organisation (a particular type of corporate vehicle, distinct from a company) have a duty to act in the way they feel, in good faith, will further the organisation’s purposes (section 220). From the perspective of those who work with commercial companies, however, the idea that a member might owe his company duties verges on the heretical.

Of course, the decision in The Children’s Investment Fund Foundation by no means purported to alter the law concerning shareholders of commercial companies. The judge was dealing with the specific question of the position of members of a charitable company limited by guarantee, and, indeed, as has been noted above, he recognised that shareholders of commercial companies do not owe them fiduciary duties. It is, though, worth considering whether any aspects of his reasoning might be used to argue that members or shareholders of companies other than charitable companies limited by guarantee could, after all, be subject to fiduciary duties.

If the view is taken that the judge’s decision was based primarily on the fact that CIFF was a charity, and as such the Charities Act 2011 ensured that its assets were devoted exclusively to charitable purposes, it is difficult to extend his reasoning beyond charitable companies limited by guarantee. Might it be argued, however, that the real basis of his decision was that the members did not have any financial stake in the company’s activities? In other words, since they had no “private interest” in the company’s success, they were obliged to devote themselves to ensuring that its purposes, whatever they might be, were achieved?

If this analysis is adopted, there is scope to argue that the judge’s reasoning is of wider application than it might appear. On the one hand, a shareholder of a ‘normal’ trading company is clearly not subject to fiduciary duties. The company’s aim is to make money, and his interest in the company is purely financial. There can be no doubt that, when he is exercising his vote, he is exercising a ‘right of property’, and as such is free to exercise it in his own interests. Consider, though, the following scenarios.

  • A civic-minded resident in a deprived neighbourhood establishes a scheme to encourage local people to volunteer to carry out small gardening projects on wasteland, and forms a company limited by guarantee, of which he is the sole member, to administer the scheme. The company’s articles specify that its object is exclusively to manage the scheme for the benefit of the community, and that distributions to members are not permitted.
Might it be argued that the member has no private interest in the company whatsoever, and that in fact his relationship with it is fiduciary in nature?

  • A number of small businesses form an organisation to represent their views to the local council. The organisation takes the form of a company limited by shares in which each business holds one share. The company’s articles specify that its object is exclusively to act as a representative body in dealings with the council.
If the company has never generated a penny of profit and has no intention of ever seeking to do so, might its shareholders be said to stand in a fiduciary relationship to it? Although there is plainly an underlying financial motive in their involvement with it (in that they hope that it will improve the environment in which they operate), they have no financial interest in the company itself. Could it be argued that, by becoming shareholders, they have taken on a responsibility to it to further its aim of undertaking productive discussions with the council?

  • Three friends form a company limited by shares to develop and, eventually, market an invention. The company’s ultimate aim is to generate profits, but the friends enter into a shareholders’ agreement which provides that for a period of three years they will ensure that the company focuses all of its attention on perfecting the product, and does not seek to make any profits, and that for the same period they will not dispose of their shares.
If the company is run along the agreed lines, such that for the three-year period in question it makes no profits and therefore makes no distributions to the shareholders, could it be argued that, during that period, the shareholders owe it fiduciary duties? In other words, could it be said that, by agreeing to put aside their financial interest in the company for the time being, they have undertaken to act in its interests rather than their own?

The fact of the matter is that the courts are very likely to take the view that the judge’s observations on fiduciary duties in The Children’s Investment Fund Foundation should be strictly confined to charitable companies limited by guarantee. The notion that a shareholder does not owe the company duties is, after all, a fundamental element in our company law and corporate governance regimes. It would seem, however, that on the basis of the judge’s observations a fairly strong case may be made for finding that the member in the first scenario is subject to fiduciary duties, and that an argument in favour of the existence of fiduciary duties can at least be made in relation to the second and third scenarios. Could it not plausibly be contended, for example, that when the shareholders in the third scenario are voting on the appointment of a new director during the three-year period, they are obliged to choose someone whom they honestly believe to be well suited to the role?

A final point worth considering in the light of the decision in The Children’s Investment Fund Foundation is that the implications of any conclusion that a member or shareholder owes the company fiduciary duties are potentially far-reaching. First, although the judge chose not to explore this point, the duties could be wide-ranging in nature. A director is obliged, under section 175 of the Companies Act 2006, to avoid a situation in which his interests conflict with those of the company. If, for example, a member of a charitable company were held to be subject to a similar duty, he would presumably be debarred from being involved in two similar charities, on the ground that his wish to see one of them succeed would inevitably compromise his ability to act in the best interests of the other. Secondly, there is the question of enforcement. The fiduciary duties would be owed to the company, and on normal principles that means that it would be in the company’s power to bring proceedings to enforce them. In any case in which a member or shareholder of a company owed it fiduciary duties, therefore, it would presumably be open to the board of directors to initiate proceedings on the part of the company against him for a breach of those duties. Claims by a company against a director for a breach of duty are commonplace; the idea that a company may pursue a member or shareholder for a breach of duty is, by contrast, rather startling. On the basis of the decision in The Children’s Investment Fund Foundation, however, it would seem to be the case that if the directors of a charitable company limited by guarantee feel that the company has been damaged by a member who voted in his own interests rather than those of the company, they can take legal action against him.


There is no doubt that the decision in The Children’s Investment Fund Foundation will be of great interest to members of charitable companies limited by guarantee. Although it does not seem at all likely that the courts will be inclined to extend the judge’s reasoning (if, indeed, they accept it at all) to members of other companies limited by guarantee, or conceivably even to shareholders of companies limited by shares, the idea that such members and shareholders might in certain circumstances be found to owe the company fiduciary duties does not now seem quite as far-fetched as it did previously. As always with cases which raise a novel point of law, the true significance of the decision will only become apparent over time.