Following a recently handed down judgement in the McGaughey and Davis v. Universities Superannuation Scheme Ltd, after being heard in the Court of Appeal in July 2023, two members of a pension scheme looked to establish accountability for the actions of directors associated with the pension trustee entity, Universities Superannuation Scheme Limited (USSL). This was notably for the directors’ alleged failure to formulate a strategy for divesting the pension fund from fossil fuel investments.
Ewan McGaughey and Neil Davies are participants in USSL, a pension scheme boasting an estimated value of approximately £90bn, and comprising approximately 470,000 members, primarily consisting of academics and support staff within the UK’s universities and higher education institutions.
USSL is a company limited by guarantee and so does not have shareholders. USSL’s directors automatically become its members.
The claim asserted by the petitioners revolved around four principal facets, contending that:
- USSL’s directors breached the duty to exercise their powers for proper purposes under USSL’s constitution, as stipulated by Section 171 of the Companies Act 2006 (CA). This breach was alleged to have occurred during the covid-19 pandemic, when the pension fund was supposedly incorrectly valued, predicting a shortfall of £17.9bn. Subsequently, the directors implemented benefit reductions, despite the fund’s post-pandemic recovery.
- The implemented benefit reductions discriminated against women, minorities and young individuals, contrary to Section 19 and 61 of the Equality Act 2010, resulting in the potential for various claims against USSL and the directors.
- The directors were accused of breaching their duty to avoid conflicts of interest under Section 175 of the CA by inflating operational costs, which had escalated from £40m a year to £160m since 2010. Of particular concern was the increase in the CEO’s salary from £291,000 in 2013 to £756,700 in 2020.
- The directors were believed to have exposed the scheme to significant financial risk by failing to divest from fossil fuels, which were purportedly the worst-performing assets since 2017.
As the trustee company was unlikely to pursue legal action against its directors, the claimants sought authorisation to proceed with several ‘multiple derivative claims’ (MDCs). An MDC is a procedure under which, if certain conditions are satisfied, a court may allow individual members in a parent company to pursue a claim on behalf of a subsidiary company against those exercising control over it.
Although the claimants themselves were not members of the USSL or any subsidiary, they argued that their participation in the pensions scheme afforded them sufficient interest to proceed.
USSL asserted that established legal principles dictated that permission should only be granted under common law when derivative claimants meet the following four requirements, a stance unchallenged by the claimants:
- They can demonstrate sufficient interest and standing to pursue derivative claims on behalf of the company or entity.
- They can establish a prima facie case that each individual claim falls within one of the recognised exceptions to the rule in Foss v Harbottle, which stipulates that the proper claimant should be the wronged company itself. (The claimants relied on the fourth exception, which pertains to cases of fraud where the minority or other interested stakeholders are unable to rectify the wrongdoing).
- They can establish a prima facie face based on the merits of each claim
- They can demonstrate the appropriateness of permitting them to pursue the derivative claim or claims given the overall circumstances.
The outcome
At first instance, the claimants were unsuccessful before Justice Thomas Leech in the High Court. Despite acknowledging the potential for pension scheme beneficiaries to initiate a derivative claim, the judge declined to authorize their pursuit of such a claim because of their inability to establish a prima facie case.
Specifically, the claimants were unable to demonstrate that the directors had breached their fiduciary and statutory obligations or that such alleged breaches fell within the fourth exception to the rule in Foss v. Harbottle.
The appeal was heard by Lords and Lady Justices Flaux, Snowden and Asplin in July 2023. They held that while the claim regarding the escalating costs and expenses of the pension fund was an issue capable of giving rise to a derivative claim, the valuation, discrimination and fossil fuel related issues were not.
Analysis
The primary argument of the claimants was that the company and members of the scheme suffered, or would potentially suffer, financial loss due to USSL’s ongoing investment in fossil fuels. The claimants relied on articles from the Financial Times and a study from Imperial College London as evidence that renewable energy investment portfolios have consistently performed better than fossil fuel investments. However, they failed to specifically illustrate the alleged loss suffered by the company and its members due to the ongoing investment in fossil fuels.
Leech J put strong emphasis on the detailed evidence provided by USSL about how the directors exercised their discretion, namely they had taken legal advice, conducted a survey of members, adopted an ambition of net zero by 2050, and adopted policies for working with the companies in which it invests in the meantime.
Importantly, the Court of Appeal held the fact that the appellants were members of the scheme did not put them in a place analogous to that of a shareholder in a company derivative action. The interests of members and beneficiaries of a pension scheme could widely differ. This difference is exaggerated greatly by USSL having approximately 470,000 members whose interests could not be accurately represented by only two members and a survey with 4000 responses that agreed that fossil fuel investments should be excluded.
Related litigation
Earlier in 2023, ClientEarth brought a claim against Shell plc in which the claimant asserted that Shell mishandled climate risk by inadequately preparing for the transition to its net-zero goal. This claim was also dismissed by the High Court on the grounds that it is at the director’s discretion how to promote the success of the company in accordance with their duties, and climate change was one of many competing considerations that had to be factored in to commercial decision making.
Despite the dismissal of both cases, the fact that claims of this type are being brought to court more frequently is a sign that companies should take ESG concerns and responsibilities very seriously and that they should factor at the highest level of strategic planning and company decision making. Moreover, they demonstrate that companies should take proactive steps to ensure that policies are duly set at board level with such concerns in mind. There is no doubt that parties to similar litigation in the future will refer back to these decisions, which set out the high hurdles faced by ‘activist’ claimants, when crafting their case.
Katie Allard, is a senior associate and Ananta Singh is a legal apprentice at Kingsley Napley LLP
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