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Rayner my parade! The importance of specialist advice.
Jemma Brimblecombe
This article was first published in Solicitor's Journal on 11 December 2023.
In the recent case of McGaughey and Davis v. Universities Superannuation Scheme Ltd, 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), notably for the directors’ alleged failure to formulate a strategy for divesting the pension fund from fossil fuel investments.
This article explores the various points raised by the Court of Appeal as to why the appellants were not successful in their claim and assesses where this leaves ESG related litigation given the similar set-back received earlier this year by ClientEarth over its derivative claim that Shell had inadequately prepared for net-zero.
Ewan McGaughey and Neil Davies are participants in USSL, a pension scheme boasting an estimated value of approximately £90 billion, 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:
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:
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.
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.
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 in the Dispute Resolution team. She has a wide-ranging commercial practice with particular interest and expertise in complex civil fraud and asset tracing investigations, boardroom and shareholder disputes, and breach of contract claims, acting for both claimants and defendants.
Ananta is a Legal Apprentice in the Dispute Resolution team, where she works on a wide variety of litigation matters.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
Jemma Brimblecombe
Charles Richardson
Oliver Oldman
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