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Climate litigation: pension scheme trustee case dismissed but scrutiny continues

Bruno Rucinski at Allen & Overy LLP

Bruno Rucinski, trainee solicitor at Allen & Overy LLP, examines what the dismissal of the climate case against directors of the corporate trustee of one of the UK’s largest pension schemes, the Universities Superannuation Scheme (USS), means for future claims against directors.

  • In July 2023, the English Court of Appeal dismissed a suit brought by two academics against the directors of the USS, one of the UK’s largest pension schemes.
  • To bring a successful ‘multiple derivative’ suit, claimants must establish that they have a legitimate interest in the company’s action by demonstrating not only that they suffered harm but also that the harm relates to or correlates with the harm to the company.
  • Despite procedural and evidential hurdles, future claimants are unlikely to be deterred from raising such challenges because they compel those defending the claim to provide substantive evidence, which is likely to involve disclosure and resulting public scrutiny of corporate decision-making.

The USS is one of the largest private occupational pension schemes in the UK. It provides retirement benefits for academic staff in higher education institutions, and is administered by its corporate trustee, the Universities Superannuation Scheme Limited (USSL).

Why did two academics raise a lawsuit against directors of one of the largest UK pension schemes?

The two academics, Dr Ewan McGaughey and Prof Neil Davies, are both members of the scheme. In May 2021, the USS announced its ambition to be net zero by 2050, “if not before”. In order to achieve this goal, the USS published a list of “likely actions”. These included:

  1. reviewing and possibly changing the benchmarks the USS use to guide and measure performance to ensure that these take carbon (and other ESG factors) into account;
  2. ensuring that assets owned by the USS are resilient in the face of a move to a Net Zero world; and
  3. divesting over time from high carbon sectors which are at financial risk from the transition.

Despite this statement, the academics asserted, inter alia, that the directors of USSL acted in breach of their duties under sections 171 and 172 of the Companies Act 2006 (CA) by failing to act for proper purposes, including to make investments that avoid a significant risk of financial detriment to the scheme and its beneficiaries.

Alternatively, they contended that the directors had not taken into account relevant considerations (including the results of an ethical investment survey of members in 2020) by failing to have an immediate plan, which also constituted a breach of sections 171 and 172.

‘Statutory derivative claims’ vs ‘multiple derivative claims’

The academics sought to challenge the directors of the USSL via a derivative action. By way of background, the rationale for the derivative action is to enable justice to be done where the wrongdoer is in control of the entity in which the cause of action is vested.

An example would be when a director defrauds a company’s investors and holds a majority of the shares. As such, the director is able to block attempts to sue for damages. However, a derivative action can be brought on behalf of the company in order to seek a remedy for a loss or harm which it has suffered which could not otherwise be remedied.

In this case, the corporate trustee, USSL, is a company limited by guarantee; it does not have shareholders. As such, the academics could not bring a derivative claim under the CA (which can only be brought by shareholders). Thus, in contrast to ClientEarth v Shell Plc and Others, discussed here, it was necessary to bring a ‘multiple derivative’ claim under common law principles. This cause of action is analogous to the statutory regime under the CA, but is broader in scope, as it can apply to non-shareholders.

Nevertheless, in order to bring a multiple derivative claim, it is first necessary to obtain permission from the court, which will only be granted where claimants can show that:

  1. they have sufficient interest or standing to pursue the claims on a derivative basis on behalf of the company or other entity;
  2. they establish a prima facie case that each individual claim falls within one of the established exceptions to the rule in Foss v Harbottle;
  3. they establish a prima facie case on the merits in respect of each claim; and
  4. it is appropriate in all the circumstances to permit them to pursue the derivative claim(s).

Challenging the High Court’s decision

In May 2022, the High Court dismissed the academics’ application for permission to continue their case. In sum, the court held that the prima facie case that the USSL had suffered any immediate financial loss as a consequence of the directors’ failure to adopt a long-term divestment plan had not been made.

The academics raised several grounds of appeal, but all were unsuccessful. A few takeaways are set out below.

A company must suffer a loss; the claimant must suffer a reflective loss 

The Court of Appeal highlighted that the derivative claim is not designed to enable shareholders or others to monitor every step taken by directors on behalf of the company. Nor is it an opportunity for someone to pursue their own grievances or claims to further their own particular interest in the name of the company.

Rather, it is intended only to be used in the exceptional circumstances where a company on whose behalf the claim is brought has suffered a loss or harm that the claim seeks to remedy, and it can only be brought by a claimant who has suffered harm or loss that is reflective of it.

This requirement to establish not only that the would-be litigant has suffered harm but also that the harm relates to or correlates with the harm to the company is necessary, in order to enable the court to be satisfied that the claimant has a legitimate interest in the company’s action. Once this requirement is satisfied, substantive points can be examined, such as whether the directors acted with dishonesty or bad faith or gained an unfair advantage at the expense of the company.

Ultimately, the court agreed with the High Court that the academics were unable to prove loss to the scheme as a result of the alleged breaches of the directors’ duties. Further, the academics had not even alleged that they had suffered any loss as a result of the alleged breaches. Without being able to satisfy this requirement, and prove that they had a sufficient interest to pursue the claim, the academics’ appeal could not succeed.

A lack of evidence of director impropriety 

Even if the academics had met the first requirement, the court held that the claim would have failed for the lack of a prima facie case that the directors had improperly benefitted as a result of their conduct.

First, the academics’ had not suggested that the directors had been acting in bad faith or done anything other than acting in accordance with what they considered to be the best interests of USSL and the USS, having taken proper advice.

Second, while it had been alleged that the directors’ breaches had furthered their own interests and put their own beliefs with regards to fossil fuels above those of the scheme’s beneficiaries and USSL, the court did not accept that there was any evidence to support this. Although the academics’ had sought to rely on an ethical survey completed by members of the USS, the court held that this survey had only been completed by a tiny proportion of active members of the USS, and so could not form the basis of such an allegation.

An inappropriate cause of action 

Finally, the court suggested that the claim would have been best suited to either a beneficiary derivative claim, where a beneficiary brings a claim in their own name on behalf of the trust or estate against a third party, or an administration action, where beneficiaries bring proceedings to compel trustees (who are not mere bare trustees) to pursue a claim, which is vested in them as trustees. However, the procedural rules in relation to these types of claim are more onerous.

As such, the court suspected that the claimants had sought to avoid these difficulties by “attempting to shoe-horn this action into the straitjacket of a common law multiple derivative claim”.

Therefore, the court confirmed that it would have found that there were strong reasons, as a matter of discretion, for denying permission to pursue the derivative claim.

What does this mean for the future of climate litigation?  

The result of this Court of Appeal case is reminiscent of the recent High Court decision in ClientEarth v Shell Plc and Others.

On the one hand, these two cases illustrate the considerable procedural and evidential hurdles that claimants must overcome, in order to obtain permission to continue their derivative action when challenging how directors respond to the risk from climate change. Further, the cases highlight that directors are afforded a wide degree of discretion to determine how they discharge their statutory duties.

The cases also highlight that the courts are prepared to look at the motives of the claimants. In McGaughey & Another v Universities Superannuation Scheme Limited & Others, this meant drawing an inference that the claimants were attempting to circumvent the normal procedural rules applicable for other, more appropriate, causes of action.

On the other hand, claimants may not be deterred by these obstacles. These cases generate publicity and compel the defending party to adduce substantive evidence, which is likely to involve disclosure and resulting public scrutiny.

In fact, such scrutiny may be viewed by some activists as a victory in itself, regardless of the outcome of the permission hearing. Moreover, listed companies and other large businesses in the UK must now disclose their climate risks according to the Taskforce on Climate-related Financial Disclosure recommendations.

This gives shareholders and other stakeholders new information to examine and question how companies address climate-related risks and opportunities. Moreover, although energy companies and any other emitters of greenhouse gases are obvious targets for claims of this type of claim (e.g. ClientEarth v Shell Plc and Others), McGaughey demonstrates that institutional investors and financial institutions are also at risk.

Finally, although the claims brought in these cases were unsuccessful, there may be instances where members of a pension scheme (or companies more generally) have the ability to bring a claim against the pension scheme (or company/directors) for climate change-related breaches. Therefore, directors should ensure that ESG considerations are at the forefront of their decision-making to minimise this risk.

The opinions of guest authors are their own and do not necessarily represent those of SG Voice.

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