In McGaughey v Universities Superannuation Scheme Limited[1], the High Court has recently granted permission for two university lecturers to proceed with a pleaded “multiple derivative claim” against the directors of Universities Superannuation Scheme Limited (“USS”), the corporate trustee of the UK’s largest private occupational pension scheme.

The crux of the complaint relates to the decade-long reduction of university pension benefits alongside rising contributions, following several valuations of the scheme’s assets. The claimants take issue with various aspects of the valuation process as amounting to breaches of statutory and/or fiduciary duty. They also claim that a proposed change to the scheme’s benefits and contribution structure is discriminatory, and that the directors’ failure to create a credible plan to divest from fossil fuels prejudices the success of the company.

Aside from its role in the bitter ongoing dispute over university pension schemes, the case is of legal interest for its proposed use of the common law multiple derivative action by beneficiaries of a corporate trustee. The claim may also be seen as a harbinger of the much-vaunted turn in climate litigation from public law claims against governments to private law claims against companies.

The Survival of Multiple Derivative Actions

Derivative actions have long existed at common law as an exception to the rule in Foss v Harbottle[2], the rationale being that were the rule applied too strictly, wrongs would go unredressed where a company is in wrongdoer control (Burland v Earle[3]).

Chapter 1, Part 11 of the Companies Act 2006 now provides an exclusive statutory procedure for bringing single derivative claims, defined as proceedings brought by a member of a company, in respect of a cause of action vested in the company, and seeking relief on behalf of the company (s 260(1) CA 2006). This raises the issue of whether a plaintiff who is not a member of a company can bring a “multiple” derivative claim on the company’s behalf.

In Waddington Ltd v Chan Chun Hoo Thomas[4], the Hong Kong Court of Appeal acknowledged the possible existence of a multiple derivative action at common law. However, it was not until Re Fort Gilkicker Ltd[5] that the English courts confirmed that common law multiple derivative actions had survived the coming into force of the Companies Act 2006. While this conclusion has been endorsed by the courts, including the Court of Appeal in Boston Trust Company Ltd & Anor v Verhoef[6], it is apparent from the McGaughey permission judgment that no further successful multiple derivative action has been identified.

The Breadth of Multiple Derivative Actions

The McGaughey proceedings therefore seek to advance a cause of action which is still a relative rarity. Further, the claimants seek to expand the category of cases in which the courts will permit a multiple derivative claim, which they say is not fixed or prescribed as a matter of law ([14](3) of the permission judgment).

The facts of Waddington, and the case law therein relied on in recognising the existence of multiple derivative actions, concerned a member of a parent company seeking to commence an action on behalf of subsidiary companies. This is the situation which Lord Millett sought to describe through the term “multiple derivative action”. It is also the situation described by the term when used by the Law Commission in the report preceding the enaction of Chapter 1, Part 11 CA 2006 ([36]–[38] of Gilkicker), and in recent case law including Boston Trust.

Gilkicker was similarly concerned with a cause of action brought on behalf of a subsidiary company, and relied on cases involving member of a holding company which was subject to the same wrongdoer control as the subsidiary [21]. However, the court applied Waddington where the “parent” corporate body was a limited liability partnership.

Briggs J had already set out at [24] that historically:

“It is not I think particularly surprising that the court has, where necessary, been prepared to permit derivative claims to be brought on behalf of companies in wrongdoer control by persons other than their immediate shareholders without regarding those cases as special, and in particular without thinking it necessary to distinguish between “ordinary” and “multiple” derivative actions. Once it is recognised that the derivative action is merely a procedural device designed to prevent a wrong going without a remedy […] then it is unsurprising to find the court extending locus standi to members of the wronged company's holding company, where the holding company is itself in the same wrongdoer control. The would-be claimant is not exercising some right inherent in its membership, but availing itself of the court's readiness to permit someone with a sufficient interest to sue as the company's representative claimant, for the benefit of all its stakeholders.”

Applying the historic principles where the parent vehicle was a limited liability partnership, Briggs J held at [51] that:

“[…] First, once it is recognised that the extension of locus standi beyond the immediate members of the wronged company is based upon the need to find a suitably interested claimant to pursue the company's claim when it is disabled from doing so, the precise nature of the corporate body which owns the wronged company's shares is of no legal relevance, provided that it is itself in wrongdoer control and has some members at least who are interested in seeing the wrong done to the company put right. As I have said earlier, the locus standi given to the member of the intermediate entity is not an aspect of that person's rights as a member, but simply the consequence of the law's search for a suitably interested representative, or champion, of the wronged company.”

This reflects the test ultimately laid out in Waddington at [74], that in answering the question of standing raised by the multiple derivative action, the court had simply “to ask itself whether the plaintiff has a legitimate interest in the relief claimed sufficient to justify him in bringing proceedings to obtain it”.

It remains to be seen whether the claimants in McGaughey will succeed in persuading the court that they have a sufficient legitimate interest, in a situation where the action is brought “on behalf of” USS as the corporate trustee of a pension scheme of which the claimants are beneficiaries.

The particulars of claim at [25] lay out why the claimants say they have standing. Further to the fact that the only members of USS are its directors, the alleged wrongdoers, the claimants rely on the fact that “the Company’s purpose and object is to exist and act for the benefit of the Scheme Members who have given consideration for their pension rights. Failing to act in the interests of the Company involves, by definition, failing to act in the interests of the Scheme members.” The claimants say that absent the instant claim, there would be no prospect of the wrongs alleged being righted.

Alternative Remedies (Dog-Leg Claim?)

In addition to standing, the claimants will need to persuade the court that there are no suitable alternative remedies. Permission was originally refused on the papers by Leech J because he considered the action better described as a “dog-leg claim”, since it was in substance a claim by beneficiaries against the directors of a trust company. He also considered it unclear why the claimants could not bring a direct claim for breach of trust against the USS itself.

In response, the claimants submitted ([14](4) of the permission judgment) that they sought to bring a genuine derivative claim, not a “dog-leg” claim, in which the impecuniosity of the trustee is the issue which gives rise to the need on the part of the beneficiaries to sue the directors. That was a very different purpose, even if the underlying justice it sought to meet was much the same. Further, a “dog-leg” claim would give the beneficiaries themselves a direct claim against the directors which they would bring personally rather than on behalf of the company. Any alternative trust claims would achieve no better outcome; be more procedurally complicated; and deprive the claimant of any possibility of obtaining costs protection by means of an indemnity.

The above arguments were sufficient to persuade the court that there was a prima facie case to answer, such that the court should grant permission by analogy with s 261 CA 2006. The case will now proceed to an inter partes hearing, in which Leech J left open the possibility that the Defendant could challenge the appropriateness of the pleading of a multiple derivative action.

Comment

McGaughey has the potential to not only entrench the use of common law multiple derivative actions against directors, but expand this into a broader set of circumstances, based on underlying principles of fairness.

While the bulk of the claim concerns breach of statutory and/or fiduciary duties in relation to the valuation of the pension scheme’s assets, the claims of discrimination and of prejudicial failure to divest from fossil fuels are also of interest.

Followers of climate litigation will note with interest the claimants’ argument that directors’ duties under the Companies Act 2006 must be interpreted in line with Articles 2 and 8 ECHR, as well as the UK’s international law obligations (i.e. the Paris Agreement). While ECHR rights have been pivotal interpretative aids in climate litigation overseas (Milieudefensie v Shell), such arguments have met with limited domestic success, with courts being particularly wary of being seen to enforce the Paris Agreement (R (Plan B) v Prime Minister[7]). It may be that should the claim proceed, success on this ground will turn rather on the strength of the evidence that fossil fuel companies have in recent years been the worst performing investments in the stock market, such that a failure to divest would prejudice the success of the company.

[1] [2022] EWHC 565 (Ch).

[2] (1843) 2 Hare 461; 67 ER 189.

[3] [1902] AC 83 PC (Can).

[4] [2008] HKFCA 63.

[5] [2013] EWHC 348 (Ch); [2013] Ch 551.

[6] [2021] EWCA Civ 1176; [2021] Bus LR 1557.

[7] [2021] EWHC 3469 (Admin).