An important case is making its way up the appellate system of England & Wales.  The case, reported at its last stage asMcGaughey v USS [2022] EWHC 133 (Ch), concerns the Universities Superannuation Scheme (USS).  Pension Funds are major investors, with a UK market share of  £1.48 trillion.  A key stated purpose of USS Ltd, by the Articles of Association, are to provide benefits ‘solely or primarily for the benefit of university teachers or other staff of comparable status’.  USS Ltd has no shareholders.  On 31 March 2020, at the outbreak of the pandemic, the directors of USS carried out a valuation of its assets.  Crucially, the directors assumed that assets would grow at 0.0% p.a. above CPI inflation for the next 30 years.  Unsurprisingly in light of market volatility, and this zero growth assumption, it showed a significant deficit. Members’ pension contributions were increased as a result, for both employers and employees.  This has led to widespread unhappiness by employees and to a collective dispute across the universities of the UK.

On 28 October 2021, two UK academics, members of USS, commenced a common law action for breaches of fiduciary and statutory duty by directors.  The action is crowdfunded.  The directors subsequently changed their valuation assumption to 0.29% p.a. growth above inflation, and began predicting surpluses. The Claimants’ application for permission to proceed was heard and dismissed by the High Court on 24 May 2022.  On 21 October 2022, the Court of Appeal gave the Claimants permission to appeal the High Court’s decision, and the case will be heard in the Court of Appeal on 13 June.

The claim is a derivative claim, so called because standing to bring the claim derives from the company.  Derivative claims in the UK may be brought under the Companies Act 2006 (‘the Companies Act’) or at common law.  The purpose of the claim is to protect the company interest against breaches of duty by directors which cannot be protected in another way. By sections 260-264 of the Companies Act (unlike section 165 of the South African Companies Act of 2008, for example) statutory claims can only be brought by members of the company, meaning other directors or shareholders. The common law test is wider, having developed exceptions to the rule in the old case of Foss v Harbottle (1843) 2 Hare 461, 67 ER 189, which said that the proper claimant to sue was the company itself, providing little protection against directorial breaches. However, any derivative claim needs the permission of the court.  In refusing permission, the judge agreed that the Claimants, as beneficiaries of the USS scheme, had sufficient economic interest to bring a claim but then went on to decide that the Claimants needed to establish fraud (in a wide sense).  As the first Claimant observed after the decision, the acknowledgement of the legitimate interest of pension members as beneficiaries was then followed by a confused view of how to assess the alleged breaches of directors’ duties in order to grant permission to proceed to trial.  

The alleged breach of duties under ss171-175 of the Companies Act, are (1) breach of statutory and fiduciary duties in carrying out the valuation in March 2020; (2) breach of duty in making changes which are indirectly discriminatory against women, ethnic minority and younger members;  (3) breach of duty in not reducing costs rather than increasing contributions; (4) breach of duty in not creating a credible plan for divestment in fossil fuels. The claims were supported by preliminary evidence,  the Claimants not have yet having the benefit of disclosure from the company.

The judge acknowledged that the Claimants had standing, but refused permission for all four Claims to continue. He held that there needed to be established a personal benefit for the directors and a reflective loss for the Claims.

The case raises important issues about stakeholder interest and the interest of the company.  Claim 4, for example, focused on directors’ duties under section 172 of the 2006 Act to promote the success of the company having regards to (a) the likely consequences of any decision in the long term; (b) the interests of the company’s employees; (c) the need to foster the company’s business relationships with suppliers, customers and others; (d) the impact of the company’s operations on the community and the environment; (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.  All of these considerations, made relevant by statute to the success of the company, clearly extend beyond profit maximisation, personal benefit or immediate detriment.  So too, the interest of pension members is both in immediate levels of contributions and in longer term viability of their pension fund.

As Robert McCorquodale and Stuart Neely observed before this claim was issued, developments in business and human rights are likely to impact company law.  The EU Directive is currently making its way through the European Parliament. Other national legislation has recognised the legitimate interest of stakeholders going beyond an immediate economic benefit/ loss axis.  In particular, Claim 4 –  failure to draft a credible,  precise plan to divest in fossil fuels  – echoes the structure of Articles L. 225-102-4 and 225-102-5 of the French Commercial Code (also known as the Loi Devoir de Vigilance) which require companies to produce a credible vigilance plan.  Failure to produce such a plan has been enforced by NGOs in France. The Claimants in McGaughey have already won judicial recognition of their interest, as members and beneficiaries of a pension scheme, in directors’ compliance with their duties.  It remains to be seen whether the Court of Appeal will recognise their interest and the interest of the company, in light of Parliament’s enactment of ss171-172 of the Companies Act 2006, as going beyond immediate short term gain to success through longer term viability.  This would allow directorial accountability for acts and omissions which threaten that viability.

Sandhya Drew is a Senior Lecturer at the City University of London.

Related articles from the Business and Human Rights Journal include:

Beate SJÅFJELL, How Company Law has Failed Human Rights – and What to Do About It.
Kristian Høyer TOFT ‘Climate Change as a Business and Human Rights Issue: A Proposal for a Moral Typology’
Karin BUHMANN, Neglecting the Proactive Aspect of Human Rights Due Diligence? A Critical Appraisal of the EU’s Non-Financial Reporting Directive as a Pillar One Avenue for Promoting Pillar Two Action
Surya Deva ‘The UN Guiding Principles’ Orbit and other Regulatory Regimes in the Business and Human Rights Universe: Managing the Interface’