Menu
Climate change litigation update: Derivative claim dismissed

News / / London

McGaughey & Anor v Universities Superannuation Scheme Ltd & Anor [2022] EWHC 1233 (Ch)
On 24 May 2022, the High Court refused a claim brought against the directors of the Universities Superannuation Scheme (the “USS”), the largest private pension scheme in the UK, for inaction around climate change commitments.

Background

In October 2021, a group of academic staff issued a derivative claim in the High Court (the Court) against the USS and its directors for, amongst other claims, failing to create a credible disinvestment plan for its fossil fuel investments. Please read our previous update here.

The claimants alleged that climate change inaction constituted a breach of the directors’ duties pursuant to sections 171 and 172 Companies Act 2006, including making investments that avoid significant risk, and to promote the success of the company, prejudicing the interest and success of the USS which will suffer loss as a consequence.

On 24 May 2022, the Court held that a derivative action could not be pursued by the Claimants.

Test for derivative claims

The Court set out guidance that permission to bring a derivative claim will only be granted where a Claimant can satisfy all the following requirements:

-       Limb 1: the Claimant has a sufficient interest or standing to pursue the claims on behalf of the company (i.e. that the subject company has suffered a loss and that this loss is reflective in the Claimants’ own loss);

-       Limb 2: a prima facie case that each individual claim falls within one of the established exceptions to the rule in Foss v Harbottle[1]  (the exception the Claimants’ relied upon was that the Directors committed a deliberate or dishonest breach of duty or that they improperly benefitted at the expense of the company);

-       Limb 3: a prima facie case in respect of the alleged claims (i.e. the Claimant only needs to present enough evidence to create a rebuttable presumption that the matter asserted is true); and

-       Limb 4: it is appropriate in all the circumstances to permit the Claimant to pursue the derivative claim.

Findings

The Court noted that the Claimants’ case was primarily directed at the USS’ future conduct and that the Claimants did not allege that they themselves had suffered any financial loss as a consequence of the Directors' failure to adopt an adequate plan for long-term divestment of investment in fossil fuels. As such, the Court concluded that the Claimants failed to show that the USS had suffered an immediate financial loss (i.e. Limb 1).

The Court refused to accept that the Directors had committed a deliberate or dishonest breach of duty or that they had improperly benefitted themselves at the expense of the Company (i.e. Limb 2).

The Court acknowledged that the USS had to exercise its’ powers of investment in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole. Evidence was put forward by the USS that it had taken legal advice, conducted a survey of members, adopted an ambition of Net Zero by 2050 and policies for working with the companies in which it invests in. The Court concluded that the USS’ ambition and policies were well within the discretion of the USS in exercising its powers of investment. As a result, the Court was not satisfied that the Claimants had created a rebuttable presumption that the directors had breached their fiduciary duties (i.e. Limb 3).

While the Court accepted that the Claimants may have a claim against the USS for breach of trust, the claim before them was a derivative one and as such the Court would not have exercised its discretion to permit the Claimants to continue with the claim (Limb 4). Instead, the Court would leave them to pursue a direct claim for breach of trust.[2] 

Comments

Notwithstanding that the claims brought by the Claimants 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.

The Court’s refusal to allow the Claimants’ to pursue a derivative claim was not related to the Claimants’ alleged losses caused by the USS’ policies or climate change inaction. Climate change policy breach claims could therefore still be actionable as a derivative claim, should they meet the necessary legal test.

This decision highlights that UK company directors have a duty to avoid significant financial risk to the company, and to promote the success of the company having regard to the company’s long term interests, including ESG considerations such as climate change policies, relationships with suppliers and whistle-blower schemes.

With the proliferation of ESG into corporate thinking, shareholders and investors are increasingly expecting fiduciaries and fund managers, whether in the energy sector or not, to promote the long term sustainable success of the company. Ensuring ESG considerations are at the forefront of directors’ decision making should help reduce risk and naturally, legal guidance should always be sought if in doubt.

If you have any questions about the content in this article or would like to discuss further, please do not hesitate to reach out to a member of our team.

[1] A case which establishes that where a wrong has been done, the only true claimant is the company itself.

[2] An act (or a failure to act) by the directors of the USS (as Trustees of the pension fund) that is not authorised either by the trust document or by law.

Chris Kidd

Chris Kidd Head of Shipbuilding and Offshore Construction, Joint Head of Energy & Infrastructure, Partner

Waled Salih

Waled Salih Associate

Related sectors:

Related news & insights

News / UAE Ministerial Directive Gives the Green Light towards Allowing Enforcement of English Court Judgments onshore the UAE

21-09-2022 / Energy & Infrastructure

On 13 September 2022, the UAE Ministry of Justice (MOJ) issued a landmark directive to the President of the Dubai Courts, referring to a recent English Court judgment in Lenkor Energy Trading DMCC v Puri (2020) EWHC 75 (QB) which enforced a UAE Court judgment, and urging the Dubai Courts to take requisite steps to follow the principle of reciprocity when it comes to enforcing English Court judgments in the UAE.

UAE Ministerial Directive Gives the Green Light towards Allowing Enforcement of English Court Judgments onshore the UAE

News / Refund guarantees – avoiding drafting pitfalls

12-05-2022 / Energy & Infrastructure

Refund guarantees are often described as the cornerstones to shipbuilding projects and the buyer’s main security. Although they do not strictly form part of the shipbuilding contract, a shipbuilding project is unlikely to go ahead at all without one. It is therefore important to understand the different types of guarantee instruments, and the impact each has in practice on the guarantor’s obligations to pay and the buyer’s entitlement to recovery. A well-drafted guarantee provides certainty to the parties and strikes a balance between their respective entitlements and obligations.

Refund guarantees – avoiding drafting pitfalls

News / You will be estopped if you cross the line

04-04-2022 / Energy & Infrastructure

Estoppel is a useful tool in litigation, which is usually used to bind one party to a statement or a promise that it has previously expressed causing another to accept or adopt it for the purpose of their legal relations. The Court’s recent ruling in Geoquip Marine Operations AG v (1) Tower Resources Cameroon SA (2) Tower Resources PLC addresses estoppel by convention and recognises the requirement for the common assumption created between the parties to be clear and unequivocal. In this article, we focus on the specifics of the Court decision.

You will be estopped if you cross the line

News / Court of Appeal overturns second Unaoil bribery conviction

29-03-2022 / Energy & Infrastructure

On 24 March 2022, the Court of Appeal overturned the conviction of a second man, Paul Bond, prosecuted by the Serious Fraud Office (SFO) in relation to alleged wrongdoing by Unaoil. 

Court of Appeal overturns second Unaoil bribery conviction

News / The Court grapples with impact of Covid-19 on European rugby

08-03-2022 / Energy & Infrastructure

As we approach the second anniversary of Covid-19 being declared a pandemic by the World Health Organisation on 11 March 2020, a number of judgments are coming out of the English Courts which are providing useful guidance on how the English Courts are treating claims concerning Covid-19, especially in a force majeure context.

The Court grapples with impact of Covid-19 on European rugby

News / Climate change litigation: Courts decide the law, not political policies

02-03-2022 / Energy & Infrastructure

R (Finch) v Surrey County Council CA (Civ Div) [2022] EWCA Civ 187 “The task of the court in a claim such as this is only to decide the issues of law. Those issues cannot extend into the realm of political judgment – which is the responsibility of the executive, not the courts …”

Climate change litigation: Courts decide the law, not political policies