Introduction

The case of McGaughey & Anor v Universities Superannuation Scheme Ltd & Ors ([2023] EWCA Civ 873) presented a pivotal examination of the procedural and substantive requirements for bringing derivative claims within the framework of pension trustee companies. The appellants, Dr. McGaughey and Prof. Davies, active members of the Universities Superannuation Scheme (USSL), sought to continue proceedings alleging breaches of directors' duties. The case raised crucial questions about the nature and appropriateness of such derivative claims, especially in entities limited by guarantee with directors who are also members, and whose primary role is to administer a single pension scheme.

Summary of the Judgment

Lady Justice Asplin presided over the initial proceedings, which were subsequently appealed to the England and Wales Court of Appeal (Civil Division). The appellants attempted to bring forward multiple derivative claims against current and former directors of USSL, alleging breaches of statutory and fiduciary duties. These claims included the Valuation Claim, Discrimination Claim, Costs Claim, and Fossil Fuels Claim. The lower court dismissed the application on several grounds, primarily due to the lack of a prima facie case demonstrating that USSL had suffered a loss reflective of the appellants' claimed losses. The Court of Appeal upheld this decision, affirming the stringent requirements necessary for derivative claims in such contexts.

Analysis

Precedents Cited

The judgment extensively referred to foundational cases and legal principles governing derivative actions:

• Foss v Harbottle (1843): Established the rule that the company itself is the proper claimant in lawsuits alleging wrongs against it.
• Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982]: Elaborated on exceptions to the Foss v Harbottle rule, particularly in cases of fraud.
• Boston Trust Co Ltd v Szerelmy Ltd [2021]: Defined "double derivative claims" and their applicability.
• Estmanco (Kilner House) Ltd v Greater London Council [1982]: Addressed misuse of power by directors to further personal interests at the company's expense.
• Abouraya v Sigmund [2014] and Harris v Microfusion [2017]: Discussed the necessity of demonstrating both harm to the company and reflective loss by the claimant.
• Iesini v Westrip Holdings [2009] and Iesini v Shell plc & Ors [2023]: Provided insights into the application of statutory derivative claims under the Companies Act 2006 (CA 2006).

These precedents collectively underscore the judiciary's cautious approach to granting derivative claims, emphasizing the necessity for clear evidence of loss and the absence of alternative remedies.

Legal Reasoning

The court's decision hinged on several key legal considerations:

• Standing and Interest: For a derivative claim to proceed, the claimant must demonstrate that they have a sufficient interest in the proceedings, typically through reflective loss linked to the company's loss.
• Prima Facie Case: The claimant must establish a preliminary case indicating that the company is entitled to the relief sought and that the claim falls within an exception to the Foss v Harbottle rule.
• Exceptions to Foss v Harbottle: The primary exception considered was fraudulent conduct by directors, which would otherwise prevent the company from pursuing its own legal actions.
• Nature of the Claims: The court examined whether the claims were genuine derivative actions or attempts to challenge legitimate decision-making processes within USSL.

In evaluating the derivative claims, the court found that USSL, as a company limited by guarantee acting solely as a trustee, had not suffered any identifiable loss that mirrored the appellants' alleged harm. Furthermore, the claims did not demonstrate that directors had improperly benefited themselves at the company's expense, a necessary component for invoking the exception to Foss v Harbottle.

Impact

This judgment has significant implications for future derivative actions within pension trustee structures:

• Strict Standing Requirements: Claimants must unequivocally demonstrate that their loss reflects the company's loss, maintaining a high threshold for derivative claims.
• Limitations in Trust Contexts: Pension schemes administered by trustees limited by guarantee face heightened scrutiny, making it more challenging for members to pursue derivative claims.
• Alternative Remedies: The decision reinforces the importance of seeking direct claims or other legal mechanisms, such as beneficiary derivative actions, instead of attempting derivative claims where they may not be appropriate.
• Judicial Caution: Courts will continue to exercise caution, ensuring that derivative claims are not misused to challenge legitimate governance or fiduciary decisions.

Overall, the judgment delineates clearer boundaries for derivative actions, emphasizing the necessity for genuine company harm and appropriate procedural adherence, particularly in the context of pension schemes managed by corporate trustees.

Complex Concepts Simplified

Derivative Claims

A derivative claim is a legal action brought by a member (like a shareholder or, in this case, a pension scheme member) on behalf of the company to address wrongs committed against the company, typically by its directors or officers. Instead of the company itself initiating the lawsuit, an individual member steps in to seek redress.

Foss v Harbottle Rule

Established in 1843, this rule posits that the company itself is the proper plaintiff in lawsuits alleging wrongdoing against it. Individual members cannot sue on behalf of the company unless certain exceptions apply, such as fraud or abuse of power by those in control.

Prima Facie Case

A prima facie case refers to evidence sufficient to establish a fact or a case unless rebutted by contrary evidence. In the context of derivative claims, it means that the claimant must provide enough initial evidence to show that their claim is potentially valid before it is fully examined.

Reflective Loss

Reflective loss occurs when a shareholder or member's loss is directly tied to the company's loss. For instance, if a company suffers financial harm, shareholders may experience a loss in the value of their shares. However, generally, this loss cannot form the basis of a separate legal claim because it mirrors the company's own loss.

Dog-Leg Claims

These are complex derivative claims where a beneficiary of a trust sues on behalf of the corporate trustee against its directors. Such claims hinge on whether the attorney's actions constitute a breach of trust and whether the claimant can demonstrate that the trustee has suffered a loss.

Company Limited by Guarantee

This type of company does not have shareholders but members who act as guarantors. It is often used for non-profit organizations, charities, and pension schemes. The members' liability is limited to the amount they agree to contribute to the company's assets if it is wound up.

Conclusion

The Court of Appeal's decision in McGaughey & Anor v Universities Superannuation Scheme Ltd & Ors underscores the judiciary's stringent approach to managing derivative claims within pension trustee structures. By affirming the necessity for clear evidence of loss and the alignment of the claimant's interests with the company's, the court ensures that such legal mechanisms are not misused to challenge legitimate governance or fiduciary decisions. This judgment serves as a critical precedent, delineating the boundaries and reinforcing the principles that safeguard the integrity of derivative actions, especially in entities governed by trust law and limited by guarantee.

For practitioners and members of pension schemes, this case emphasizes the importance of understanding the procedural and substantive thresholds required for bringing forward derivative actions. It also highlights the need to consider alternative legal avenues when seeking redress for alleged breaches of duty by directors.